Who has done preconstruction investing?

Amail · 02-02-2006, 03:43 PM

I've got a line on a preconstruction opportunity in Idaho wherein I can buy a lot outright for $55k and the developer will buy it back from me for $70k when the lot records, which should be in June. The money is held in an escrow account, and I can withdraw my $55k and walk away at any time before it records. After it records I can sell it back to the developer for $70k, flip it to another investor if prices are significantly higher than $70k, or take out a construction loan once the builder is in place and flip the house when construction is finished.

I did pretty well last year in multi-family units in AZ, but want to move into something different - I think AZ is kind of tapped out for now, and I'm not real keen on the long-distance landlord thing.

Who can offer me insight into preconstruction investing? Does this sound like a reasonable investment? Too good to be true? Not nearly good enough?

turbo6bar · 02-02-2006, 05:24 PM

You are about to set foot in lukewarm water. By the time you get your torso in, it might reach boiling.

Can you make money? Of course. Do you have full grasp of the risks?

Preconstruction investing is the latest thing. It isn't investing. It's speculation. There is nothing wrong with speculation if you're aware of the downsides.

The obvious question is if the developer is buying the lot from you for $70k, why don't they buy the lot NOW for $55k? I guess the developer also has the right to walk away at any time, leaving you with a $55k lot and a slim pool of buyers. I could be 100% wrong about this.
I wish you the best of luck,
Jurgen

Amail · 02-03-2006, 08:37 AM

Actually, the money is held in escrow as a fully refundable earnest money deposit. When the lot records my options are to take my money back (with interest), take the developer's offer, sell to another investor, or close on the lot.

The developer owns the lots already. They need to show sufficient interest in the development in order to secure the financing they need to follow thru with the build-out. Once they've got the escrow account built up to $500k of earnest money they will no longer offer the buy-back incentive. The investment is purely speculative at that point, bearing in mind that your deposit is still fully refundable until the lot records.

Jamie79SC · 09:59 AM

Sort of like in the old days when they's sow nuggets of gold in the ground to sell land to prospectors...

I guess that would make you the nugget.

Amail · 02-03-2006, 09:28 AM

Nobody's got a crystal ball, that's not news. I'd like to hear about the mechanics of these deals, if anyone has the experience.

Has anyone here put their money on the line to do these?

Paul T · 02-03-2006, 12:52 PM

Do I understand this correctly? The developer needs people to "buy" these lots so he can get to a certain level of escrow, then he can go to his bank and say, "look, I've got all these "deposits" for homes already, give me a loan"? And before his escrow builds to that point, he'll offer to buy back the deposit at a 27% premium?

I must be misunderstanding...

Amail · 02-03-2006, 01:45 PM

That's the gist of it as I understand it. You can buy in with as little as $10k earnest money to hold the lot at full price ($70k) which you would then pay off when it records for the remaining $60k. No discount at that buy-in.

You can buy in at a $5k discount with $20k earnest money, but the offer to buy it back at $70k when it records is not extended.

It's only those that put the entire $55k as earnest money get a $15k discount and the offer to buy it back at $70k when it records.

The developer feels he needs to offer incentive to build up the escrow account quickly. This is the incentive. Once the account is built up, this particular incentive goes away. He's confident enough to believe that the $70k he will offer in the future will be a good deal for him due to appreciation. He thinks it will be worth more than $70k, but can't be certain. $70k is his conservative estimate. If the value is more than $70k he makes out. Or, you ask him to waive his right (not sure why he would) and you can sell at market price to anybody you want. If the value is less than $70k either the developer offers you the $70k he promised (again, not sure why he would) or you walk away with your original $55k. Or, of course, you get the lot for $55k if you want to keep it.

If you buy in for the $10k to hold the price at $70k you're definitely speculating, because there's no built-in equity or promise of a buy back. Still and all, if the area's appreciating on a general scale, it seems a good way to lock in a lot for several months while you see which way that market is headed.

Paul T · 02-04-2006, 05:51 AM

Interesting. I guess it boils down to how familiar you are with the RE market in that section of Idaho - is demand building that rapidly to support that appreciation in such a short time? Is land that scarce there? Idaho aint Phoenix. I don't know, I'd be hesitant, but then again, I'm somewhat conservative..

turbo6bar · 02-04-2006, 06:47 AM

Is the reward adequate for the perceived/real risks? Pretty much sums it.

If the developer already owns the land, why does he need to create this artificial demand? Why doesn't the developer market the lots to investors/owners/buyers? Signed contracts (with deposits) to build would suffice to show interest. It smells fishy, as described.

pwd72s · 02-04-2006, 02:17 PM

Quote:

Originally posted by turbo6bar
Is the reward adequate for the perceived/real risks? Pretty much sums it.

If the developer already owns the land, why does he need to create this artificial demand? Why doesn't the developer market the lots to investors/owners/buyers? Signed contracts (with deposits) to build would suffice to show interest. It smells fishy, as described.

Fishy indeed. Should this developer go bankrupt before the utilities reach these lots? You just paid raw acreage price for a small plot of undeveloped land. It's quite possible the land would then be worth zilch, unless you were allowed well & septic permits.

Rodeo · 02-04-2006, 03:40 PM

Do I smell something?

Hey, I have a million dollar asset that I will sell you for only $750k so I can scam a bank into thinking I sold this asset so they will loan me money that I will use to buy the asset back from you, at $250k profit.

Leland Pate · 02-04-2006, 03:53 PM

If it's in the Boise, Caldwell, Meridian, area I'd be willing to bet my lunch that there will be a good deal of growth there in the next few decades.
It's already ahppening. Boise is one of the greatest cities I've been to in the US.
A lot of people compare it to Seattle when it was considered to be the PNW's little secret.

I love Boise and would move back in a heartbeat if I could find a well paying job.

RANDY P · RANDY P's Garage

Sounds like the value is artifically inflated for several reasons -

Percieved equity

Percieved downpayment.

You're also holding land for the investor who doesn't have the means to lock it up - either that or his financing isn't in line. It looks like a pending sale on paper - raising cashflow. That's the game.

Sketchy, at best. Consult a local realtor - call one up and pretend to want to buy one of the lots (an identical lot) - get an idea what it's really worth