Buying Unfinished Builder HousesPosted on March 9, 2011 by
Don’t be fooled: all that glitters isn’t gold. There are a large number of unfinished builder house sand small subdivisions where the builder ran out of money before they finished the project. Many of these were built by reputable builders who did everything right and just got caught in a sinking economy. They may have had a construction loan with a bank that failed. Though no fault of their own, they were unable to finish their projects. They may have been unable to sell their other homes, leaving them short of the money to finish other projects.
There are also properties out there that are a money pit waiting to catch the unwary. I know of several subdivisions that were built to sell to unwary investors. They were clearly built to pull cash out by the developer. Some of them are so bad, that they will ultimately be bulldozed. (We call those Scrappers). They do not conform to current building codes, and have covered up shotty workmanship.
I once purchased a house that was full of covered up fraud. The furnace was built out of spare parts, the shower was plumbed with a garden hose, and the washer dryer connections just rested in the wall. When I turned on the shower, I was left holding the pipes in my hand! The seller told me a very convincing story about having the HVAC inspector eventually approving the system, after thoroughly checking the system out. All of these issues were covered up by the sheetrock and without x-ray vision, I could not have see these issues. Fortunately, we purchased at such a low price that we still made money, but not as much as we had hoped for.
When looking at distress property with issues, do your homework! There can be issues with the construction, code violations, zoning or deed restriction issues or title issues. Just make sure you don’t get caught holding the shower pipes, like me!
Good inspectors are worth the money. If you are contemplating this type of project be sure that your skill set matches the project, or that you have people on board who have these skills. Get an owners title policy, and read the title exceptions. A good hard money lender can be a source of information. If they do not like the project, ask them why. Remember that the contractor who looks at the house is ultimately looking for work and may not tell you the whole story.
This is absolutely not to say that some unfinished houses are not great opportunities and very profitable. Just remember to analyze the risk reward equation and make sure that what you purchase is a good use of your time and resources. There are lots of houses out there right now if it’s not a good deal, pass. Another one will come alone in no time.