new house/apt vs used

[turnipmonster]

this may be a stupid question but figured I'd ask it anyways. in nyc where I live, there are tons of new condos going up all the time. it seems to me that when you buy a new condo, you are basically betting on appreciation as it is unlikely that the developer selling it has undervalued it (same is obv true of most property in nyc if you replace "developer" with "market"). although this is probably true of most property, my intuition would be that there are a lot more inefficiencies in FSBO and things like that. is my intuition correct here, or not so much?

it obviously depends on a lot of things, but I was having this discussion with a friend and I had a hard time articulating why I would rather buy from an old lady than the toll brothers, but I felt pretty strongly that I would. I am curious if my intuition is off.

[kimchi]

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it seems to me that when you buy a new condo, you are basically betting on appreciation

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A lot depends upon your objectives. If you're in the BTL game, then maybe yes.

If you're looking for a roof over your head, then maybe no.

What are your objectives in considering this purchase?

[spex x]

For an investment, you want to buy from the person that is going to give you the best deal, be it old lady or developer. In my experience, FSBO sellers can be quite stubborn and irrational, while developers simply look at the numbers and make a decision.

Now, there are times when a market will slow to the point that builders MUST move their inventory fast. Often these properties will go to auction with a break-even reserve price. Here you can find great deals.

If you want the house for yourself, I'd say forget about the deal and try to get the house that best fits your needs and is the most affordable.

[turnipmonster]

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For an investment, you want to buy from the person that is going to give you the best deal, be it old lady or developer.

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of course, but my intuition is that on average you will get the better deal from the old lady. this is a hypothetical question btw, although my neighbor across the hall who hasn't lived there for 15 years is selling and we were thinking of expanding. problem is we have a rly good mortgage and don't want to refinance. that's a different can of worms though.

my question is more about, if a developer is putting up condos to make money, it's pretty unlikely that those condos will be attractive from an investment perspective unless you want to bet on appreciation. just wondering if this statement is mostly correct or mostly incorrect?

[superadvisor]

I'd say that statement is mostly incorrect. The builders should theoretically be in more of a hurry to sell than your average homeowner because the survival of their business is depending on getting their money out of finished projects as fast as possible so that they can fund new projects. They can't afford to hold on to unsold homes.

[hawk59]

Some of the developers are going bankrupt/getting in financial trouble so there are going to be forced sellers of new units too.

[spex x]

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They can't afford to hold on to unsold homes.

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In my area the break even point for a builder on a single family home is 12 months. The builder can afford to build a spec home and carry it for 12 months to break even. Any longer than 12 months, and he loses money. I don't know any commercial builders that develop large condo projects, but my guess would be that the cost per unit is much lower in a condo development, and thus, the developer can afford to carry the units longer to break even. I'm sure that the carry time to b/e varies with location, as well as other market factors such as the availability of credit, etc.

Also, I'd bet that 20% of the condos in a new development generate the profit for the project. So really, the developer only has to sell 80% of his project to break even. The rest he can afford to hold indefinitely as long as the taxes don't kill him.

Fundamentally that builder is looking to sell those homes though. If he's having a hard time moving his last 20% and making his profit, surely he'd start to make some decent deals with bargain-conscious buyers. See he's not attached to those homes at all. He is only trying to make money. So if you bring him a deal that makes sense, he'll probably take it.

Now, contrast that with the FSBO old lady. First, she's a penny-pincher that is too cheap to hire an RE agent. Or she could be a person that took out a 100% LTV loan two years ago and doens't have enough equity in the home to be able to pay an agent. Either way, there won't be much room for negotiating.

Also, that old lady probably THINKS she knows how much her home is worth. The problem is that the average FSBO seller isn't privy to information like the # of similar homes on the market, the # of recent home sales, etc. She has NO IDEA whatsoever (generally) the condition of the current market. So she'll stubbornly hold onto her price.

Plus, that FSBO seller gets very emotional during negotiations. She'll get insulted when you low-ball her, and she'll feel that your low offer is a reflection on HER rather than her house in the current market. Last week I had a FSBO seller literally start shaking he was so mad at me and my offer. Needless to say, that deal didn't work out.

I think that a lot of the time inexperienced RE investors think that FSBOs just don't really know anything and they can get a great deal. Well, in my experience you're MUCH more likely to get a great deal from another investor, a developer, or a bank than from a FBSO seller.

Just my two cents.

[spex x]

I wanted to add that getting great deals in RE investing is ALWAYS ALWAYS ALWAYS about finding motivated sellers. I call on every deal that I think might pay me, including FSBOs, auctions, other investors, REO, whatever.

[turnipmonster]

thanks for the insight everyone!

[superadvisor]

Every market is different, take a look here:

http://money.excite.com/jsp/nw/nwdt_...d8rgd2ug0&

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Hovnanian Enterprises Inc. reported another loss in the third quarter, citing continuing problems of credit availability and high inventory.

Four consecutive quarterly losses, a 35 percent cancellation rate, fewer sales and contracts.

The company also said it would slash prices on homes across the country beginning late next week to try to sell off excess inventory.

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