Why Are Some People Losing Money On Assignments?
Register Now11.11.23
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Assignment
In the dynamic world of residential real estate, not every venture succeeds; more importantly, not every venture succeeds for flippers – long-term investors always win. The current landscape has left many puzzled and questioning, “Why are people losing money on assignments right now?”
Let’s peel back the layers of pre-construction investing and uncover some hidden opportunities in today’s market as well as show a path to a profitable flip in pre-construction investing. Whether you’re a seasoned investor or a newcomer to the real estate game, understanding the nuances of assignments in today’s market is paramount.
Let’s begin.
Pre-construction investing has been a lucrative asset class for many investors over the past decade. In 2019, we were flipping assignments with $200-$300,000 profit, in some markets in 2020-2021 we were flipping assignments for upwards of $500,000 profit. Let’s dive into the benefits of pre-construction investing and what to look for when choosing the right project, then get into why some are losing money in today’s landscape.
The benefits:
- Deposit Structure Over-Time
- No Worry About A Mortgage For Years
- Brand New Home
Having a deposit structure that you can pay over time is great for first-time investors, first-time home buyers as well as seasoned investors who want to spread their capital over a longer period as opposed to deploying 20% right away. Not having to worry about a mortgage right now until 4-5 years from now is also great because some investors don’t want to deal with closing costs on a property now and want to delay that for a longer period. We also cannot deny the fact that you are getting a brand new, never lived-in before property that will be attractive to tenants or yourself if you are moving in.
The investment angle of pre-construction investing is extremely important to understand. There are two things we look at in pre-construction when advising an investor if it is the right project to buy for them or not.
- Time
- Spread Percentage From Resale Values
When purchasing pre-construction, you typically purchase at a 20-25% premium compared to brand-new buildings in the area on the resale market. The time between the time you buy and the time you close is paramount for a successful flip. Here is an example of a project in Toronto that would make sense in terms of the numbers
1 Bedroom, 1 Bathroom
Pre-construction: Q Tower (448 sqft for $790,900, Occupancy – 2029) = $1765/sqft
Resale: Harbour Plaza Residences (529 sqft sold for $720,000) = $1361/sqft
The price difference is 22%. If we factor in a very conservative 7-8% growth in the marketplace per year. We could be looking at a 42% growth in the resale market by 2029.
The flip here could make sense depending on how the market performs in the next 6 years because if you are purchasing at a 22% premium, your breakeven point is roughly around that 3-year mark then you have 3 years of growth. Your potential exit on a deal like this could be about 20%.
Now let’s break down the numbers of what that could mean dollar-wise…
20% down: $158,180
20% return on $790,900: $158,180
Now why are some assignment flippers today losing money? The reason why is because of two factors:
- There wasn’t enough time between the time of purchase to the time of the sale.
- There are less buyers on the market today.
Flippers or speculators in the marketplace can always get caught in the middle of a market that is underperforming because of the current state of the economy. If you find yourself in this crack, you should prepare to close and keep the property. If you keep the property then you have other advantages such as principal pay down from your tenant, more capital growth over time as well as leveraging the equity in the property over time to purchase more real estate.
Let’s run through an example of a deal that someone could be losing money on…
Preconstruction Purchase of $1500/sqft in 2021 closing in 2024. There is a 3-year spread between the time of purchase to the time of closing. This deal could have been purchased at a 20% premium in comparison to resale values in 2021. Even if the market had gone up 7% per year, you would be at a breakeven point on the investment after 3 years, with no profit built into the deal on closing. The reason why some are losing money is because the unit may be valued at what they purchased it for but because they have a tight deadline to close, they are forced to sell it cheap to get a buyer on the table. These investors are the ones who either can’t qualify because of the higher interest rate environment to close or they were flippers that didn’t time the market correctly.
When investing in real estate, it is extremely important to be strategic in your investment. The numbers are where the money is, there is tons of money to be made and strategic investments at scale can yield incredible returns but there is always a downturn in the marketplace when investors don’t buy strategically.
Regardless of what real estate investment you are making, it is extremely important to think of the investment as a long-term hold. Flippers can always get stuck in the crack of the market. The best investment is the one you can keep but have the option to flip and cash out if market conditions are in your favour.
Hope this helps in your real estate investing journey!
