'Almost New' Homes Better Than 'New' When Investing in Real Estate

Real Estate Agent with Keller Williams Realty

One investing trend that has really picked up speed lately involves investing in "Almost New" homes rather than new homes.  Many out of state investors have learned that maintenance and property management can be very difficult when you are not near the property, even with a great property manager.  In addition, it is much more difficult to estimate costs and expenses on older homes because huge maintenance issues occasionally occur.

For this reason, many investors turned toward investing in new homes in the size and price range for young families.  Lately, however, savvy out of state investors in the Dallas/Fort Worth area have instead turned their sites on homes that are 1 - 3 years from construction for several reasons.

Almost New HomeOne reason almost new homes have become popular is because of the amount of foreclosures occurring under the recent trend towards 100% financing and the people who purchase more home than they can really afford.  Though every foreclosure will have maintenance costs associated with it, foreclosures of homes only a few years old have usually have relatively minor repair costs associated with them.

Another reason is the pricing phenomenon that occurs in subdivisions where new homes are being built.  When a developer sells lots to a builder and begins the basic road work in a subdivision, the land values in almost every case begin to rise.  The first home built is usually the cheapest because over time construction costs rise and builders also offer incentives to overcome the headaches of living in an area where construction is occurring.  Then as more homes are built and the parks, pools, or other highlights of the subdivision are built, builders start jumping up the price.  Unfortunately, however, few people will want to purchase a home in a subdivision that is pre-owned, when they can either build a house the way they want it or can pick out a spec home that meets their approval.

For this reason, a homeowner in a subdivision that is still being built in is in constant and unfair competition with a builder in that subdivision.  The moment a contract is signed, the home becomes worth less than they paid for it.  To further complicate matters, if the owner of an almost new home is forced to sell in the off season they will also have to compete against builder specials to sell off spec homes before year end for tax purposes.

Money TreeThis does have a good side for buyers of new homes, if they understand that they need to wait several years before they can sell their home.  Let's use a fictitious example to show how this can work.  Take the first buyer of a home in a new subdivision that takes seven years to build out.  They buy their home for $200,000 and after the finish moving in, their home goes down in value to $180,000 because other buyers will prefer the new homes at $200,000.  In year two, the builder is still offering discounts to encourage people to live with construction in the neighborhood and they raise the price to $210,000 on new homes, but the first buyer's home is still worth only about $180,000 because it is a year old now.  In year three, the first buyer now has a two year old home competing with brand new homes in a halfway completed subdivision and other pre-owned homes as well.  It is still only worth about $185,000 for this reason.  In year four, a catastrophic hurricane hits the entire south-east coast (sound familiar?) which forces construction costs to rise in year five, but which also drives people into the area from other states.  New homes are at $225,000 while the first buyer has a home worth about $190,000 because it is now three years old competing with new homes.  The next year the costs of the hurricane really hit home and the builder raises prices to $250,000.  This forced jump because of costs benefits all the home owners and the first buyer now has a home worth about $220,000 because of the competition with the new homes.  Time progresses and by the end of year seven, the subdivision is completely built out.  The last home sold (with same plan as first built), sells for $290,000 and the first buyer now has a home six or seven years older but worth $265,000.  As the years go by the gap will close between the last home built and the first home built, and over time the first homeowner will get substantial increases in property value because of the rising costs that the builder faces and the fact that a completed subdivision is nicer than a brand new one with empty lots.

Though these numbers are simply made up to demonstrate the process, you can see that if a seller is forced to sell a new home in the first few years, the competition with other pre-owned homes and the builder can cause them to sell their property at a loss in most markets.  For investors, however, this can be a golden opportunity.  An investor can swoop in and purchase these discounted properties and then cover their costs and even produce income through rents while waiting for the finish out of a subdivision.  During the holding process, it may not even matter if they have to take some losses for a few years while waiting for the property to appreciate, depending upon the amount of equity initially invested.  Then when a subdivision is complete and new home building is not as big a competitive factor, they can sell and take advantage of all the price increases incurred by the builder raising prices and the subdivision adding amenities and landscaping.

Please keep in mind that if you are new to real estate investing there are numerous other variables that need to be considered, and that this is only one of a number of successful strategies for investing.  In Dallas/Fort Worth and North Texas market this is a common recurring them because of the state of the market, but not all real estate markets will work in the same manner.  Should you be interested in investing in a different are please be sure and talk to a local Realtor® who will better understand that particular market.  And remember, when investing, the goal is to make money, not to necessarily have the nicest or 'newest' property on the block.

Comments (3)

Dee Copeland
Copeland Group Realty - Austin, TX
Principal Broker
Good article! Thanks!
Feb 09, 2007 01:15 PM
Fred Price
Wells Fargo Home Mortgage - Orlando, FL
(321) 368-5564 NMLSR ID:506517

The Major problem with the example given is that it doesn't take into consideration the Comps of recent sells that push up the value of the initial buyers.

I've lived it and the first ones in - usually benefit as long as the builder doesn't go under and another builder change the price point of the product to complete the project.

No offense - thats the way I see it.

Still would be interested in working with you - Construction Lending is my forta!  

Apr 03, 2007 11:28 AM
Steven Holcomb
Keller Williams Realty - Plano, TX
Esq. - BBA, JD, GRI


Your point is well taken.  I did not clearly state that there are times at the end of the development of the subdivision that early buyers of new homes can take advantage of all the price increases by the builder.  Where new home owners get hurt is when they have to sell their new home in the early or middle stages of the build out of the subdivision.  This is when the price increases have not yet increased enough to counter the continuing competition of brand new homes.

This is also why almost new homes can be such a bargain.  You get a discount on the front end because of builder competition, but then get all the builder price increases on the back end as the subdivision nears completion.  Thanks for the comment.

Apr 03, 2007 12:10 PM