Posted by Mark-NC on July 20, 2001 at 11:33:12:
Ronni,
Yes, Ryan homes have been around a while. They are very big in our area and what you are propossing to do is very common. One of the reasons they do it is to free up their working capitol.
I would think as long as the subdivision is filling up and selling homes it should work out OK.
Mark
Super-duper idea! Help me sort it out - Posted by Roni
Posted by Roni on July 19, 2001 at 15:34:14:
I’m new to real estate investing and I’m not astute on all the creative concepts. But my idea is to buy a model home in a new neighborhood for $420,000. According to the builder I have to put down a total of 6% before closing which is $25,000 (which I can raise). I will get a mortgage for the remainder at a rate of approx. 7%.
The builder will pay me a “rent-back” of $3000 for the next year-and-a-half. I am in PG county in Maryland and real estate is HOT! From all my research, I am sure I can sell the home in 18 months for a conservative profit ($50 - $60K).
The benefits are that I can have the mortgage paid for by the builder for over a year. I will start looking for a buyer 3 months before the builder stops paying the rent-back. AND I can write the taxes off (which I REALLY need a write-off).
How can I lose on this deal? I’m patient to earn money back. I don’t know of any other way I can double my money in 18 months.
Remember, I’m conservative and uninformed on a lot of other concepts. But I’m open to suggestions.
Whoa There! Do the numbers… - Posted by Irwin(CA)
Posted by Irwin(CA) on July 20, 2001 at 21:54:41:
Roni,
Property taxes and Insurance will create a negative cash flow. In my area that would be about $300/mo. Not good. Yes, you will be able to write off the taxes, but you only get a small part back in tax savings. It’s like spending $1 and getting back 40c.
The real advantage will be in the depreciation write off and the possibility of exchanging the property via 1031 and deferring taxes.
Get the builder to pay a rent which covers your expenses.
Just my thoughts.
irwin
50-60K profit in 18months? - Posted by Vladimir IL
Posted by Vladimir IL on July 20, 2001 at 10:23:45:
Roni,
I don’t understand something. If the market in your area is HOT as you say (for 400K+ homes) allowing you to make 50K+ profit in only 18 months, then WHY would a builder pay YOU any money? If you can sell it, why can’t THEY sell it?
how about nothing down and… - Posted by David
Posted by David on July 19, 2001 at 17:40:54:
use the $54,000 rent credit as a deposit against the sale price. In other words he sells you the house for $420,000, you get a mortgage for $365,000 and the balance is the buidler rent back credit. Then you don’t have to worry about a down payment or closing costs, and can possibly get cash back at settlement. Additionally you don’t have to worry about the builder not paying the rent, defaulting or even going out of business, since his rent is pre-paid at settlement for 18 months.
All that is posiyive, however does a rental of $3,000 per month justify a $420,000 purchase. I’d like to see a 1% rent in other words of like $4,200 per month.
Re: Super-duper idea! Help me sort it out - Posted by phil fernandez
Posted by phil fernandez on July 19, 2001 at 17:10:46:
Roni,
Good idea if all goes well. My concern with doing one of these with a builder is - will the builder actually pay you your $3,000 rent each month for the next 18 months. If he does swell. Builders by nature are a fly by the seat of the pants depending on the economy type deal… If things start slowing, whats to have the builder saying to you, " sorry things are slow and I can’t come up with your $3,000 anymore.". I’ve seen this happen.
To protect yourself you will want the builder to prepay 18 months worth of rent. In your case that would be $3,000 x 18 months = $54,000.
My guess is the builder doesn’t have that kind of money available. One reason he is offering the sale leaseback is that his sales are a bit slow so he needs a gimmick to create a sale. Which in itself is ok, but just be careful about a deal where you will be dependent on the builder coming through for you for the next 18 months.
Re: 50-60K profit in 18months? - Posted by Becky IL
Posted by Becky IL on July 20, 2001 at 11:10:16:
Vladimir,
Of course the builder can sell the house themselves, but that takes time even in a hot market. Builders are often “very motivated” because of financial reasons, and that is very often their construction financing funds are based upon how many of their houses/buildings are sold versus unsold and how many of their lots are reserved or unreserved. Sometimes it’s more important that they get as many houses sold (no matter how it’s done) so that they qualify for more financing for their construction project. Remember, they’re in the business of building homes.
Re: Super-duper idea! Help me sort it out - Posted by Roni
Posted by Roni on July 19, 2001 at 17:34:47:
The Builder is Ryan Homes. Aren’t they pretty repituable?