My wife and I were recently discussing the state of the real estate market; particularly the differences between single family detached (SFD) “new builds” and high rise condo new builds.
We see that in many of the high rise condo buildings being delivered today as many as fifty percent of the units were originally sold to investors. We know this because of the very large number of units that go back onto the market (resale) as soon as the buyer closes the purchase with the developer.
This observation led us to wonder why the high rise developers allowed this to happen when builders of SFD homes made it EXTREMELY difficult for investors to buy in their communities; and even then as many as thirty percent of those houses were purchased by investors.
I believe that in both cases; the high rise developers selling to investors and the SFD developers not selling to investors do so because it benefits them.
In the case of the SFD developer, because the delivery time is only nine months or so, they can not afford to sell too many units to investors. In a typical SFD subdivision the developer needs at least two years to sell, build, and deliver the units before moving on to the next subdivision. During that time, new potential buyers will be “shopping” the subdivision, assessing whether or not they want to buy there, while folks who bought nine months earlier are moving into the subdivision.
Now, can you imagine how sales would absolutely drop off if nine months earlier the developer had sold fifty percent of the units to investors and those investors turned around and put the homes on the market as soon as they were built? How many potential buyers would feel comfortable buying into a community in which EVERY OTHER HOME HAS A “FOR SALE” SIGN IN FRONT OF IT? After all, we know from basic economic principals that an unusually high supply of homes will lead to downward pressure on prices? Who wants to buy into a subdivision if they think prices are going down and not up?
So, the SFD developer restricts sales to investors in order to avoid this problem and to protect their own interests and future sales.
On the other hand, the high rise condo developer has a very different sales and delivery cycle. With a high rise condo development, ALL units are delivered within weeks or months of each other. The developer does not face the possibility of their future potential buyers recognizing that too many units have been sold to investors. By the time we get an inkling of an idea of how many units sold to investors the buyers are already financially committed to the purchase.
So, in this case, the developer can sell to whomever the heck he wants and does not risk the possibility of future sales in that project being compromised; great for him but lousy for his customers. |
