Buying New Construction With Hopes Of Big Payoff

Added July 27, 2007 by Ilyce R. Glink

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Summary: A home buyer is considering stretching his pocket book and buying a new construction home in hopes that it will result in a big profit in a few years. Buying a home and hoping it appreciates is a risky move without a lot of wiggle room. The years of buying a home and having it appreciate quickly are over, for now.

Q: My wife has her eyes on a new home that costs $380,000. Her idea is to have the lender squeeze us into a loan for this house. Our income will barely cover the monthly mortgage payment.

The home, which is quite beautiful, is located in a new sub-division. Supposedly, we will be able to sell it in a few years and make a big profit.

I feel this is too risky. I would like to hear your comments.

A: You don't need my comments. You already know this is a risky move that could financial derail your family.

But let's take a look around at what's going on in the new construction industry at the moment: Developers around the country are desperate to unload new homes and are not only offering a lot of perks and upgrades, they are dropping prices of these homes in order to get them sold.

But even that isn't working for some developers. In the Atlanta area, several smaller developers have gone belly-up in the past year. Of the larger developers, KB Homes and Toll Brothers have seen sales slow dramatically and profits drop by as much as 45 percent. In Michigan, the economy is so bad that houses there are barely moving at all.

Yes, there are some areas where homes are selling more quickly than others. And, in a few communities, construction of new homes and new subdivisions continues.

But the years of buying a new house off the plans and flipping it automatically for more are over -- at least for now. Depending on where you live, and what you're buying, the down cycle could last for the next five years or longer.

If you buy this house, and everything doesn't go as planned, you can expect trouble at home, sleepless nights, and a future that includes a second or third job.

I'd take a pass.

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