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Know about flipping destination condos

Know About Flipping Destination Condos

A particular type of “investing” in destination condos has become an easy path to riches in some circles. It is asserted that flipping “preconstruction” condos can make “big bucks.”

This opportunity is created when developers offer the lowest prices to buyers before the condos are completed (or even before they are begun). Some purchasers buy with only the thought of selling as the condo nears completion or is finished for a quick profit. Thus, the condos are flipped.

But the risk in all this is that the condo price does not rise or, even worse, that the investor may not be able to find a buyer at all and have to take possession and live in it or sell the condo at a fire sale price.

Selling a lot of units “preconstruction” to investors often benefits the builder. Developers usually have to presell a certain percentage of units in order to qualify for a loan to finance construction.

Also, the early sales can be used as evidence of strong demand to prospective buyers. Some developers even make contractual commitments to raise prices
when predetermined sales thresholds are passed-a major motivation for bargain hunters to put down deposits in the earliest stages of a development. Contractual commitments to raise unit prices then promotes the appreciation that can make flipping profitable.

Aside from the risk to the investor that the market for condos will fall before getting a chance to flip the property, where the relationship between the investor and the developer is anything but arm’s length, the relationship between the developer and the “preconstruction” investor may appear questionable to the bank that finances the developer or to the eventual buyers. Of course, such concerns are unlikely if the market stays strong and all participants come away satisfied.

The problem is that condo markets are inherently volatile (at least more so than residential housing). If the developer winds up defaulting because of a spike in interest rates, some economic calamity, or simple overbuilding in that particular market, you can bet that the aggrieved parties will be looking for someone to blame.

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