San Diego Housing Bubble News and Analysis

Since they mentioned Lease Back opportunity, I'd say it's exactly that--one can purchase a model, but you need to be willing to lease it back to John Laing until they're finished with the project.

I don't know much about it, but I know of one other example where it was actually a pretty good deal in that the developer leased it back at an above market rate.

Not sure how commonly this is done, but I can see where they'd do it in a declining market--they'd get more for it today than they would 2 years from now.

Hi sdcellar, thanks for pointing out the implications of the lease back opportunity. After thinking about it, this indeed seems to be a smart move for a builder in a down market. I guess the down side of doing so is the builder's risk-avoidance image created by this offer on potential buyers.

Even in a sellers market, it's very common for builders to sell the models 6 months (or more) before they're finished with the project.

In today's strong buyers market, builders have another reason to sell the models early: today's price is very likely to be higher than next year's price.

I don't think the builders will stop building in 4S. The development of 4S is 2/3 finished. And since it's a master-planned community, they'll finish building everything out.

Is it just me or does a three-car tandem garage sound like a nightmare?

Silhouette's lots are all graded and ready to go for a long time coming. the weed to dirt ratio is increasing on these lots, in comparison to the lots for the other 4S projects.

the lease back plan by the builder is a good idea, but if they can't even finish selling phase II, I don't see how they are going to get someone to buy their model homes at $100,000 above their already build phase II homes that are still standing empty.

Do the homes come with the furniture?

Typically model homes are sold with everything in them from the furniture to the glued down place settings.

Some people I know bought a model home. To this day, they still have the glued down stuff -- very tacky.

When a developer leases back a model home the lease rate is usually sufficient to cover the entire mortgage payment at 100%. In a good market a model home purchase/leaseback can be the ultimate flip. The property completely services its own debt, it is maintained professionally, and it is maxed out with all the upgrades and options imaginable, including the professional landscaping and yard improvements.

However, if the market goes soft between the time of purchase and the time the lease expires, such an arrangement can be a problem.

One example is what happened over at Bressi Ranch. An investment group bought 18 model homes from Lennar in early 2005, apparently at their retail pricing, which included all the options, upgrades and furniture. Lennar leased them all back while they finished building out their projects. When the leases were finished the LLC got the homes back.

Unfortunately for them by the tme they got the houses back the market had already gone from booming to squishy, and pricing had stabilized out. So they were sitting on 18 top-of-the-line homes, each of which had been priced $150,000 - $200,000 or more above the intial base pricing, but was now only about equal to the base pricing or perhaps only slightly higher.

This LLC was apparently successful in selling off a couple units right off the bat. Who knows, maybe a couple of partners decided to buy them. The other 16 were listed in the MLS for a while, with no success. As time wen't on they started discounting the pricing but to no avail.

Finally the LLC ran an auction about 9 months ago. There was an article in the Union-Trib on it and a couple of our posters attended. To make a long story short, that auction failed miserably - lots of lookers and no serious buyers.

Since then the LLC has been selling one or two of these units off every month, at reduced prices that are generating outright losses of $50k and up, not counting brokerage fees or the mortgage payments they've had to pay while these homes langish on the market.

The last time I looked, there were still a couple of these listed in the MLS, and if the sell within their listing ranges they'll generate $100,000 - $150,000 in overall losses by the time its all over.

Of the 7 residential "projects" at Bressi, 6 of them were built by Lennar. The 7th one was sold off by Lennar to Barratt, who bought the finished subdivision lots in 2005, apparently for about $500,000/lot. Barratt has been building 4,500 - 6,200 SqFt tract homes on these lots and selling them starting at $1,800,000 and up. I personally saw the appraisals on 3 of those sales, including one of the model homes. In the year that they've been selling those homes, it looks like Barratt has been able to sell off 9 of the units, including most or maybe all of the models. They still have another 15 to go, about 5 of which appear to be completed and just standing there.

Inasmuch as Barratt paid so much money for those lots they can't really go smaller on their homes, They probably have a little room to drop pricing, but if they do so at this point the project will probably turn out to be a loser for them because of the length of time they've spent on it and the amount of carrying costs. By the time the model home leases are over I imagine those homes will be worth a lot less than their purchase prices.

The moral of the story is that a model home purchase with leaseback can turn out to be a bad move if the market isn't booming and you don't plan to live there when its over.

In anyones opinion, is this a little too premature to sell off the models when they are only in phase 3 out of 9. Does this sound like they have given up selling or is it typical for developments to do this so early in the selling?

Apparently it is the in thing to do these days. One thing that selling a model early in a project does for the project is it instantly provides a closed sale. Closed sales are of great value at the outset of a project because they set a price range for the project from the outset. That willing buyer pulling the trigger at that price is considered proof that their list prices are reasonable, and these inside sales comps are always given more weight overall than sales from outside the project. A closed model home sale will get used as a comparable sale in subsequent appraisals until it becomes too dated to use.

Of course, when using a model home an appraiser is supposed to take into consideration the effect on value of the furnishings and other non-realty property included with the sale as well as all the options and upgrades. The point remains that, beside reducing their carrying costs, selling model homes and then leasing them back for a year or two is almost all poisitive for a builder.

Seeing as how they've apparently already sold some homes in this particular project I guess the "closed sale" aspect doesn't apply. But the "reduced standing inventory" argume still does apply.

The models sure are nice to say the least. I wonder if the furniture comes with it or is it just the upgrades such as the applicances, fixtures, blacony , back yard etc....

Below are the articles about the Bressi Ranch flips that Bugs mentioned. The partners of the LLC are lawyers. Since it's an LLC, I wonder if they can shutdown the LLC & leave the lenders holding the bag.

http://www.signonsandiego.com/uniontrib/...
http://www.signonsandiego.com/uniontrib/...

You would normally buy a model home because the total package appeals to you. You want to live the lifestyle they portray in their marketing materials.

Model homes are USUALLY sold with all the furniture, artwork, rugs, fans, shutters, TVs, etc, in place. Once in a while the big pieces of furniture are moved out just because the buyers flat-out don't want them.

All 3 models sold in under a week. Seems the market is not that dead.

I wonder if it was the same buyer on all three properties.

Models are also the worst locations in the neighborhood. Right in front of the whole neighborhood where every one driving in lights up your house - you're on display type of thing.
Cool.
Cow_tipping.

They are right across the street from the school. I can only imagine the line of cars you have to pass through just to get in and out of your garage. Sure they are nice but nothing you couldn't have done yourself for the extra $100,000 they added on top of the base price. Heck for $100000 on top of base price I can turn it into a palace and of colors and choices that I made not some random designer.

bugs, how can we find out if it was the same buyer? I was shocked when I heard how fast they sold.

If you post the addresses of the 3 model homes, I'm sure some of the folks here can tell you whether it's the same buyer who bought all 3 houses.

But, you have to wait until the transactions closed.

Unless the developer was finished with the project these sales would most likely include a leaseback agreement that would be intended to last long enough for the completion of the project. That's what leads me to question whether the buyers were owner-users or investors.

The builder is in phase 4 or 5 of 9 phases so you're right about this most likely being a lease option so probably an investor.

Since all signs are there about a decline wouldn't this investor be smarter than to pay for a model as opposed to a base home then putting in 50K of their own cash to deck it up then save 50 grand in the long term?

If an investor was buying the hype that this downturn will end shortly then they might roll the dice. By buying now they are locking in a discounted price and having the developer completely carry the entire mortgage payment and other holding costs until the project is completed, at which point they get back a model home that's never been lived in and has every option that builder offered.

All it would take for this strategy to work is if the market rebounds and starts to head back up by the time the project is completed. I sure as heck wouldn't take this gamble, but I could see how a die-hard flip addict would see this as a "bold move" that might lead to a big payday.

I agree....the models are in a bad location. I would not want to be by all that school traffic. The inside is nice but...location stinks.

We asked the sales people when they thought the model homes would be released to the buyer to move in and they said in about a year and a half. So I assume that's their new projected completion date.

I also noted that the sales flyer said the homes from phase II came with pre-selected options. Since the homes in phase III were already sold/being sold, either the homes in phase II were not the "popular" models or they fell out of escrow.

As I see it, these builders are fighting two battles - first they need to get their buyers in and sell their units, then they have to find financing for those buyers. Regardless of prices, the availability of the liar loans is dwindling.

One of the cute tricks the builders play is to create a charity organization that they fund

This org then provides downpayment assistance for 'needy' buyers and helps them obtain financing

Builder gets tax write offs for charitable contribution, goodwill for 'taking care of' the needy (yeah, right!) AND gets another house out of their inventory

Prices in California are probably too high for this game to make sense here

Cow_tipping - seen any of this going on in your neck of the woods?

4P,

You're right, that is a pretty cute trick. I hadn't heard that one before. Is this something they're doing in the lower priced regions?