One of the hottest trends in real estate investment today is putting a property from the Builder under contract today, watching the property appreciate while it's being built over the next 4-12 months, and then selling the property at the appreciated price. This concept is currently being referred to as "flipping," but is more accurately called new construction speculation. While I'll refer to it as flipping on this website, I do want to point out that the term "flipping" originally was applied to the concept of putting a house under contract and then assigning the contract to another investor for a fee. This is also referred to as "assignment of contract," and that's how we'll refer to that concept on this website.

Although most don't look at it this way, flipping is like rehabbing. You're hoping to find a property that you can buy at a price considerably lower than what you can sell it for. You intend to hold the property for a very short period of time. You should consider the upgrades at the design center the same way you would consider them for a rehab. The biggest difference is with flipping, you frequently don't have to pay the cost of the upgrades up front, and when you finance the deal, you can still end up putting a total of 5% (or 0%) down thereby leveraging your upgrades.

Builders v. Investors: Round One
Perhaps the hardest part about flipping is finding a project to get involved with. Prior to 2004, builders rarely cared who bought the home: primary occupants, vacation home buyers, or investors. In late 2003 they started restricting investors in many markets, only allowing so many investors per release. By early 2004, they stopped selling to investors at all in many markets including Las Vegas and Phoenix.

The builders did this for two main reasons. Primarily, they did not want their subdivisions to become rental tenements. Additionally, they did not want to have a subdivision full of FOR SALE signs. This looks bad to potential buyers, and they might just buy a house off the open market instead of from the builder.

The latter started to occur to some builders who held out and continued to sell to investors. Aliante in North Las Vegas, a Del Webb community, allowed investors through the thick and thin of it all. As a result, when the properties were completed, there was a glut on the market. Because some investors did not have the reserves to hold out for 3-4 months that it took to sell at the top dollar price, they were willing to sell at basically their cost, ruining the comps for the subdivision. The other investors who had prepared for this were damaged by the amateurs because they were now looking at $10,000 to $20,000 profit instead of $100,000 they had predicted 9 months before.

A phenomenon that shocked the Realtors was the anti-investor addendums many builders started utilizing. Builders became tired of being lied to by investors who said they were buying the property as a primary residence, only to have them put the property on the market the day after they took possession. Their lawyers crafted some addendums with teeth and required the primary residence buyers to sign. These addendums came at the investor from two angles.

First, they prohibited the buyer from selling the property within one year. If they did sell it inside of a year, the builder required that they offer to sell it back to them at the cost they bought it for before they could put it on the open market. This prevented the flipping concept. As of this writing, I have not heard of anyone challenging this in court, and it is questionable about how binding the addendum might be. For the record, you are signing a contract and that contract says you agree to not sell it in a year. It's not my business what you do, but if you intend to test the waters, I'd recommend you discuss this with your attorney before you do.

Builders v. Investors: Round Two
The second addendum they started circulating was to prevent renting the property for one year. As the Las Vegas market progressed and the builders started letting investors back in, this was the first addendum to go by the wayside. While they don't want tenement subdivisions, it's much less damaging to them than the flipping concept. When sales began to slow down, they started allowing investors to buy properties to rent, as long as they agreed to not sell them within a year.

Again, I have not heard this addendum being tested in court. Once again, you should check with your attorney if you are getting involved in a project with this addendum but you intend to rent out regardless.

The Phase One Frenzy
If there is one phenomenon I wish I did not have to educate investors on, it's debunking the whole Phase One frenzy. Yes, I know you want to get into the first phase of a new development, but that's not what you really want. What you want is to get involved with a property early enough in a project so that when you take possession of it, the builder is still selling houses and are still increasing prices with each phase release.

First of all, phase one rarely sees the light of day. Normally, the builder's employees don't immediately scoop them up. If they don't, the builder's cronies usually get a crack at them. Realize, phase releases are frequently 4-12 properties, so it doesn't take a lot of insider deals to sell them all.

Larry Murphy of SalesTraq in Las Vegas has the job of tracking all of the new construction projects that are going on in the Las Vegas Valley. As personable as he is knowledgeable, Larry wrote an article on this subject. His theory, and it's one I adhere to, is that what phase you buy in is not nearly as significant as to how much earlier you actually put a property under contract. For example, you could buy a Phase 10 (of 20 projected phases) Pulte home in January, or you could wait until April to get into that Phase 1 insider deal. If the base price of the house increases the same with each phase (i.e., if the first project increases $5,000 per phase and so does the second project), why would you wait an extra three months to go under contract. You could be three or more phases ahead by buying the Phase 10 house in January.

The above example presents a situation where the Phase 10 house will be completed while the builder is still selling houses in the neighborhood. This allows for an apples-to-apples approach to the topic. The bigger question is should you buy a house in the last few phases of the development. The answer is a resounding maybe.

It is relatively easy to look at the historic base price increases for a development and predict how much they will increase over the next few phases. They can basically program in your appreciation. Of course, the longer the build time, the less accurate your predictions will be. If you purchase a property in the last few phases, you will not have the builder still selling houses, and there won't be a builder "controlling the market value."

So you must ask yourself (or more importantly, your Realtor) "What do I think the local appreciation will be during the build time?" This is a much harder question to answer, but if you can answer it and feel confident that your estimates are sound, and if your answer is that it will increase in price an acceptable level, then why wouldn't it be a reasonable investment to consider.

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