A North Dakota homebuyer who's planning to build and flip isn't so sure the developer's real estate agent, who's also assisting the buyer, is on her side.

The buyer writes Realty Times:

"My husband and I are building a spec house in a brand new 12-lot development in a rural area of North Dakota. We're not builders by trade, but have a unique opportunity to put some off-time into a project of this nature in hopes of a profit.

My husband built the house we live in now, and we will be the general contractor on this project. We have a favorable deal with the developer to delay payment on his lot until after sale of the house we build. He wants to kick-start interest in the other lots by having building activity started sooner than later (where we come in). The lots have been up for sale since Jan. 06.

"Part of this deal with the developer is to use his real estate agent (who's listing all the other lots) to assist us in development of our houseplan and in the eventual sale of this spec house. We've been getting bids for determining cost to build and are about ready to go to a bank for a construction loan. However, we've asked our agent several times to give us a CMA or estimated market value of the house we'll be building ... to see if it's even worth doing.

He's got enough detailed info on the materials we'll be using in order to get us some kind of comparative value range. However, he's refusing to give us this CMA. He insists he cannot calculate the market value until he gets the building costs from us. We're still waiting for the last of the bids to come in.

"We are very wary of this, and think it sounds funny. It's our opinion that a CMA has nothing to do with actual building costs, but is a reflection of the housing market value for this particular home. We'd like an estimated value that is not "influenced" by knowledge of the building costs. We're starting to worry that this agent could have a conflict of interest here, and his efforts may not be totally in our best interest.

Getting this house built regardless of the profitability of it would be in the agent's best interest, would it not? Or am I way off base here? We want an honest assessment of what we could get for this thing, as opposed to the cost to build it. If it's not worth it, we need to know."

Realty Times responds:

Dear North Dakota:

There are several items to respond to in your letter. The first word that raises alarm bells is "rural."

Not that there's anything wrong with rural developments, but properties tend to sell faster in densely populated areas. If you're looking to flip properties quickly, a rural development seems an odd choice for speculation. And the fact that these lots have been for sale without moving since January 6th is alarming. Even if you build, it doesn't appear like you'll make your money back very quickly, so you'd better factor in holding costs.

Here's why. Don't you find it a little disturbing that the developer wants to "kick-start interest" by having a neophyte contractor rather than a production builder or local custom builder build a spec house? Usually, a developer will show development plans to known area builders and allow them to purchase the lots they want. They build and the home buyers come. Developers also put out a lot of feelers to the community -- they talk to multiple real estate agents, create focus groups of potential homebuyers, and use other means to find out if their development is going to be a success.

If your developer has done these things and other builders have passed on the opportunity, what does that tell you? There's something wrong and it boils down to price. He wants too much money for the lots.

If the price is too high, then it no longer matters if the demographic is there, or the commute to jobs is good. If builders with much greater "buying" power for materials than you have think the development is overpriced, you don't have a prayer of making money, and certainly not quickly.

The first rule of building is never, never overpay for the lot, so that's what you should be scrutinizing - not the fact that you don't have to pay for the lot until later on out of your sales proceeds. Overpaying later is just as bad as overpaying now.

Do you have a handshake deal with this fellow or a signed contract for sale with the unbelievably favorable terms you describe? If you have an agreement with the developer, and the real estate agent plans to help you sell the home, then there's no reason on earth why the agent should not be sharing as much information with you as possible -- demographic trends (are homebuyers moving this direction; what kinds of homes do they want,) commercial development plans (grocery stores, roads, etc.) and comparables for the nearest existing homes. You should know everything that the developer knows.

If this elementary research hasn't been done, then everyone's in trouble. So find out.

Technically speaking, there is no comparable for your home because it doesn't exist yet, but there are comparables for the sales price, size and features of the home you intend to market. While the real estate agent is correct that he needs more information in order to provide clear comparables, he doesn't need to know what you're spending. For example, you may intend to build a three bedroom home with two living areas, and a kitchen with granite countertops, stainless appliances and other top-of-the-line accoutrements. That makes a marketing difference to any Realtor, because the home is more upscale, but he doesn't need to know how much your countertops cost you to install.

You may intend to build a home for $150,000 and flip it for $200,000 in three months, but will the current market support that gameplan? Are any homes selling in three months? Are any homes selling for $200,000 and if so, in what condition and with what features? If the comparables say yes, then you've got a shot at doing well, but if your home is only going to have five bedrooms and sell for $500,000 when the best jobs in town are minimum wage, then you're going to be in for a long haul.

Your question should be how much home can I build including the cost of the lot and is there a market for it?

Real estate agents use days on market as a determining factor. Builders and developers use a similar metric called the absorption rate. The bottom line is you need to know how fast you can sell a home and for how much over your cost.

Published: August 22, 2006

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