Real estate investments are often attractive to buyers as a potential means to wealth accumulation, and residential dwellings also have the emotional appeal offered by a place to call home. Owning your home is part of the American dream, and many extend the vision by turning a property into income. Still, real estate is volatile and subject to ups and downs.
A hot real estate market may be evidenced by rapidly rising prices, which fuels the compulsion to buy. In some tight markets, potential buyers initiate bidding wars, offering more than the asking price for desirable homes. But these boiling market conditions can also cool as rapidly, halted by external forces like an interest rate increase. As a result, the house that had five above-asking price offers last month might sit on the shelf next month with no reasonable offers forthcoming.
Buyers and sellers expand their horizons.
When markets change direction, buyers and sellers both need to adapt. For example, a slight change in price or interest rate can exclude a potential buyer from qualifying for their targeted acquisition, narrowing the pool of potential buyers for both personal and investment homes. Conversely, a more competitive market may reduce the available supply, further raising prices. In these conditions, some potential buyers may expand their consideration of potential purchases. Similarly, owners with no prior intent to sell may decide to jump in while prices are high.
What does this mean for owners of unfinished houses?
While an owner can always put their unfinished, under construction, or in-need-of-work home on the market, some conditions may be more supportive of the potential for success. When buyers need more options, they may consider a property they would likely overlook in times of greater supply than demand. A potential buyer "priced out" of their target market may consider buying an unfinished home and completing it to their specifications.
Construction loans are often short-term and typically carry higher interest rates than conventional mortgages. Still, that higher rate is a temporary concern. It holds out the possibility that the owner will be able to acquire a more favorable loan when the construction is complete if rates change during the project's duration. Some investors may also consider hard money loans for this purpose. Again, the interest rate might be higher than with a conventional loan, but the term is shorter, and the approval may be faster.
What about disclosures?
As with selling any property, sellers are obligated to offer honest information about some essential aspects of the dwelling. Disclosure requirements vary by local and state law but almost always require that sellers share negative information about the property they offer for sale.
The bottom line is that you can buy or sell a house under construction. For potential buyers, it could be a way to maximize buying power and acquire a custom-made home by finishing the work after you buy the property. But there are potential pitfalls to look out for, so proceed with caution.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.
The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.
