Is there any reason not to do a "Guaranteed Buy" deal with a builder?

March 20, 2009 5:47 PM

Should we sell our current house to the builder who will be building our new house? Is a "guaranteed buy" offer too good to be true?

My wife and I are getting ready to put our house on the market in the next 2 weeks. We are planning to move into a neighborhood that is just getting started. No homes are complete yet, though a couple of homes have been started and several lots (maybe 15 out of 60 total lots) are sold. This afternoon we had a second exploratory meeting with the builder to discuss options and talk over the process for us moving forward. In both meetings I have explained that we have to sell our house before we could commit to building in the neighborhood. We talked more about our current house, what we're hoping to sell it for, size, condition, etc. when the builder surprised me by asking: "What if I bought your house?"

If after coming out to inspect our current house, he still wants to buy it, the deal would be, he'd buy our house, we'd buy a land/house package for the new house. There are some key details to be worked out regarding us staying in the house, ownership of house, responsibility for repairs, liability, etc. but these will be part of the negotiation process and I would have lawyers and real estate professionals working on my behalf to iron these out.

Assuming these could be worked out, is this too good to be true? How common is such a deal?

The pros for us would be: we'd have a guaranteed buyer, we could start moving forward with construction of the new house and minimize the time between when we left the current house and moved into the new one. We might not even have to move at all until the new house was done. Other pros are we wouldn't have the extra cost for some of the cosmetic things we'd have to do to please a buyer such as landscaping.

The pros for him are: he'll make a sale on the new house and the land he's currently holding, he can invest a little money in our house for things we aren't going to do such as kitchen remodel and likely make a profit. (He can remodel a kitchen much cheaper than I can) If he can't, or doesn't want to sell immediately, he can rent it and still make money.

So even though there are risks, it does seem like a win-win. Here are my questions:
Does anyone have experience with a similar situation? How did it work out?
Am I missing some obvious flashing red warning "do not do this" sign?

Other possibly pertinent details:
*I'm in the Chapel Hill, NC area where the market is relatively stable compared to the rest of the country.

*Our current house fits nicely in the "starter home" niche and has several advantages that make it stand out in the market, but it is an older home and does have some minor things that could give buyers pause. So while I'm optimistic it will sell, I can't say for sure how quickly it will sell.

*We're planning on pricing it at market price, but don't have much flexibility to come down too much on the price (no more than a 8-10% reduction from listing price). I expect that if we listed it and sold it on the market, we'd have a decent shot of selling it for more than the buyer will give us, but not so much more that it would offset the "bird-in-hand" factor and the pros outlined above.

*We had a pre-sale inspection and no significant issues were found and all of the issues that were found have been repaired.

posted by cptspalding to home & garden (7 comments total)

Consider this in the same light as a trade-in to a car salesperson.

Of course, it's a guaranteed sale, but they're either going to give you a bad price for your current house or a bad price for your new home. They have to make money somehow.

There's certainly nothing wrong with that if you're willing to accept that to make the transition easier, that's your call. I just wouldn't trust them, since they have to sell the house in exactly the same market you would have to.

It seems like you've thought this all out, which is great. However, I would take a moment to reconsider how much you actually value your time versus how much you could potentially lose on the trade. Don't think in terms of percentages, think in terms of dollars. You can't buy food or pay your mortgage with percentages. You may very well conclude that the time necessary to sell the house for its true market value is absolutely worth it. That said, I don't know your current situation.

For perspective, I would never trade in a car to a dealership. Hence, I would never sell a house to a developer.
posted by saeculorum at 5:53 PM on March 20

Edit: we'd have a decent shot of selling it for more than the builder will give us,
posted by cptspalding at 6:16 PM on March 20

Random thoughts:

Well what are the additional benefits (e.g. staying in the house) worth to you? That could easily end up being worth a lot of actual money, plus what you'd be willing to pay for the convenience.

What prevents you from putting it on the market and seeing if you get an offer you like better? If you put it on the market and got this offer from another buyer the first week, would you take it or wait for something better? There's no reason to get derailed from the way you'd be thinking if you were selling the house the regular way.

With anything you're selling, you can probably get a higher price when you're willing to wait longer. But there's not a magic moment when you know you've waited long enough. You still have to make the bird-in-hand decision at some point.
posted by winston at 6:18 PM on March 20

The only question you need to answer is whether or not he's willing to pay you what you're willing to sell for. You should probably take into account the money you'll save on realtors and the time and aggravation you'll save trying to sell your house in the worst economy in decades. Unless his offer would cause you to take a huge haircut on the house, it's may well worth it.

But no, I'm not aware of any "red flags" that such a situation would arrange. It's not that uncommon, actually. When you consider that a house that costs $100,000 to build on land that cost $15,000 to acquire may well sell for $300,000 (though in today's market that's anybody's guess), so they can stand to take a pretty big hit in a deal like the one you're proposing and still come out ahead.
posted by valkyryn at 6:28 PM on March 20

Thanks for the responses. Those are good questions, winston. If we got a reasonable offer the first day, we'd probably be inclined to take it, just to get rid of the uncertainty. So in that sense I guess we're prioritizing certainty over likely marginal financial gains.

valkyryn: Those are good points about realtor commissions. And your point about the land/house package profit for the builder is what we're thinking too. The builder doesn't like uncertainty anymore than we do and he's going to make a profit from building on the land, a bird-in-the-hand is as valuable to him as it is to us.
posted by cptspalding at 6:51 PM on March 20

The value of certainty in this sort of deal is HUGE. How many months can you make two mortgage payments? Keep in mind that each mortgage payment is about 1% of the value of your house.

The only uncertainty that I'd worry about is that the builder is having trouble moving his inventory and you end up living in a neighborhood of streets, curbs and empty lots.
posted by gjc at 8:39 PM on March 20

From your most recent comment, it looks like you're trying to minimize risk. Minimizing risk necessarily comes at a financial expense, but the reward is peace of mind.

Note that when buying a new house, there's always the likelihood of the builder being late. So if you sell the house yourself you would have to have a closing date on your old house just before the builder's date for completion of your house, which would expose you to the risk of being homeless while your new house is being finished. Or, you could build in a buffer time of 1-2 months (or more, depending on when the builder's penalties kick in), but that would cost you money out of your pocket.

If I were in your situation (I'm pretty risk-adverse too in some situations), I would take the guy's offer with the stipulation that you only need to move out when the new house is ready and has been inspected by you. (IANAL, so I don't know if you can do that.)
posted by Simon Barclay at 8:51 PM on March 21