How To Make $100,000 And How To Lose A $50,000 From The Same Property
At our new web site, www.GetPreconstructionDeals.com, I always get one specific question sent in after we announce a new preconstruction project: ?So Chris, is this preconstruction project a good deal?? . The answer that is expected back by the person is ?yes this is a GREAT deal? or ?no, I don?t think this is a very good deal?.
Even though I am not trying to be flippant, my response back is usually along the lines of you could potentially make a lot of money from this project or you could lose a lot of money. Boy, that?s a big help thinks the person asking the question. In fact, it is quite possible that two people could invest in this project, at the same time, with one making a $100,000 and another losing $50,000 from it.
If I?m talking to a person face-to-face about this, it is about at that this time in the conversation that their eyes glaze over and they really start to wonder about this so called ?expert?.
So let me give an example of two hypothetical investors, Freddie the Flipper and Barbara the Buy & Holder, who both contract to purchase a preconstruction condo in Atlanta. Suppose the condo costs $250,000 and requires 20% down at time the hard contract is signed. Furthermore, suppose the condo will be ready 18 months after signing the hard contract. The broker in charge feels very strongly about this project and is honestly convinced they will be worth $350,000 at time of closing.
Now this is Freddie?s first deal and he has heard you can make TONS of money flipping preconstruction projects. Freddie does not have much money and takes out an equity line of credit for the down payment. Freddie has no intentions of closing this property but wants to flip so he does not have to pay closing costs. All he can think about is that this very knowledgeable, and quite trustworthy broker thinks he will make $100,000 in 18 months. He can hardly control his excitement.
Now Barbara the Buy & Holder is an old seasoned pro. She has done 10 preconstruction projects in the past, has multiple long term rental properties, and does a flew flips of single family houses on the side. When she enters the contract to purchase this property, Barbara thinks the values will keep going up but she KNOWS that she can get close to covering her monthly expenses if she has to rent it out. She firmly believes in the area and believes this is a low risk investment. She listens to the OPINIONS of the broker, agrees with him, but knows that nothing is certain.
Looking into our crystal ball, suppose we find out that at time of closing, the condo?s have actually dropped in price and only have a fair market value of $210,000. There has been a temporary softening of the local economy and some people have been dumping their properties in a panic. All expectations are that this is a temporary blip but we know that NOBODY can predict the future.
Freddie gets the call that he has been dreading. It is now time to close on the condo and will require about $10,000 in closing costs. He does not have it! After consultation with his attorney, he realizes that there are two options: close the property or walk away from his $50,000 down payment. Since he financed that down payment in a home equity line and it does not ?feel? like he really lost the money (even though is monthly payments have gone up), he decides to walk away. This finally releases him from months of mental anguish over this foolish mistake he has made.
Barbara on the other hand realizes that this is part of the game. She is still very bullish on this project and simply closes and rents the condo and is losing about $50 per month net all expense. No big deal for her. Furthermore, she buys another condo from a really desperate seller who closes on it, then does not know how to rent it, panics, and sells for $200,000. Two years later, Barbara sells these condos into a booming economy for $350,000 netting $100,000 from one and $150,000 from the other.
Yawn: just another day at the office for a well prepared real estate investor.
I hope that this article has provided an example of how the outcome of an investment is MORE about the approach and thought processes of the investor rather than the investment itself. I learned this in the area of trading from one of my mentors, Van Tharp, but it is equally applicable in all types of investments.
About the Author: Chris Anderson is a leading authority on preconstruction real estate investing. Get his 4 day e-mail course and a 33 minute video free today! Visit http://www.GetPreconstructionProfit.com & http://www.GetPreconstructionDeals.com