Sale and lease back of display homes

From: Frank Modrich


Metricon advertise an 8% return on there properties, all kept in pristine condition

Has anyone had experience
My concerns are Asking price is it inflated to allow them t give you the return and

location,location,location they are all supposedly built in growth corridors???
 
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Reply: 1
From: Geoff Whitfield


The only one I've seen like this gave a leaseback only while the property was on display- perhaps 6 or 12 months.

A friend had a property some years ago which gave 10% in the first year- that went to 6% when it went on the market.

You may find that this sort of display home is built in an area where there's a lot of vacant land available- and where a lot of people want to build their own dream home. That might stunt growth.
 
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Reply: 1.1
From: Sergey Golovin


Geoff is probably right there in regards to location.
In regards to “guarantied rent” - if house on the market is let say for $200K and you just happily paid $218K the difference of $18K is your guarantied rent of 10% for next 2 years, well, something to that extent.

How do you find out? I do not know. It is tricky one. Maybe compare with other/similar properties in the area, with and without the rent?

Serge.
 
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Reply: 1.1.1
From: Asy .


Frank,

When builders sell the display homes, they often build the cost of leasing into the price, and often other sundries, like re-carpeting. The problem with these is that you will have the oldest house in a new area, and in addition to that, often on a high traffic road, which can make them more difficult to tenant.

If you are looking for cap growth, you will have to ride out the inbuilt costs before you appreciate any growth on the property.

That said, the right builder will look after the property, and you can inspect it whenever you like!!

This, like any other investment is a numbers game, if the numbers stack up, go for it!!

Hope that helps.

asy


"Don't forget what happened to the guy who suddenly got everything he ever wanted...
He lived happily ever after.
(Willy Wonka).
 
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Sim

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Reply: 1.1.1.1
From: Sim' Hampel


I've certainly seen what Asy described for myself... really nice display homes with a 10% lease for 3 years (sounds pretty nice !), but when I researched it a little more, I discovered that they were asking significantly above what other houses were selling for in the area - basically it was way over valued.

Even though it would have been nice to have a new property with 3 years of good +ve cashflow, it was obvious that the cost of this was built into the purchase price.

So do the sums, work out what the rental guarantee is worth over that amount of time, then subtract that figure from your purchase price. Now is this lower figure a reasonable price based on the expected rental yield for the area ? In the case of the property I was looking at - this analyis gave a yield of around 5.5%, when the average for the area was around 7-8% (this was southern suburbs of Adelaide)... so I let it go.

The numbers were indeed too good to be true.

 
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Reply: 1.1.1.1.1
From: Steve Piggott


Would have to agree with Sim here!

Developer/builders want to get their money back ASAP... so they will do an attractive looking lease package so they can get money for their next project. Their main concern is not the prospective buyer but their next development. They NEED the $$$$$$ and will offer enough bait to catch the unwary investor. You really must assess the property as if there was no tenant and you had to do your own lease or perhaps with an agent! What is the worst case scenario? what if the development stalls and your IP is a lone tree on a hill?? What facilities and infrastructure are available? Would people live there and at what rental return??
Am I labouring this too much????

Happy Investing Neb :)

PS. However.. if the deal stacks up DO IT!
 
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Reply: 1.1.1.1.1.1
From: Michael G


Hi,

In regards to numbers, pay a couple of hundred $$ and get a valuer to come in and value the house.

If the develop wants to harp about fixed term rent, then factor 5% for property management savings and 2% vacancy against the purchase price.

Explain to them that these are the figures used in seminars. If they have other data, then they, the vendor should produce it.

Of course which vendor in their right mind is going to go out and prove the BUYER that the vacancy is much BIGGER than 2% ???? hehe

Furniture package?, well by the time you get it will be 3yrs old. So have your accountant create a depreciation schedule. Don't forget to factor items under $300 can be knocked down 100% in 1st year (I think).

Basically you have to go in there and critised EVERYTHING, and reduce the value of EVERYTHING.

If they say that this is worth $x, get them to produce a receipt!.

Good luck, tell us how it goes!

Have a look at DHA homes, and see how much they are inflated because of leases.

Remember, after three years, your home will be valued at MARKET rates. So if you paying ABOVE MARKET now, and sell AT MARKET later, then you have lost money WHEN YOU BOUGHT. Its as simple as that.

Its even possible the MONEY YOU LOSE is EQUAL to the RENT you got. If that is the case, was there any point in getting the rental agreement in the first place?

Just a thought?

Michael G
 
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