That Abominable Four Letter Word

Writen by Luigi Frascati

There is no such thing as a ‘riskless’ investment, certainly not in real estate. And if there was, common sense dictates that it would not offer sufficient return to justify its existence. Risk and reward are closely linked. For the most part, the higher the perceived risk of an investment, the higher its potential reward. Therefore, attempting to eliminate, or even to reduce risk dramatically, may not be an investor’s most optimized strategy.

Harry Max Markowitz, the 1990 Nobel Prize winner in Economic Sciences and Professor Emeritus at City University of New York pioneered significant breakthroughs in the correlation between risk and diversification, and between relative and absolute risk aversion and risk tolerance in finance utility, the principles of which were later on used to the postulate Risk Theory and the Modern Portfolio Theory in financial economics.

In simplistic terms, Prof. Markowitz wanted to go beyond the traditional ‘don’t put all your eggs in one basket’ axiomatic line to managing investments. His approach was to define how can an investor earn attractive returns without undue amounts of risk and, conversely, establish how much risk input is necessary to achieve a certain investment goal.

Risk aversion is a concept that attempts to explain the behaviour of consumers and investors under conditions of uncertainty. More specifically, risk aversion is the reluctance of a person to accept a bargain with an uncertain payoff, rather than another bargain with a more certain but possibly lower expected payoff. The inverse of a person’s risk aversion is called risk tolerance. Using this model, Prof. Markowitz discovered that it is possible to simultaneously minimize risk and improve returns by having a broadly diversified portfolio. The efficiency optimization of this portfolio is known as the Markowitz Efficient Portfolio, where no additional expected return can be gained without increasing the risk of the portfolio (or, alternatively, where no added diversification can lower the portfolio risk for a given return). In practical terms, the Markowitz Efficient Portfolio finds the optimal equilibrium between risk and reward.

In essence, the thrust of Modern Portfolio Theory has been to shift from trying to maximize returns to managing risk. Unfortunately, a great many real estate investors spend their time doing exactly the opposite. The lure of a single high yield investment is tempting and capturing but, all other variables being constant, many fractional smaller investments add up to the same yield over the same capital investment with a much lower degree of risk.

Take the case, for example, of three investors Investor A, Investor B and Investor C who are each about to purchase two million dollar worth of real estate properties. Investor A purchases a 2 million dollar rental building yielding an 8 percent CAP rate. Investor B purchases eight residential rental units worth an average of $250,000 apiece, yielding an aggregate 8 percent return. Investor C purchases a two million dollar worth combination of residential, commercial and industrial products, yielding an aggregate combined total 8 percent return. Prof. Markowitz’ theory can detail out, as a mathematical function, that the risk return profile of Investor C’s portfolio is the most optimized and, moreover, that it displays the lowest possible level of risk for its level of return. This is obtained by measuring risk as the standard deviation of the return on investment, that is the level of uncertainty of the return.

The relevance of Prof. Markowitz’ work to the discipline of real estate investments is to be found in the underlying movements of Market Risk. Market Risk is the stress that the value of an investment will undergo due to moves in market factors. Market Risk is of very real importance in times of price reductions, such as the present. The three standard risk factors that apply to real estate investments are:

[ ] Equity Risk, or the inverse of the risk that prices will change.

[ ] Interest Rate Risk, or the risk that interest rates will change.

[ ] Volatility Risk, or the risk that the speculation component will change.

Market economic shifts are caused by two, and only two factors: a shift in the Interest Rate component of risk or a shift in the Volatility Risk. For instance, these days it would appear that Volatility is the primary factor in the slow down of real estate markets, due to lower speculation which is causing a upward shift in Equity Risk (the lower the prices, the higher the risk) through lower demand, which in turn generates an inventory surplus. Interest Rate Risk, though certainly a contributing factor, is of secondary importance, as the Fed has been very cautious to allow ample time for the economy to adjust between increases.

Contrary to the belief of many, risk allocation has nothing at all to do with market timing. In fact, all empirical evidence suggests that market timing is more pipe dream than reality. By definition, market timing means buying low and selling high, and we all know that this is the key to successful investing. So, in theory, market timing is logical. Regrettably, however, there is no guaranteed way to anticipate market movements, so most attempts at market timing fail to deliver the results investors hope for.

Risk Theory and the work of Prof. Markowitz are of utmost importance in the two main financial disciplines of Capitalism: real estate and the stock market. But they also find their place in more exotic fields of application. For instance, when combined with probability calculus in Applied Mathematics, Risk Theory is used by casinos or lottery institutions to optimize (reduce) the risk of payout (a.k.a. the ‘odds’ of winning), which goes to explain why one always loses. Likewise, governments use the Markowitz curve to set taxation policy. Capital gains tax deferments, both allowed by the Internal Revenue Service in the States and by the Canadian Customs and Revenue Agency, are predicated on the basis of Risk Theory. And large industrial conglomerates, such as the Big Three or even Hollywood, use Prof. Markowitz’ work to determine the risk of launching a new product, that is to anticipate with reasonable accuracy whether a new product will be a hit (risk tolerance of the output at decreased uncertainty) or a flop (risk aversion of the output at increased uncertainty).

Although, in the case of Hollywood, it might be argued that when applied to the ‘Da Vinci Code’ , Risk Theory did not deliver very accurate results Oops … Luigi Frascati

Luigi Frascati is a Real Estate Agent based in Vancouver, British Columbia. He holds a Bachelor Degree in Economics and maintains a weblog entitled the Real Estate Chronicle at http://wwwrealestatechronicle.blogspot.com you can find the full collection of his articles. Luigi is associated with the Sutton Group, the largest real estate organization in Canada, and is based with Sutton Centre Realty in Burnaby, BC.

Luigi is very proud to be an EzineArticles Platinum Expert Author. Your rating at the footer of this Article is very much appreciated. Thank you.

How To Scan Through The Brochure When Buying Property

Writen by C Guan Soo

As you know, brochure plays a very important role in our society. They are the tools which companies use to convey what they have to offer you.

Developer companies do the same too. And specifically for property in Malaysia, having a laser sharp eyes to scan through brochures can ensure that you’re well prepared to invest into real deals that bear high returns.

Specifically how, or what you have to look out for in a brochure, before deciding if the property is ideal for you?

These are the guidelines which you can use to screen for information:

1. The Housing Development’s License number and the expiry date.

2. The advertisement and sales permit number and the expiry date.

3. Name and address of:
a) The licensed housing developer
b) Authorized agents (if any)
c) Those holding power of attorney (if any)
d) The project management company (if any)

4. Land status
a) Freehold
b) Leasehold – number of years left
c) Encumbrances – whether the land has been mortgaged to the bank for a loan
d) If it is a Malay Reserved Land (Applicable for Property in Malaysia)

5. Location description
a) Building material specification
b) Size of building
c) Amenities and/or Services

6. Name of housing project (if any)

7. Expected date of completion

8. Price of each type of house

9. Number of units for each type

10. Reference number of the approved building plan and name of the local authority.

Other than those, you’ll need to exercise ‘due diligence’ to further investigate and to verify the information you find in the brochures, e.g. find out more about the developer. (in my previous article)

In addition, if you’re looking to own property in Malaysia, get yourself familiarize with the Sales and Purchase Agreement as per Schedules G and H of the Housting Development (Control and Licensing) Regulation 1989, to further understand your rights as a buyer.

As once a marketer told me that there are 3C’s in sales and marketing: If you can convey the message and ‘convince’ them to buy, it’s good. But if you can’t, then you have to ‘confuse’ them to buy. If that still doesn’t work, you have to ‘con’ them to buy.

So, equip yourself with x ray eyes and solid information, to defend against been conned or confused by brochures offered by developer companies, specifically if you’re looking for property in Malaysia!

C. Guan Soo is a free lance writer, copywriter and internet marketer who has produced few books before this. He has written a number of articles on various topics.

Recently, due to his rising interest in search of information for Malaysia property, he set on a trail in gathering useful information to share with the public.

He’s a co writer for the book, “How To Own Properties In Malaysia Without Been Ripped Off!” at http://www.MalaysiaPropertyGuide.com and as a web writer for Hunza Property Bhd’s latest project in http://www.Alila.com.my

Selling Your Home: The Price is Right

Writen by Jim O’Brien

Many real estate professionals consider price, marketing, and condition the three most important controllable factors affecting the sale of a home, with price being the most important of them all. If you really think about it, pretty much anything will sell if it’s priced right. An old non classic beat up car would probably not attract many buyers at an asking price of $10,000, but at $500, fixer upper buyers suddenly appear willing and able to purchase the vehicle. Market value of real estate is determined by what willing buyers will pay within a reasonable time period. How do you determine the market value of your home? The most common method used is the Comparative Market Analysis, also known as a “CMA”. The CMA report will include comparable properties that closely match your property’s characteristics and location, which are currently for sale or have recently sold. The purpose of the analysis is to arrive at an estimated fair market value, or the price at which a home will sell within a reasonable amount of time. Major factors that affect the value of a home include location, competition, market timing, and condition. Most real estate agents will be more than happy to prepare a CMA for you free of charge, and you may want to request an analysis from more than one agent. A professional appraiser can also be employed to determine home value. An appraiser can be particularly helpful where there are no comparables that closely match your property’s characteristics and location.

When two or more agents present a CMA and marketing plan to a prospective client, many home sellers will be tempted to list with the agent who offers to try to sell their home at the highest price. It is important to remember that the market commands the price, and not the agent. The main reason that real estate doesn’t sell is overpricing. It is hard to get real estate sales people excited about showing their buyer clients a home, when they feel the home is priced above what people are willing to pay. Also, most people now utilize the internet when searching for a property, making today’s home buyers savvy at home comparison shopping. Therefore, it can be a challenge to get serious and qualified buyers to look at an over priced listing. What’s more, even if a buyer is found, and is willing to pay above market value, financing can be difficult to obtain. Lenders may be unwilling to finance a home they determine to be priced above fair market value according to their own appraisal.

“What about starting with a high price, as we can always come down?” This may not be such a great idea, because the first couple of weeks are most critical for a newly listed home. The current group of buyers looking for homes will rush out to see properties that are new to the market, and within their price range. The objective is to get the willing and able buyers of this group to view your home. Unfortunately, many qualified prospects will miss your home in this initial phase, because buyers search for homes within their price range and overpricing puts the home out of their sight. Ultimately, activity is reduced to buyers that are new to the market. After a while, a listing acquires a case of “market age”, and buyers might feel something is wrong with the property. Offering a home in the competitive price range from the start can produce the most money, the quickest sale, and the fewest problems. After allThe Price is Right!

For Saratoga County and Capital Region NY real estate visit SaratogaLivingHomes.com. A resource is also available for area Homebuyers and For Sale By Owners

What About the Woodstove?

Writen by Gil Strachan

Woodstoves and inserts are more efficient than open fireplaces and, if properly installed, can be quite adequate. However many difficulties have been experienced, especially with poor connections between fireplace inserts and original chimney flues.

Liability (in the context of this article) is the state of being legally responsible to compensate someone for property damage or injury. Almost anyone involved in a real estate transaction could be open to potential liability. Here is an example which illustrates the issue of liability

A home is sold with a wood burning space heater. If a house fire occurs because of an inadequate installation, who is to blame? The vendor? The Realtor? What about the home inspector? What if the home inspector was able to inspect only part of the total system? What if the type of system required more tools for dismantling and testing, and considerably more time than available?

The key issue here is what the purchaser thinks he or she is getting from the parties involved.

Protect yourself, and avoid potential liability the easy way.

A complete inspection of any wood burning appliance involves an evaluation of every part of the heating system, from the floor pad to the chimney cap. All of these parts are covered in the codes, so compliance can only be determined if every part is inspected.

The chimney is usually the most difficult part of the system to inspect properly. Chimneys which run up through the house are often inaccessible at critical points, such as ceiling and attic penetrations. In some cases, even though you can see sections of the chimney, they cannot be reached with a tape measure to confirm their clearance to combustible building materials. Flue liners are subject to cracking inside masonry chimneys, or buckling and corrosion in the case of metal chimneys. It is difficult to inspect a chimney liner unless it has just been cleaned.

Why not have a certified wood heating technician perform a thorough cleaning and inspection, before the house is listed for sale?

Most state and provincial fire codes, as well as most household insurers, require homeowners to maintain the safety of their chimneys and inspect them at least once a year. Consulting a certified chimney sweep will ensure the present and future owners’ safety, and help relieve the liability issues for all parties involved.

A certified technician or chimney sweep will prepare a detailed, written report and have the homeowner sign it. He or she will make sure the homeowner understands the report, especially those areas where problems are found.

A Simple Solution:

Aside from the safety and liability issues, if a wood burning installation is disassembled, thoroughly cleaned and inspected prior to the house being listed, all parties will be aware of the physical condition of the system before an offer to purchase is presented.

There will be no surprises after the fact. Deals will not fall through because of defects discovered, or concerns raised as a result of a subsequent home inspection.

Inspection by a certified professional prior to listing can streamline and simplify the process of purchase and sale.

Gil Strachan is a professional home inspector, representing Electrospec Home Inspection Services in east central Ontario, Canada since 1994. For more information about home inspections, visit http://www.allaroundthehouse.com.

Selling Your Property How to Present to Potential Purchasers

Writen by Allison Thompson

When you are deciding to sell your property it is always an idea to make the property a potential purchase too as many buyers as possible. One of the best ways of doing this would be to present the property as if it were a blank canvas on to which a potential buyer can stamp their own individual tastes. Below are provided a few simple rules which should help you when to obtain that potential sale of your property without too much effort or cost to yourself.

1. De Clutter

Wherever possible try and depersonalize the property as much as possible, such as putting away any photographs that you have of yourself and your family and try only to leave out a few essential items on show in each room, which will hopefully still show the property as a family home, but will give the illusion of space. Also if possible try only to have a select number of pictures/paintings on the walls; this will also help to give the illusion of space in a room.

2. Smells

An idea that some people say helps when they have people in to view their property is to make it smell homely. They suggest that you either have freshly baked bread or coffee that has just been brewed in the kitchen. However, if you don’t have time to do this then just ensure that you make the rooms smell as nice as possible, there are number of good quality plug in air fresheners on the market that will provide a pleasant smell to the potential purchaser when entering your home.

Also if you have pets then make sure that wherever possible you have been able to neutralize the smells that they produce. You should remove their bedding from the house before a viewing starts and purchase a good quality air freshener that will eliminate the smells.

Finally, if you are able to arrange for your carpets to be cleaned, either professionally or hire a carpet cleaner (these can be rented from most supermarkets and dry cleaners now day at a very reasonable cost).

3. Colours

If you are able to, keep the colours of the house as neutral as possible, this will help to make the rooms look both larger and brighter. Unfortunately bright colours and dark colours although may be too your taste may not be the preferred option of your potential buyer. Also by having a neutral colour scheme throughout the property you are able to provide your potential buyer with a blank canvas onto which they can stamp their own preferred styles.

4. Cleanliness

It is always good to ensure that your house looks and smells clean. People when viewing a property have a habit of sometimes looking everywhere in the property (this includes cupboards, drawers, toilets and baths). Always make sure that you toilet is clean and that if possible a toilet block has been placed in it, which will not only clean the toilet after each flush but also make the room, smell nice. If you find you have limescale around the taps, the bath and the toilet, make sure that this has been removed (there are a large number of products on the market which would be able to assist you with this matter). It also helps the potential buyer to see that you have maintained the property well.

Any wood surfaces should be either wiped down with a damp cloth or polished to remove any dust from the surface. Also the same should be done for any items such as TV’s and Entertainment centers including the stands that they are sat on.

Windows wherever possible should be cleaned and a good way of getting clean windows if you do not want to pay a window cleaner is to fill a bucket with warm water and vinegar. Use a cloth to wash the windows in the water and vinegar and then use newspaper to wipe the water off. You will find that this leaves your windows streak free.

5. Exterior of the Property

One of the first things that you should make sure always looks good is the front entrance to your property as this is the first thing that a potential purchaser will view when approaching the property. Therefore ensure that you keep the front of the property clean and well maintained. The more kerb appeal your property has the more likely a potential purchaser will be keen to enter the property to view it. If you have any plants at the front, ensure that any dead ones have been removed, the lawn is kept neat and tidy and if you should have a driveway make sure it is in good repair, potential purchasers will not want to be thinking about money they will need to spend on the property if they decide to purchase it. Many times problems like this could give your potential purchaser the chance to lower the asking price.

The rear of the property should also be shown in a clean and tidy state, make sure that the lawn is neat and well kept, and if you have a patio area keep it clean and tidy. Any pots that are broken should be removed and the same should be done with any dead plants. Make sure that any fencing is well maintained and if it is broken then replace it, a few pounds spent on keeping this in order could mean that extra money on the sale of the property.

I hope that you find the above to be of use to you when deciding to sell your property.

Allison Thompson now living in Spain and the partner in a small and friendly real estate company. http://www.inlandpropertyservices.com

Investing in Florida & Las Vegas Preconstruction Real Estate

Writen by Mark Goldberg

So you’re interested in investing in the lucrative Florida and Las Vegas preconstruction real estate markets but you don’t know where or when to buy? Then this article is for you. We will show you what to watch out for in this once in a lifetime opportunity. First thing is to do your due diligence and find the right real estate brokerage, be sure that this brokerage deals with preconstruction real estate… Preconstruction real estate is the safest and fastest way to make a healthy return on your initial investment. What is really important to remember is that very few companies deal with preconstruction and even fewer deal with a large selection here’s why:

1. Less Money While the investor makes more money from a preconstruction investment brokerages usually make a smaller percent on preconstruction because they are in such high demand from serious investors. This is why you’ll hear so many brokers say “It’s Impossible to get preconstruction unless you have the connections. Trust me no one can get you on the list.”

2. Too Much Time In order to sell preconstruction real estate in Florida you have to constantly research new up and coming developments that are not advertised anywhere. This can take many hours a week calling and researching the market and because the projects are all word of mouth brokerages need connections in the industry to get in on the stellar projects. Many Las Vegas and Florida brokerages just don’t have the man power to do the research or the connections in the industry to find all these hidden gems.

3. Timing Timing Timing Preconstruction real estate investing is a very fast moving market… If you wait even a day to move on a project chances are you’ve missed out on the development and this frustrates many new agents and causes them to drop out of preconstruction.

4. Delayed Payment The number one factor on why most brokerages don’t sell preconstruction investment real estate is because it takes so long to get paid compared to traditional projects. Because agents are selling units so early before development starts; payment is significantly delayed, in fact payment can be delayed for up to two years… This is also why many brokerages only deal with a small handful of preconstruction projects (If any). By only offering a small amount of projects the Las Vegas and Florida brokerages can negociate quicker payment on those projects and push them hard even if they are not in the best interest of the client.

Bottom line is in this industry you have to be very careful who you invest your money with. Many companies have their needs above the clients and because this is such a big ticket sale many companies don’t need referrals or returning customers to stay profitable.

Remember, when searching for Florida investment real estate chose a brokerage that has a large selection of both preconstruction and phase one projects and doesn’t pressure you into one of their flagship developments where they make a higher percent off the sale.

If anyone ever has a question about a specific preconstruction project or development in the Florida or Las Vegas area feel free to contact me first and I will give you my honest advice on ANY project. http://www.InvestRealEstate101.com

Goldberg Executive Realty Group
Mark Goldberg
Phone: 1 866 247 2259
E mail: GoldbergRealtyGroup@cfl.rr.com
http://www.investrealestate101.com

Investing in Real Estate for Your Retirement (and Now!)

Writen by Ailsa Forshaw

You’ve probably heard a lot of opposing information about Investing in Real Estate, which is completely annoying! The straight forward fact about Real Estate is that it is probably the best and safest investment you’ll ever make, especially if you live in it, and that you are far more likely to make money in this market than with any other type of investing. The chances are very slim that you’ll wake up one morning and the housing market will have dropped by 40%. Egads! That ain’t good!

In general,Real Estate values always go up. There are some Apartments in Calgary (Alberta, Canada) that I wanted my husband to buy (he wouldn’t, but that didn’t stop me from asking!) about five years ago. Back then, the Apartments were selling for $96,500.00 for a Two Bedroom place, and now that same unit is selling for over $150,000.00. Quite an increase in value, eh? (You’re learning how to speak ‘Canadian’, too!) That’s over $50,000.00 in gross profit, for the mathematically challenged (me included!). We sure didn’t make that kind of profit in the Stock Market in that span of time.

Now, if that were your Primary Residence (the place you actually live), and you had lived there all that time, you would make that profit tax free. The same profit made on the Stock Market would be subject to regular taxes, which totally sucks, since you were the one to invest in the first place, and you were the one to take the chances, but, them’s the laws of the land what are you gonna do?? That’s right, buy Real Estate! Ha,ha!

Buy Apartments or Condos

One of the best bits of financial investment ideas that I ever got was from an old boyfriend of mine, Ben Johnson, the Olympic Runner. (Remember him? Turns out, great guy, bad rap, punished more than any real criminal, very wise business man funny how the press doesn’t focus on that) Anyway, his idea was to buy 15 apartments and rent them at approximately $1000./month (he lives in Toronto, Canada where the rents are high, if that seems exorbitant to you, or low, if you live in New York, and that seems waaay too cheap! ha,ha!). That would give him a regular ‘income’ of about $15,000./month, provided that the properties are owned outright. Good idea, eh?

Now, we can’t afford that many rental properties, yet, but the idea is a good one. I don’t know if he ever actually did that, but he planted a seed in my mind that will allow my husband and I to build a solid foundation for a comfortable retirement.

I happen to be partial to the idea of buying new apartments in a regular Apartment Building as opposed to Town Houses, Duplexes or Single Family Homes, because you don’t have to worry about serious repair problems, like a new roof or furnace! Those problems can add up to some serious bills for the Property Owner.

New or well cared for buildings are unlikely to require repairs within the first five years, and if you purchase in a Condo Development, your renter can pay the Condo Fees, which will cover any major building repairs. You will, of course, be responsible for general up keep, but even that will be minimal if you have good renters and start with good stuff. If you are reluctant to get into the ‘Landlord’ game because of the whole ‘collecting the rent’ thing, you can always hire a Property Management Company. They’ll handle everything for you for a relatively small fee.

When you’re first looking at Rental Properties, Apartments specifically, try to find one that is relatively inexpensive, and make sure that you are in a financial position to carry all the costs involved if you don’t have a renter.

Be careful not to pick up a ‘real steal’ that needs a huge amount of work you won’t save any money on this one it could ruin you, financially, too, if there are too many complications in the deal. Again, I prefer new, but an apartment in good repair is fine, too. Only you will know how much you can take on.

Also, check with your Banker or Broker to ensure that you qualify to carry a mortgage on the new property. The Interest Rates are particularly low, right now, so this is a great time to invest in property. The great thing about having rental properties is that not only will you be gaining a perpetual monthly income (the difference between the costs of operation and the rental fee), when you are ready to sell the property, you’ll get back all of your initial investment and you’ll have the equity spread as well.

If you happen to live in the Property for a couple of years, or so, yourself, then any profit you’ve made will be tax free, since it will have been your Primary Residence. Always check with your Accountant to comply with local tax laws. Also, you may be able to hand the property down to your children. Amazingly enough, this is no longer a basic right of a parent in certain countries without some one paying massive amounts of taxes, making it virtually impossible Man, can’t wait to live in the States, again!

Our own plan is to pay off our Mortgage on our Primary Residence, then use the money that we would normally put toward the Mortgage Payment to get a mortgage on a Rental Property an Apartment.

I like the idea of purchasing a number of apartments on the same floor of an Apartment Building, or at the very least, picking up another apartment in the same building. It seems to me that it would be waaay easier to manage properties if they’re close together.

Also, we’d like to have an apartment available for each of our children when they are old enough to move out on their own. They could have the choice of having a room mate, themselves, who would pay them directly for their share of the rent. That way, our children could learn first hand how to be landlords (Man, I really don’t care for that term!) and we wouldn’t have to worry about where they’re living and whether they have any money for groceries! Scoooore!

The other thing that is key to a comfortable retirement is that the properties you acquire before you retire may be paid off before your actual retirement date, if you have one. If you’re living well on your regular income (not including the rental income), then you can put a larger portion of the rental income directly on the Principle of the rental property mortgage. This will give you a higher monthly ‘income’ later.

(I thought this Ad was really funny!! Of course, It’s Great to Be A Landlord, so you can still shoot for that!! ha,ha,ha!)

Ailsa Forshaw is a Writer, Builder, Website Owner & Manager, Teacher, Mother… all in Alberta, Canada. She is Married with Two Lovely Children, and one gorgeous wee dog. Her Website, http://www.buildyourownhouse.ca, is chock full of all sorts of useful & fun information to help anyone become Financially Successful, Slim, Trim, and Happy… what more could you want?? Pop in for a wee visit! http://www.buildyourownhouse.ca http://www.theScottishDiet.com

A Secret to Real Estate Profits Follow The Builder

Writen by Raynor James

As the real estate market cools, the profit potential of home ownership has cooled as well. Here’s a strategy called “follow the builder.”

It is relatively easy to make a profit when you sell your home if the market is rising sharply like it has been in most of the country for the last three years. It becomes more difficult when a hot market slows down. It’s very difficult to make a profit on the sale of your home when prices are falling.

Is there a way to be relatively sure you’ll make a profit when you sell your home? There is under all but the most negative market conditions. In fact, I’ve seen young, energetic couples use this maneuver multiple times when they don’t even need to move.

Follow That Builder

In many areas of the country, there are builders who build hundreds of houses each year within a fifty mile radius of each other. They build entire communities or are one of three to five builders who build entire communities around big employment centers. This present you with an important opportunity.

New Community

Builders will typically sell first phases of communities for significantly less than later phases. On one hand, they need to get the cash flow moving. On the other, it is harder to sell at high prices because the community typically consists of dirt lots and construction equipment. Put the hands together and you have a great profit opportunity.

The idea is to get in on the first phase of the build out. You will purchase the home at a discount, which gives you built in equity. As the community is built up, you sell the home for a profit at a higher price. While you’re doing this, you keep tabs on the builders projects and find another location where you can do the same thing.

You’ll end up living in each house for a year or more and picking up nice profits along the way. The only real downside is you have to move repeatedly.

Tax Consequences

I’ve seen this work well for a number of people who have done it more than once. However, you need to be aware that generating profit this way can have tax consequences. You need to discuss your plans (including projected timing and profit potential) with your tax professional so that you are prepared to deal with any tax consequences.

Raynor James is with the FSBO site http://www.fsboamerica.org FSBO homes for sale by owner. Visit our home buying page http://www.fsboamerica.org/buyer.cfm to view and buy homes, houses, condos, land and real estate.