A significant method of building real estate wealth in the recently booming market has been buying newly built properties. In many rising markets investors have been able to sign purchase contracts for new properties. These properties typically take several months to build. The contract price of the property is the prevailing price at the time of the contract. In fast rising markets the price of the property may be substantially higher on the day the property is actually purchased. The gap between contract date and purchase date can be six months or more. This gap in time can allow for a property that has risen in value substantially. For example, a property that is purchased for $300,000 will not be built for 6 months. If the annual appreciation rate in a real estate market is 30% then the value of the property in six months will be $345,000. When the buyer purchases the house on construction they will have paid $300,000 for a property now worth $345,000. There is built in equity on day one. The buyer can either move in to the property or use it as a rental property. It is important to note that many builders place restrictions on investors buying new properties. This property may be purchased with 100% financing, an option that is available for primary residences as well as investment properties. The lender that does the purchase loan will value the property on the lower of the purchase price or current market value. If the purchase price is $300,000 and the current market value is $345,000 then the loan will be for $300,000. On the first day of ownership the house will have a loan to value ratio of 87% (300,000/345,0000). Some lenders will allow a borrower to refinance this property the day after purchase at the current appraised value ($345,000). The important thing to note is that this type of refinance is usually only to lower the payment, not to take cash out. Taking cash out in a refinance is usually restricted to six months or a year later for a property purchased with 100% financing. A borrower can still get a refinance just to lower their property. The borrower in this instance can even get a minimum payment loan on the property. Assume that the current loan payment on a $300,000 loan at 6.5% is $1,896. With a refinance into a minimum payment rate loan of 2% the minimum payment is now $1,109. This represents a reduction in the monthly payment of $787, or an annual lowering of payments of nearly $9,500. This reduction in monthly mortgage payments can be useful for an investor or a regular buyer. |
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