Buying a New Development Cheap
If you choose to ignore my warnings and go hunting for a new home, try this strategy for getting a new home for less. Hunt for a new subdivision going up in an attractive area. Walk the neighborhood, and get a feel for its value.
You should be able to locate the contact information for a few of the builders in the area. Contact them and state that you would be willing to purchase one of their model homes. These homes are used to showcase the development to other buyers interested in the new homes. These are usually the first homes completed in the development. Negotiate an option to buy at a lower price than what the other homes will be listed at, and then have the builder pay you rent while using the model home as a showcase (generally for a few months to a year’s time). If contacted early enough, the builder should be overjoyed to be able to sell the model, and will be able to offer preferential treatment.
If done correctly, you will be able to buy a home with instant equity (rare for a new development) as well as maintain cashflow for the first few months time. You’ll likely still have to hold the property for a few years to see enough profit to justify the expense of selling, but this definitely beats paying retail for a new home.
Don’t Buy New
If you’re considering buying a new home, with or without an agent, I would caution against it. Besides the reasons I already listed off, new constructions generally lose value, or appreciate very little during the first few years of ownership, particularly in today’s market. Keeping all that in mind, some people just like new stuff, and hey, at least you’ve got a better chance of a new home appreciating than a new car.
If you’re trying to get the best deal possible, chances are, unless you find an extremely desperate builder, your best shot is with and older home. Always shop however. You may get lucky and find an exception to the rule. Know your market well. For example, Las Vegas is currently overflowing with new home inventory. A shrewd buyer willing to bargain hunt could potentially do quite well in such an area.
Flipping can Work in a Bad Market
Today’s market seems to reward flippers who are able to buy homes and gut them well, then start from scratch. Homes with terrible interiors, and unconventional basements, or weird pockets of space, can often be purchased very cheap and then cleaned out, repainted, re-floored, and resold quickly and for a good profit.
Finding homes with easily convertible basements or patios is an easy way to add square footage to a home, and make an old 1 bedroom 1 bath into a three bedroom 1 bath. It sounds great, but finding such perfect projects takes a lot of time hunting, and a trained eye to identify the diamond in the rough.
If you find yourself looking at a finished home, you’ll likely be impressed at the space addition, and new look to the formerly old home. That said, if you’re up to the project, I recommend doing it all yourself, rather than paying a flipper tens of thousands in profit for the month’s work they did.
Realize Flipping is Hard
Contrary to what many reality shows will have you believe, the average person will have difficulty purchasing a home and then immediately selling it for more. The key to successful flipping, and something that most shows don’t even mention, is to buy low…very low.
Money is made at purchase, and successful flipping is a matter of finding a property that is being sold for a good deal less than what it is actually worth. Locating such a home takes hard work, buying it without wasting too much on commissions and loan fees takes genuine financial talent, and finally, fixing it up and selling it for a profit all within a short time.
Can it be done? Sure, but it with today’s real estate market, it is certainly a risky proposition for a first time flipper. Many real estate shows will merely show a home selling for more because it appreciated in value over a year’s time. This is not true flipping, it is getting lucky through speculation. Just like day trading, many people get burned looking for quick easy money flipping.
If you want to make money in real estate, buy and hold. It may take a decade, but chances are you’ll sell for a lot more than you bought for, and be able to pat yourself on the back.
You Need an Accountant
If you’re looking to spend much more than $100,000, and chances are you’ll be spending a lot more than that, or if you stand to make quite a bit off of a property sale, it is definitely wise to consult with an accountant or a financial planner of some sort in order to avoid unnecessary taxes, fees, and maximize your investments.
I’ve said it before, and will say it again. Mortgage brokers are not accountants. They will not generally be able to advise you on tax issues, breaks or advantages in one loan over another. The same goes for real estate agents. Many financial planners will meet with you free, and present some ideas for saving large amounts of money over the long run. Always consult with another for a second opinion before making any decision.
In retrospect, I wish I had consulted with an accountant prior to purchasing my first home. Had I done so, I would have been made aware that I could use my IRA to pay my closing costs essentially tax free. One of the best things to realize when buying or selling a home is that you do not know it all. The right professional can save you a fortune.