Risky for a newbie … - Posted by Frank Chin
Posted by Frank Chin on March 17, 2006 at 09:09:26:
Up in my neighborhood, older homes are snapped up by builders for “more than its worth” to be torn down. This is because zoning allows three 2 Families to be squeezed onto the lot. The numbers look like this:
- Buy a clunker worth 450K, pay 550k, ask the owner to leave immediately. Ok, give him a week.
- Build three 2 families with demolition, costs about 1MM
- Total cost about 1.5 MM with land.
- Asking prices for the brand new units?? 900K each. A neighbor down the street sold an older 2 family for 850K, so 900K sounds reasonable.
- Gross profit 2.7MM less 1.5 milliom or 1.2 million, less selling costs.
Compared to your deal?? A much better margin, and lower risks.
Why am I not doing this??
The went to auctions at many an RE in the early 90’s where construction started when the RE cycle turned down, there were no buyers, and the builders could not hold on.
I bought and live in a 2 family where construction started in 1986, with the CO issued in 1987. The builder got a mortgage, negative cashed flowed till 1990. The bank held on for two years, and I got it at an auction for 227K. The mortgage was 290K.
I actually looked into building one of these in there late eighties, where there was an empty lot for 50K down the street from my mom in law. The construction cost was about 250K.
The builder turned down offers of 360K for the 2 family in 1987, as he wanted 399K. Apparently, the market was not his friend.
I bought condos in MA that was completed around the late eighties. The developer went broke, the bank foreclosed on it, and the bank went broke, taken over by the RTC.
I rememeber going to the closing, and the seller’s attorney showing up, and my attorney and this guy was discussing whether he actually represented the bank, or inherited the right of the developer as called for in the bylaws, or he actually represented both.
The seller attorney didn’t know the answer.
Tom, I held off playing developer since I figured when the downturn comes, being a vulture represents a smaller risk.
The problem with constuction often is the lead time involved, and you can start the process in the boom times, and the market can be as cold as ice when you’re done.
As a vulture, dead meat is dead meat.