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Builder selling model and leasing it back

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3 Putt

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Aug 18, 2005
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Certified General Appraiser
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Ohio
A local builder is currently selling some of the models to different investors. Then, the builder leases the model, from the investor to continue using as a model home.

I understand how this would allow the builder to capture the dollars as if it were a sale and create cash flow. I also understand the investor thinking they are getting a good deal, hoping the real estate market will rebound and they are buying at the bottom. However, I have never seen this happen before and it begins to sound like a smoke and mirror magic trick. Anyone familiar with this scenario and willing to share some thoughts?
 

leelansford

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Mar 29, 2002
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Certified Residential Appraiser
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Illinois
A local builder is currently selling some of the models to different investors. Then, the builder leases the model, from the investor to continue using as a model home.

I understand how this would allow the builder to capture the dollars as if it were a sale and create cash flow. I also understand the investor thinking they are getting a good deal, hoping the real estate market will rebound and they are buying at the bottom. However, I have never seen this happen before and it begins to sound like a smoke and mirror magic trick. Anyone familiar with this scenario and willing to share some thoughts?

Each situation is unique.

Consider that it might not be an arms-length transaction.
 

Lawrence R.

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Mar 27, 2007
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Certified General Appraiser
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South Carolina
I have seen this done before, and I agree it is a way to keep the lines of credit open for the builder.

Once or twice is no big deal for a large to medium builder, but if a builder has 5 or more models set up like that, he is on the verge of disaster.

You do have to look at that builder's "sales" carefully to make sure if you use any as comps they are at arm's length.
 

Kevin A. Spellman

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Aug 30, 2003
Professional Status
Certified Residential Appraiser
State
Massachusetts
The questions to ask were the buyer giving future rent at closing from the proceeds. Was the sale discounted in respect to the monthly rent? Can I buy a property under the same conditions?
 

Mztk1

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Dec 3, 2006
Professional Status
Certified Residential Appraiser
State
Florida
I bought one of those and now live in it.

It is common practice by me.

Most of the time the builder is looking to liquidate in order to begin a new project but he needs to retain the models for showing the development he is selling. The models are typically top of the line in their upgrades and everyone who walks through it is 'wowwed'. Sales agents get the "Can I buy the model?" question over and over. So the sales office will keep a list of very interested buyers. When the time comes, they go down the list till one that wants it qualifies and they will not waste time. Because the "showcase" home is in high demand, the builder will usually give you no more than a week to be fully approved and ready to close. If you can't do it, someone else on the list can and will. The models even remain in demand now, in slow times. During the busy when every one's hobby was to go look at new houses, the demand was incredible. All my children's friends from the neighborhood, when they come over, still say how they wanted "this house". The builders usually rent them back at a good rate too.
 

Kevin A. Spellman

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Professional Status
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Massachusetts
Jim did you receive monthly rent, discounted price and how long was the agreement enforced or used? Were the market conditions in your favor or the builder’s favor when you bought?
 

Obsolescent

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Jul 6, 2004
Professional Status
Certified Residential Appraiser
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Minnesota
I presume you have been asked to do an appraisal for the sale of the model to the investor. Not unusual.

This can be a complex assignment in that
1) the models typically have all the bells and whistles and may be of higher quality than what it typical (overimprovement)
2) the garage was converted into a sales area, (you might have to do a hypothetical that the garage will be converted back - or the cost to cure to turn it back into a functional garage.
3) they are located at higher traffic areas at the front of the development,
4) though never lived in, its not really considered a "new" home because the flooring has been walk over, the 1/2 bath and kitchen probably used by sales staff, mechanicals have been in use, etc. Needs an appropriate effective age determination.
5) best to use other model homes, which you won't likely find within its subdivision.

Select the homes within the development with the most upgrades and try to find sales of other model homes in other nearby developments if they are available.
 
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Couch Potato

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Mar 15, 2004
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Certified Residential Appraiser
State
North Carolina
It is a very common practice, and I'm amazed you have never seen it before. You will want to take a good look at the details of the sale. Rarely is the cash exchanged in these sales reflective of market value. The lease, personal property, repair issues, and many other things factor into the deal.
 

Riick

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Aug 14, 2007
Professional Status
Certified Residential Appraiser
State
Delaware
A local builder is currently selling some of the models to different investors. Then, the builder leases the model, from the investor to continue using as a model home.

I understand how this would allow the builder to capture the dollars as if it were a sale and create cash flow. I also understand the investor thinking they are getting a good deal, hoping the real estate market will rebound and they are buying at the bottom. However, I have never seen this happen before and it begins to sound like a smoke and mirror magic trick. Anyone familiar with this scenario and willing to share some thoughts?
VERY Standard Builder Operating Procedure.
No smoke, No mirrors
Bad part of owning the Sample House is that it's virtually always on a very visible lot,
where a major amount of traffic in & out of the development passes, and often visible from the road and with audible distance of road.
 

LA Woman

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Joined
Jul 18, 2007
Professional Status
Certified Residential Appraiser
State
California
Common practice out here in California also, but most people are not aware of it unless they ask. No smoke and mirrors, usually a good business decision for both parties.
 
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