What would you say to a brand-new home with a long-term tenant in place, guaranteed rent, no maintenance and discounted upgrades as an added bonus?
Interested investors are eagerly saying, “Yes, please.”
Model homes allow real estate investors to buy at low cost, immediately lease the property and potentially sell high. By utilizing builder leasebacks, investors can cover much of the cost associated with the home, receive free maintenance and keep the investment property pristine during the life of the lease.
Through a builder leaseback agreement, investors purchase one of the builder’s model homes and lease it back to the company so it can continue to serve as a marketing tool for the sale of future homes in the development.
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Builders offer leasebacks primarily to generate funding for new projects and the development of more homes. Smaller building companies typically use this tactic more frequently than larger companies. Smaller companies present riskier investments because they are more likely to run out of money and fail to finish developments, thus hindering the lease or the future profits from the model home. Unloading a model home means they can free up their credit for new ventures.
Since model homes are typically built in the early stages of a housing development, they can often be purchased at a lower price than subsequent phases. While model homes do see a bit of wear and tear, builders have a vested interest in keeping model homes in excellent condition and will cover most or all of the maintenance fees. Once the builder sells all the homes in a development, investors can sell their model homes at market value and cash out, or just keep them as rentals.
Take, for example, a pre-furnished, three-bedroom, three-bathroom two-story home in Atlanta, Ga. The builder and real estate firm Southern Equity Investments offers a builder leaseback agreement for 24 months and guaranteed cash flows of more than $100 per month. In addition, investors could benefit from appreciation on top of the cash flow and equity they captured by purchasing a pre-construction home. Having a signed purchase and sale agreement for a home helps builders get additional bank financing; thus, builders typically offer better prices early on in order to fund later stage development.
Investors will need to be aggressive to secure a model home. Typically, builders will offer them first to investors with whom they already have relationships. (For more on working with builders, see our Investor Highlight with Robert Locke.) Interested investors should look far in advance of a development’s groundbreaking to invest in a model home.
To get started in builder leasebacks of model homes, investors should speak with as many local builders as possible, especially those who have offered builder leasebacks in the past. Even if they do not have anything available at that time, investors can give builders their contact information and tell them to call during their next development. Another way to get on the inside track to builder leasebacks is to establish relationships with the real estate agents who represent the builders.
Model homes can seem like a dream come true, but investors need to be clear on exactly what they are getting. Evaluating the financial strength of the home builder is necessary to ensure they will honor the full length of the rental agreement. Model homes may also contain certain amenities to suit the builder, such as an office in the garage or walking paths to other homes. These features will be unnecessary for the buyer, and it is important to make sure the lease contains provisions stating that the builder will remove them before the lease is up.
