Buy Unsold, Discounted Inventory from Builders in Distressed Markets Part 1

Amid endless media speculation aout whether there was a real estate bubble, and if there was, when it would burst throughout many of the hottest real estate markets of 2004 and 2005, the bubble either burst or deflated rapidly. Home builders had been building at unheard of rates. In areas such as Las Vegas, Phoenix, Washington D.C., and much of California and Florida, real estate was appreciating at more than 20 percent per year. In some cases, appreciation was nearly 50 percent in some years!

An investor can adopt several strategies when buying from home builders in depressed or soft markets. The best strategy will depend on both you, the investor; and the builder. Even a combination of strategies might be the best approach.

Strategies When Buying from Builders in Depressed Markets:
1) Outright purchase at a reduced price
2) Lease Option
3) Lease Purchase
4) Short sale

Outright Purchase at a Reduced Price

Obviously, the first option is to purchase the house outright from the builder. With this strategy, not only do you accept all of the closing concessions, free upgrades, and price reductions available to the public, but you would also want to negotiate the purchase price vigorously. The key here is to ensure that the deal you are buying is not only a good deal now, but will be a good deal next year if the prices haven't recovered in that year. In addition to securing a better price, you might be able to negotiate guaranteed rents or mortgage payments for a period of time. In this case, the builder is guaranteeing rental or mortgage payments for a certain predetermined amount for a given period of time. This helps cover you, the investor, should you have trouble keeping or getting the property occupied or sold.

Your exit strategy on this approach could be either to hold the property as a rental until its value has gone up enough that you are ready to sell and make your profit, or, if you have secured a low enough purchase price, to wholesale the property to a home buyer or another investor.

We will continue tomorrow with Lease option and Lease purchase in Part 2 of Buy Unsold, Discounted Inventory from Builders in Distressed Markets.

Excerpts taken from Making Hard Cash in a Soft Real Estate Market Chapter 11, Pages 113-116