How to invest in pre-construction flips

I recently tied up some SFHs in Boise, Idaho. The plan is to put down a small deposit, wait for six months until the homes are complete and then sell them for a profit. While it sounds very simple, there are some important rules to follow.

  1. Make sure you target an area where there is strong price increase.
    After you subtract closing costs, real estate commissions and maybe holding costs, the property needs to have risen sufficiently enough to make a decent profit. example: I’ve tied up homes for $190k [included closing costs] and they’re already worth $250k even though they’re a few more months from build-out.
  2. Make sure the area is experiencing actual population and job growth.
    You want to ensure that the price growth isn’t just fueled by rampant investor speculation. if so, when it comes time to sell, you won’t have any buyers.
  3. Make sure you get in at the right time in the Cycle.
    You don’t want to be left holding the bag at the tail end of a cycle like some Pulte home investors in Las Vegas. After they closed, Pulte reduced the prices by as much as $100k.
  4. Stick to bread and butter homes
    I’m buying between 1600-2000 sq ft homes in the sub 250k price range [depending on the market]. Don’t go for the super luxury homes. that just increases your risk. instead go for several b&b homes. that spreads your risk.
  5. Make sure you get a home inspection done
    Sometimes in a new home, the electrical won’t work or the plumbing is jacked up [because the contractor dumped plaster down the toilet]. dont’ skimp on this $300 investment.
  6. Try to work out a deal with your agent
    If you use them to resell the property, ask if they’ll give you a discount on the listing fees.
  7. Try and work out a deal with the builder
    Sometimes if you buy bulk, the builder will work out a deal with you.[difficult, but worth a shot].
  8. Make sure you do your homework about taxes.
    The last thing you want to do is be in the highest tax bracket or be labelled a dealer.But thats a topic for another day.

UPDATE: March 2007
I NO LONGER RECOMMEND PRE-CONSTRUCTION FLIPS IN ANY PART OF THE COUNTRY. THE SITUATION HAS DRASTICALLY CHANGED AND YOU’RE MORE LIKELY TO BE STUCK WITH A PROPERTY YOU WON’T BE ABLE TO UNLOAD

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