Sounds easy. But what am I overlooking?

**sand2418** · 04-02-2008, 05:51 PM

Here's my dilemma: My wife and I financed a 1 acre lot (bought for $50k) in a very desirable subdivision in South Carolina, last two available lots in subdivision .45 and .50 an acre are selling for $70k-$75k. The last four custom homes in the subdivision are near completion and listed for $350-$400k, the lowest priced being 2200sqft, highest 3000. With construction costs down, I have a very good builder in the area who will build a 2600sqft home for $220-230k. Home prices never skyrocketed here, so homes are still selling. Here's my question: Is it possible to get a construction loan for the house and sell the house before it is completed for profit? It all sounds easy when my wife and I talk about it, but are we missing some big details? I know getting a buyer is the biggest obstacle, but if we were able to get one, potential profit could be around $100K.
Lot/construction loan=$270-280, sell house for $370-380= $90-100k profit
I know there's realtor fees, closing costs, etc, but the profit could be substantial. We plan on rolling the profits into a 1031 exchange for rental property investments. Would like to hear any advice or comments. Thanks.

**kosmo** · 04-25-2008, 08:20 AM

im not a RE agent, but since no one answered your question I guess I will take a stab.

You are missing carrying costs, risk, listing fees, attorney fees, and taxes

costs- a loan on a $230,000 will be about $2000 per month- so if it takes a year to sell, it cost you $24,000.

taxes- you will pay short term capital gains tax since you wont have ever lived there. so you will pay $30k on $100,000

Risk- not immediately quantifiable but there are all sorts of things that can (and will) go wrong and will be unexpected. at least 3 things will occur that will cost you money, guaranteed. what if it doesnt sell? what if the builder doesnt seal a wall and there is mold? what if there are unfoeseen site conditions? etc.

if you want to sell your property you will probably want to list it. 6% of $350k= $21,000

if you dont list it it, you will need an attorney to draw up purchase agreement.

between all this stuff your $100k is probably more realistically about $25k, IF you sell within a year

so teh question is whether the risk of losing a little (or maybe alot) of money is worth $25k (10%). which, incidentally is less than the average return of the stock market

**wexeter** · 09-19-2008, 04:45 PM

You have to be careful with the 1031 exchange here. The issue is that you must have the intent to hold property as rental or investment property in order to qualify for 1031 exchange treatment. Your plan is really to build and sell, which technically does not qualify for 1031 exchange treatment because you had the intent to hold for sale and not hold for investment.

I would be happy to delve into this deeper if you like.