The current state of the real estate market is nothing short of unusual—it’s downright crazy. Buyers are engaged in bidding wars, offering cash above listing prices, and the market is buzzing with activity. What’s the driving force behind this frenzy? A structural imbalance between the supply and demand of houses. In this blog post, we’ll explore how builders, contractors, investors, and even business owners can strategically leverage this housing market boom for profitable outcomes.
Unpacking the Housing Market Dynamics
Common wisdom suggests a shortage of four to five million houses to meet the current and future market needs. The scarcity of available houses has led to a scenario where buyers are aggressively pursuing any property that hits the market. Now, let’s delve into how different players in the market can capitalize on this situation.
Builder and General Contractor Strategies
When we talk about builders or general contractors, we’re not referring to major corporations like Pulte or Lennar. Instead, we’re focusing on local builders and contractors who can fill a gap in the market. The strategy involves identifying vacant lots, especially infill lots or underutilized land in both urban and suburban settings.
A Strategic Play for Builders
Builders can approach property owners with vacant lots, offering an innovative deal—an option. Instead of buying the property outright, the builder pays a non-refundable amount, say $5,000, for a purchase option. This option grants them the right to buy the lot at the full market price within a specified timeframe, typically 24 months. During this period, the builder has the freedom to conduct due diligence, secure permits, and even make improvements to the property.
Crunching the Numbers
Builders can invest in creating a turnkey package for construction. This involves developing blueprints, obtaining necessary permits, and estimating construction costs. With a cost basis in hand, a builder can approach lenders for a construction loan, covering up to 90-95% of the total cost. This way, builders minimize their out-of-pocket expenses while having the potential to construct a profitable property.
Investor and Business Owner Opportunities
For investors and business owners not directly involved in construction, opportunities still abound. By partnering with a builder or contractor, or even by connecting with someone in the building industry, investors can engage in option-based deals with minimal cash outlay.
Risk Mitigation and Upside Potential
The key to success lies in keeping speculative money out of pocket low. By structuring deals with due diligence, involving surety bonds, and managing project timelines effectively, risks can be minimized. The potential upside, on the other hand, is substantial, with the opportunity for 10x or more returns on investment within 12-14 months.
A Low-Risk, High-Reward Play
In a housing market facing a deficit of millions of homes, strategic players can turn this supply-demand imbalance into a lucrative opportunity. Builders, investors, and business owners can collaborate to address the shortage by developing vacant lots into turnkey residential properties. With a focus on option-based deals, due diligence, and effective project management, this approach offers a pathway to low-risk, high-reward returns. As the housing market continues its unprecedented run, these strategies provide a playbook for those looking to capitalize on the frenzy.