The idea of selling new construction to investors probably brings back some unpleasant memories. Maybe you associate these individuals with last-minute cancellations, or perhaps you affiliate them with a market collapse that turned chunks of communities into rentals and harmed the value of countless developments.
I understand if these memories give you pause when investors express interest in purchasing your properties today. But now that the market has rebounded, I feel this fear may be misplaced.
Instead of remembering the investors who walked away from deposits, it’s time for builders to creatively embrace this demographic and see it as a source of additional sales.
INVESTORS LOVE THE INVENTORY HOMES YOU DON’T Nearly every construction project will yield a stubborn home (or two) that takes forever to sell — perhaps because it backs up to power lines, or it has unattractive granite in the kitchen. When this happens, builders can spend months lowering its price while trying to convince buyers it’s their dream home — a process that kills their comps, drains their bottom lines, and prolongs their involvement in an otherwise finished project. Recently, I saw a big builder hold a home for more than 250 days in a hot market because it was on a tough road lot. Think about the carrying costs and opportunity costs that came along with that decision!
Many builders don’t realize that investors would happily buy these less lovable properties on day one. When it comes to new construction, on day one. When it comes to new construction, investors aren’t deterred by power lines or ugly granite. Those things don’t impact their ability torent out properties. They actually want the simplest, lowest-priced home in the neighborhood.They want a great deal, so they avoid lot premiumsand prefer homes with modest amenities.As you embark on your next project, thesethree tips will help you attract and profit from investors:
1. BRUSH UP ON THE METRICS. Your sales team needs to understand and emphasize the metrics investors care about most. Two big data points stand front and center: rental rates and cap rates.Your team should be able to emphatically sella rental rate from the top of its head. Sites like Zillow make it easy to compile these number sand give a firm and accurate “Here’s how much rent you’ll collect” estimate to investors.The same applies for cap rates (rent minus expenses divided by home value). On the foreclosure market, an attractive cap rate to an investor is around 8 to 10 percent. With new construction, a more realistic goal should be 6 to 8 percent —and it will be your job to explain why the warranties that come with your home make this lower rate on paper actually net out more in reality.
2. TRIGGER THEIR EMOTIONS. Investors are primarily looking to make money, but there is always a deeper purpose behind that drive for profit. Your sales team needs to unearth that purpose and craft an emotional narrative around it.If an investor’s goal is to fund a newborn son’s education, explain how the short-term rental income can help cover his grade school years, and how selling the home 18 years later will easily fund a degree in biochemistry. For investors seeking retirement income, stress the fact that in 30 years, they’ll own the home outright and be making plenty of passive income.Providing a timeline and narrative that matches an investor’s personal goals will tug on his heartstrings and help you seal the deal.
3. KNOW WHEN THEY LOVE TO BUY. The investor demographic is particularly attracted to two specific events: grand openings and grand closings.They love grand openings because they come along with pre-construction prices. If builders gear a few specific home sites toward investors during this event, they can pick up early momentum that drives even more interest toward the project. Once people hear that a new subdivision is selling like hotcakes, they’ll come flocking.Investors know that grand closings also provide favorable pricing and great opportunities for cash sales. They will happily purchase the final few homes in a community, allowing you to liquidate your lingering properties, cut your carry costs, and pursue your next project in a timely fashion.Selling new construction to investors isn’t a sign of weakness or surrender; it’s a strategic move that helps builders avoid delays. The above tips — plus strategic partnerships with brokers or property management companies that eliminate the home-to-sell challenge — are great ways to embrace a key demographic every builder should have on speed dial.
Mike Kalis is the CEO of MarketplaceHomes.com, a Detroit-based brokerage that specializes in new construction sales and property management. He may be reached at firstname.lastname@example.org.