I've been confronted with an investment opportunity that I find very appealing but is not easy for me to accept. Initially, I was planning on buying a new 2007 Toyota Camry for $26,500 ($18,000 balance transfer check at 5.99% life of balance and $8,500 cash). Today, a friend who is a real estate agent called me and let me know of an unbuilt condo up for sale with special pricing. The condo would have a value of $340,000 once built. I could buy this condo today at a special price of $300,000. So, I am looking at an almost immediate profit of $35k to $40k. The condo's construction would be finished around December 2007. In the meantime, I would need to come up with a 10% down payment on the condo.
The problem lies in financing of this condo. I would have to forgo the purchase of my car, leaving me with the $26,200. This is actually no problem since I am still going to school and don't need a car there. I do need to come up with an additonial $5000 - $7000. I can do this via another balance transfer or loan. I've read somewhere that it is stupid to use borrow money to buy a depreciating asset such as a car. So I'm very tempted to take the leap and put my money on this condo.
Being an unexperienced college student, I would like to receive some advice regarding this situation. What are the possible pitfalls? Is it ridiculous to do a downpayment with borrowed money? Any comments/suggestions are highly appreicated! Lets assume that I will no trouble making monthly payments on the balance transfers or loans.
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posted: Jul. 3, 2006 @ 4:03p
ArbolLoco
Tired Member
posted: Jul. 3, 2006 @ 4:12p
lilminwoo said: ...a friend who is a real estate agent called me... special price... immediate profit... unexperienced college student...is this a joke?
1. Your friend makes a big commission on the deal. So he may be a little less than truthful.
2. If your friend's figures are right (ha!), then you are looking at a 10% return for locking your money up for eighteen months. If the construction proceeds on schedule. That is almost 7% per year for a very risky investment.
3. Most people expect RE to drop in the next year or two.
4. You will have to pay approx $3K a month for eighteen months until the condo is built. For nothing. After that you will have to pay $3K a month for a place to live.
5. Sounds like you don't even have an income.
6. In addition to all the above, there are transactional costs with buying. Also with selling - after you graduate you may want to move. Note that HOAs are notorious for not being friendly to lease arrangements, so don't count on being able to rent it out.
7. WTF did those numbers of $300K and $340K come from (as if I didn't know)? Unless you are talking about California or NYC condos, that number looks pretty healthily inflated to me.
Don't do it. Don't buy the new car either.
lilminwoo
Member
posted: Jul. 3, 2006 @ 4:32p
Yeah he does make a bonus commission for the sale of this particular condo. He uses a portion of that commission to lower the condo price to $300K
At the end of the stock market 'boom' it was fueled by getting people that had no clue about stock values to pay massively inflated prices while the people that knew what was going on quietly cashed in and got out.
The same thing is happening now in real estate - and the person that has no clue about real estate values (and is going to get burned bad) in this case is you. Your friend makes $18k in cash for selling you the condo now, and makes another $20k in cash when you sell it. That is why he wants you to buy.
If you can afford to burn (lose) that money, then you can afford to risk it in the real estate market - but be assured, there is no sure thing with respect to profit in real estate in today's market.
lilminwoo
Member
posted: Jul. 3, 2006 @ 4:54p
The responses have made me feel like a dumb *$$ but they are appreciated.
xerty
Senior Member - 2K
posted: Jul. 3, 2006 @ 5:04p
lilminwoo said: ... but they are appreciated.Count yourself well ahead of the game then for listening to that good advice. If you can learn the lesson that "easy money" opportunities don't appear "just for you" from caring RE salesmen, stock brokers, etc, without actually investing and losing money, you'll have been burned several times fewer than average.
manuel
Greedy Member
posted: Jul. 3, 2006 @ 5:07p
lilminwoo said: I've read somewhere that it is stupid to use borrow money to buy a depreciating asset such as a car. So I'm very tempted to take the leap and put my money on this condo.
Wow, as true as this is I think you may have found a worse deal. Course anyone willing to pay 26K+ for a camry is just looking for ways to waste money.
Go for it.
soupcxan
Senior Member - 1K
posted: Jul. 3, 2006 @ 5:49p
lilminwoo said: The responses have made me feel like a dumb *$$ but they are appreciated. That's what we're here for!
lilminwoo said: The responses have made me feel like a dumb *$$ but they are appreciated.
You would've felt like a bigger dumb *$$ if you had done it.
unknownshopper
Senior Member<br>6K
posted: Jul. 3, 2006 @ 6:02p
manuel said: Wow, as true as this is I think you may have found a worse deal. Course anyone willing to pay 26K+ for a camry is just looking for ways to waste money.
FWIW, I could write a check for that condo, but I've never paid anywhere close to $26k for a car of any kind.
Hmmm, maybe that's why I could pay cash for the condo.
hokies2006
Member
posted: Jul. 3, 2006 @ 6:27p
unknownshopper said: $40,000 profit - $24,000 opportunity cost (what you'd earn in a CD over 18 months) - $20,400 RE commissions on sale
equals a net loss of $4,400.
Assuming the property is completed and appreciates.
Sign me up!
Where can I make $24,000 on a $75,000 18-month CD? I agree the condo is a bad investment, but your opp cost figure doesn't seem accurate since he'd only be investing $30,000 (down payment) + $45,000 in payments (~$2500/mo over 18 months).
But for the OP, let's assume interest on your mortgage is 6.5%. The interest you'd pay over 18 months alone would be $26,325. Factor in closing costs for buying/selling the property and the commissions on the sale and even with your "guarenteed $40,000 profit" you lose money in the end.
keokeo
Member
posted: Jul. 3, 2006 @ 10:01p
wow, you r out of ur league in this one.
unknownshopper
Senior Member<br>6K
posted: Jul. 3, 2006 @ 11:05p
hokies2006 said: Where can I make $24,000 on a $75,000 18-month CD?
I used the full $300k and a cash purchase transaction. That's why there weren't any interest payments in my calculations ... which returned the most favorable net outcome.
Your calculations included more factors and resulted in a more precise, yet even more unfavorable outcome.
Either way works for figuring out whether a deal is worthwhile or not.
FWIW, neither of us included a risk factor for the possibility of the builder not completing the project. Or of the project completing, but an excessive number of units remaining unsold and thereby resulting in sharply increased HOA fees.
But the more one analyzes this, the worse the deal looks. Unless, of course, one assumes more optimistic appreciation than the realtor has expressed.
anakinskywalker
Senior Member - 1K
posted: Jul. 3, 2006 @ 11:24p
It is nice to see after quite some time that someone took good advice from FWF on these kinds of questions without simply (illogically) disputing it and aggressively questioning the credentials and knowledge of the person who provided the good advice.
Anakin
ArbolLoco
Tired Member
posted: Jul. 3, 2006 @ 11:39p
keokeo said: wow, you r out of ur league in this one.lol what are you talking about? you're the guy from the other dumb thread on FW right now.
lilminwoo said: The responses have made me feel like a dumb *$$ but they are appreciated.
Where is the condo located and what is the square footage?
skwiggey
Handsome Member
posted: Jul. 4, 2006 @ 12:34a
You people suck at calculating profit based on leverage. That being said, sounds fishy, not "guaranteed"
xerty
Senior Member - 2K
posted: Jul. 4, 2006 @ 12:37a
ThankYou said: Where is the condo located and what is the square footage? I want to know too! I've got $340K in 2/1 ARM financing to buy myself a nice new (almost completed) condo. I'm just sure it'll be worth 10% more than I paid almost immediately, just like the last few years.
unknownshopper
Senior Member<br>6K
posted: Jul. 4, 2006 @ 12:37a
The real problem with buying an unbuilt unit is the near impossibility of being able to "overinsure" your way out of the investment.
xerty said: ThankYou said: Where is the condo located and what is the square footage? I want to know too! I've got $340K in 2/1 ARM financing to buy myself a nice new (almost completed) condo. I'm just sure it'll be worth 10% more than I paid almost immediately, just like the last few years.
I passed on a $250k condo earlier this summer cuz it was too much, so I'm not interested in this one. I'm just curious where it is and how big it is because I want to get some idea if this guy is getting totally ripped off by his friend or not.
lilminwoo
Member
posted: Jul. 4, 2006 @ 11:47a
It's located in Tysons Corner in Virginia. It's a 700 sq ft. luxury condo. 700 sq ft., pretty sick huh? The real estate agent is a very close friend of mine, and I had no reason to believe he was lying to me about the immediate increase in value of the condo.
Why is your "friend" giving you $40k if has the same chance as you to make this money?
That's what came to my mind first. If anything, your friend has more connections than you to make this go through quicker in terms of financing, etc.
Additionally, something is worth only as much as one is willing to pay for it. With interest rates climing, expect home prices to drop to compensate for increased mortgage costs. Not to mention the fee you will pay to the broker to sell the place for you, unless you go at it yourself. But I am sure your friend has a special deal for you if you enter a brokerage agreement with him to sell on your behalf...
Spending $26,000 on a car is just as bad an investment for an inexperienced college student. Your OP says you do not need a car: Who buy's a car, let a lone a new car for $26,000, that they do not need?
Buy used, get settled in a career, then add a little luxury to your life in the form of a new car.
Kempman
Senior Member
posted: Jul. 4, 2006 @ 11:53a
Why don't you ask the guys on this site what they think about your guaranteed $40k profit?
Reminds me of fleabay printer auctions where the USB cable has a value of $15
OP - I have a bridge for sale as well valued over a few billion, but just for you, I am willing to swap it for the new Camry.
DeMarcus
Member
posted: Jul. 4, 2006 @ 11:59a
lilminwoo said: It's located in Tysons Corner in Virginia. It's a 700 sq ft. luxury condo. 700 sq ft., pretty sick huh? The real estate agent is a very close friend of mine, and I had no reason to believe he was lying to me about the immediate increase in value of the condo.
Is this the one that they're building near Jones Branch Dr? If so, I think $300k is a good investment, though it may not pay off in the short run.
lilminwoo said: It's located in Tysons Corner in Virginia. It's a 700 sq ft. luxury condo. 700 sq ft., pretty sick huh? The real estate agent is a very close friend of mine, and I had no reason to believe he was lying to me about the immediate increase in value of the condo.
There are no friend's in business. Besides, never trust a real estate agent.
Outside of this deal he may be a great friend, but just wait until this plan goes even a little bit down the toilet: friends no more.
I honestly do not believe anyone can predict the value of a home 18 months from now; especially a unit which has yet to be completed. Perhaps the sponsor is having problems generating interest in the finished product, which is why the "deal" has come your way via your friend.
Unless you are absolutely okay with moving into this place yourself and floating the mortgage payment in case the bottom falls out of the market of you cannot get the $$ you need to turn a repectable profit, I suggest you walk away from this deal.
As pointed out, even if you sold for $40,000 more than you pay now, the Unguaranteed return on investment is not much better than a good CD or Money Market, which is guaranteed.
duna
Senior Member - 1K
posted: Jul. 4, 2006 @ 12:16p
Since the market, expecially for condos, has turned recently, this appears to be bs, or outright Ponzi.
Yeah unless I missed something or something has changed, you don't get a mortgage until you purchase the condo AFTER it is built (in fact with rising rates that is one of the risks OP faces). You do often have to put a deposit down though and it often is 10% or more of the overall cost of the unit. Builders in fact are supposedly notching up the amount of these payments these days as so many folks are now trying to back out. I actually used to own a condo in Tysons and I believe it is a good area to own a condo. I purchased mine back when everybody thought you were crazy to buy a condo (Lillian Court when it was pre-construction in '96). Though I like Tysons a lot (for a condo) the DC market in general and No. VA in particular appear to be really overbuilt condowise. The Washington Post has had several articles on their web site in the last few months on the number of condos sitting on the market. If you want to live there for at least the next 5-7 years that is one thing but I think the days of flipping preconstruction for profit are probably gone.
unknownshopper said: The real problem with buying an unbuilt unit is the near impossibility of being able to "overinsure" your way out of the investment.
Please explain what you mean by this.
One of the really favorable speculations has been to buy an unbuilt unit in an area of rapid RE appreciation. If prices continue to rise, flip for a healthy profit. If they drop, back out and forfeit the earnest money. Big upside and a fixed downside. Of course, that's when the closing isn't scheduled until the unit is completed - OP's situation is different and involves eighteen months of mortgage payments
IF the builder tracks to schedule.
But your comment seems to contradict this gamble?
Raf2
Senior Member
posted: Jul. 4, 2006 @ 10:25p
StevenColorado said: unknownshopper said: The real problem with buying an unbuilt unit is the near impossibility of being able to "overinsure" your way out of the investment. But your comment seems to contradict this gamble?
I think he means by burning it down, or a 'fire sale' to your insurer.
didYOUsearch
Cranky Member
posted: Jul. 5, 2006 @ 8:09a
thats what he meant
Robbyman
Tired Member
posted: Jul. 5, 2006 @ 9:50a
lilminwoo said: It's located in Tysons Corner in Virginia. It's a 700 sq ft. luxury condo. 700 sq ft., pretty sick huh? The real estate agent is a very close friend of mine, and I had no reason to believe he was lying to me about the immediate increase in value of the condo.
I am very familiar with that area. A lot of the complexes are coming down in price. I know there is one condo complex there, where they were asking $1 mil for a unit and now they are asking $700K. Tyson's is overbuilt. If you buy anything atleast get a townhouse. The condos will be the first to depreciate. I don't know your friend, or maybe I do, (Northern VA is a small place when it comes to knowing people) but it sounds like he is in it for the commission.
lilminwoo
Member
posted: Jul. 9, 2006 @ 11:30p
isles1 said: OP: unless I missed something, who would make the mortgage payments for those 18 months?
Mortgage payments wouldn't start until the condo is built. My plan was to sell off the condo immediately for the 40k profit. But apparently, I don't know jack squat about the real estate market. So I have decided not proceed with the purchase.
Probably should post a different thread on this but what's wrong with buying a reliable car for $26,200 OTD (TN sales tax is a pain) when I will need a car upon graduation anyways? I want something reliable with good power. The Camry offers this. Maybe you guys just think its just strange that a 23 year old college grad isn't opting to buy a RSX, 350Z or some other sports coupe...
codename47
Senior Member - 3K
posted: Jul. 10, 2006 @ 12:01a
reliable cars do not necessarily cost 20k or 10k for that matter. eBay is your friend, especially when car shopping.
Raf2
Senior Member
posted: Jul. 10, 2006 @ 12:22a
lilminwoo said: Probably should post a different thread on this but what's wrong with buying a reliable car for $26,200 OTD (TN sales tax is a pain) Tennessee sales tax? Virginia condo? Where are you from? If you did buy the car, you'd pay the sales tax where it is registered. TN is a high-tax state, VA is a relatively low sales tax state, but they do have a personal property tax on your vehicle (another money-draining reason not to finance a brand new Camry)
when I will need a car upon graduation anyways? Upon graduation? You're not saying you need a car now, so why would you go $18k in debt to buy something you don't need? By the time you graduate, hopefully you'll realize that going into heavy debt for a car you admittedly don't need isn't exactly a 'wise financial decision'.
I want something reliable with good power. The Camry offers this. Maybe you guys just think its just strange that a 23 year old college grad isn't opting to buy a RSX, 350Z or some other sports coupe... A used (or if you don't like that word, "pre-owned") Camry offers these same exact things, but you don't have to go into debt for them. Sure, it doesn't have the new car smell, but you can buy that crap in a spray bottle.
lilminwoo said: It's located in Tysons Corner in Virginia. It's a 700 sq ft. luxury condo. 700 sq ft., pretty sick huh? The real estate agent is a very close friend of mine, and I had no reason to believe he was lying to me about the immediate increase in value of the condo.
so youre about to spend 300k on a studio in virginia at the near end of a bubble housing market... hmm that seems rational
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