We seldom talk about Builders and Realtors offering home trades. In markets like this one however, the technique is making a comeback in order to move real estate. In a real estate market where properties are selling in under 60 days and at list price or higher, builder trades are not valuable to most people because Builders know that their buyers will be able to sell their home if it has not already sold.
But, in a real estate market that holds on to its inventory like my 18 month holds onto his eight ounces of slightly warmed vitamin D milk, we are all compelled to take another look. My belief though, is that Trades should not be looked at as temporary, necessary evils, rather, as a profit center and net worth builder that did not exist 24 months ago.
We all believe in the investor Mantra: “Buy Low and Sell High”. Why is it then; that so few of us are interested in finding ways to employ that right now? We will have to do things differently in this market that’s for sure – and action in this market has the potential to yield returns even greater than traditional markets where supply and demand are in a more normal balance.
Strike while the iron is hot! In a nutshell, a Builder trade is the offer of a builder to purchase the home of an interested buyer who’s home has not yet sold. Traditionally the Builder will price his home to sell at or near its asking price and the buyer’s home price is the negotiated number. The Builder and buyer work closely with the lender and essentially ask “What will it take to make this deal work – and are we willing to do it?” If the answer is “yes,” the deal can be structured to work well, cash flow wise.
Here is a simple scenario to explain how a Builder Trade happens. A homeowner wants to buy a builder’s new spec home but cannot unless his home sells. The homeowner has had his home listed with a listing Agent, for the last 8 months with no buyers. The builder’s listing agent is going to go crazy if another interested party comes through their completed spec home with a home sale contingency.
Because the Realtors are usually not paid on the acquisition of the buyer’s home by the Builder, creative deals are struck to fairly compensate the agents involved. The homeowner’s agent is losing the commission on this home that he had listed. But, he understands that without the trade, it was unlikely he would have gotten paid at all.
The homeowner could not buy the Builder’s home unless his sold first – and this had not happened for over 8 months. The Builder’s agent would get paid upon the purchase/trade of the spec home. Because the Builder now owns the homeowner’s previous home the two agents could co-list it and share the commission or some type of arrangement could be worked out. Now the areas where decisions must be made are:
How much does the builder pay the home buyer for his previous home?
How much does the customer pay for Builder’s new build?
How does the Builder dispose of the buyer’s previous home?
These questions have answers that are easily arrived at by parties that want to find them. Remember “Cash is king”. Don’t use a dollar more of your own money than you need to. And don’t borrower if you can’t make the payments. Work with a Cash Flow Coach that understands how this works and can give you good advice about whether you are positioned well for this type of transaction.
In the end, the Builder loves trades! Why?
1. He maintains the sales price in his neighborhood.
2. By charging full price for his new home he keeps his neighbors and/or previous clients happy.
3. Because lesser valued homes keep their value better than higher priced homes he will likely not have to discount the home he acquires in trade as much as he would have his spec home.
4. Buyers of lower priced homes are usually more concerned with monthly payment and cash up front than with the home value and price of home so the sale is more likely.
5. Buyers of homes of lower value are more prevalent because these buyers don’t necessarily have homes to sell.
6. Even if he has to take a price reduction to sell the home he acquired on trade, a 20% reduction on a $140,000 home is less than the same 20% reduction on a $275,000 home. If a market is down 20%, then which home would you like to discount, your spec or a lower priced home?
7. The Builder prefers the lower priced home. If you have to reduce the value of a home, he says: “make it a home I DIDN’T build that is next to homes I DON’T have past clients in and in a neighborhood I DON’T own more lots in”.
8. The Builder also has other options, he might decide to sell the home he acquired using a land contract or lease option. He may even just hold and rent it.
9. When the values come back in Lansing in five years, what would be wrong with Build More owning six or eight homes of his choosing that he purchased in a very low market.
10. Renters and land contract buyers are more prevalent when home prices are down especially in this particular market where the property value decline is in part due to foreclosures and other credit damaging events:
a. More families are dealing with challenged credit, they still need homes and are having trouble getting loans these days.
b. People moving to Lansing, Michigan for 2 to 4 years are choosing to rent more often than in the past because they are afraid of getting stuck with a home they can’t sell in a few years.
Now is the time for your business plan to involve some calculated creative strategies that will allow you to profit even in what may be called the worst of real estate markets. All of the above statements are true and are all a win-win-win.
- You win as you are making money in a down market while moving homes.
- Your clients win as you have solved their problem.
- The person or family that ends up using or buying the homes you acquire win because they need a place to live and have limited options.
Do what makes sense, do it well and profit from it while adding a ton of value to a real estate market that desperately needs it!