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How much can you afford to lose? Posted by MI-Roger [Email]  (#882) [Profile/Gallery]
(more from MI-Roger) on Fri, 12 Nov 2004 04:12:31
In Reply to: OT: Real Estate Question - Buying in a new development, Randy Thatcher   [Profile/Gallery]
, Thu, 11 Nov 2004 22:42:03
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There is an element of risk with this plan (although an enticing plan) that you have not mentioned in your short list. The biggest risk item may be an increase in mortgage rates which caps prices on new homes and drives buyers towards smaller/less expensive models than what you purchased. Your only source of profit is an expected increase in home prices due to developer greed, but the developer has some control over his margin and may squeeze it if the new home market stagnates.
Another item is the legality of the mortgage itself. Although the bank would probably never complain, a standard home mortgage (if such a thing exists anymore) typically includes language identifying the loan as one for "owner occupied property". If everything goes south in a big way with your plan and you are forced to surrender the home, the bank may have additional recourse against you for a fraudulent application - the bank may sue to recover all their costs not covered by reselling what had been your home.
But then, California real estate is an exception to almost every rule, and as an engineer I am slightly risk adverse by nature. I have a good friend who has done well financially by buying in new developments at "Pre-Construction" pricing, living in the home for 3 years or so, then reselling at a handsome profit. Your plan accelerates the time span, not giving you an opportunity to wait thru a poor home-selling market, but otherwise is identical.
I strongly considered doing a similar plan with a Lotus Elite ~15 years ago but stopped after doing more investigation and evaluating the risk to reward ratio. Around 15 years ago GM purchased Lotus Motor Car Co, and employees could purchase Lotus cars at employee discount prices! My plan was to buy on a "balloon note", store the car for the minimum holding period, then resell it, pay off the note and pocket a handsome profit. Prices for Ferraris, Porsches, Lambo's, and other exotics were increasing at double digit annual rates at the time. But after factoring the cost of the loan, cost of storage, cost of insurance (comprehensive only), and the very thin market for Lotus cars, I opted to not make the purchase. Time proved me right with this decision - Lotus car prices on the re-sell market stayed flat.
But don't give up. There is never any reward without a willingness to accept some risk. Study it well and if it still looks good - go for it. Best of luck.
posted by 198.208.22...
_______________________________________ Saabs owned: 2008 9-5 Aero Sedan, sold at 227K miles 2006 9-3SC 2.0T - Wife's daily driver 2000 Viggen Convertible - Sold May, 2022 1964 Quantum IV Formula Car - Retirement project 2000 9-5lpt Sedan, sold at 318K miles
, Thu, 11 Nov 2004 22:42:03
, Fri, 12 Nov 2004 11:35:32, Fri, 12 Nov 2004 10:47:55, Fri, 12 Nov 2004 10:57:30, Fri, 12 Nov 2004 04:12:31 <-- Viewing This Message
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