Comments on: Real Estate Development or Gambling?

By: Anon

Anon — Sat, 22 Nov 2008 03:34:40 +0000

Here’s another interesting example of “Will This Flip Fly”. A developer has the penthouse unit at 495 Harrison in the South End on the market for $4.5 million. They purchased the unit as raw space 2 years ago for $1.4 million at a foreclosure sale.

Questions: 1). What is the right price for this property in order for the developer to turn a profit? 2). Is there a buyer out there today that will pay this price?

By: Observer

Observer — Sat, 22 Nov 2008 03:29:54 +0000

Take the bet…and then double down — there are a lot of numbers missing in the PF as expressed by the other broker…..e.g. arch., permit, condo docs, closing on acq., closing on units, enviro assesement and appraisal for bank, loan fees, imputed dev fee, etc. Little #s make a difference in these thin deals.
In particular, the const. number of $100K for 4050 nsf (excl the retail) is unlikely unless this is a shave and a haircut — that’s about $25/nsf – and excludes any common area improvements (paint, windows, doors, floors). $11,250 per unit gets a very cosmetic cleanover – but not a new bathroom and kitchen.

By: John Ford

John Ford — Sat, 22 Nov 2008 02:26:44 +0000

I can’t argue with you. No win situation – for me.

By: BS

BS — Sat, 22 Nov 2008 02:13:45 +0000

Depends on how much developer is willing to come down on price to move units. The carrying cost will kill ‘em if he sticks it out. Couple of things in favor, first and foremost is small price point means conforming loan, PMI and less than 20% down is option. But mortgage on $375k – 350k is a little more than rent on larger 1 bed would be.

Some basic assumptions are: 10 units sell between $360k and $375k. To get the $275k developer will have to push everything out by 9/2009. (About $800/day carry.)

Can’t sell till 11/2010 and he’s somewhere around BE.

Drop to $340K and get stuff out the door by end of January ‘09 and he’s back to $275k.

Every 14-15 months eats an entire unit. Tuff spot to be in.

Close call. I left out a ton of costs, so I’d go with “No”, take the bet.

BUT: Bad bet. You win, you loose. You loose, you loose. You win the bet means nothing is moving and you loose cause well it’s also your biz.. You loose the bet, you loose the bet.