Buyer wants to sign at framing for 431. I modeled 455 finished. Which risk do you actually want to own?

Question

Two identical lots, same 1,900 square foot plan, budget of 268,000 vertical on each. Carry runs me about 2,900 a month once the loan is drawn up, so five months from framing to closing is roughly 14,500 of pure time cost plus whatever the market does.

House one is framed and dried in. A couple who live four streets over walked it on a Saturday and want to sign a build contract now at 431,000, picking their own finishes out of my allowances. My finished-and-listed model on that plan is 455,000, based on three comps that all closed inside 90 days.

So the spread is about 24,000 and the question is what I'm buying with it.

The case for taking the 431 at framing: the house is sold, the exit risk is gone, my lender likes a signed contract and it changes the conversation if I need an extension. I can order finishes to a real deadline instead of guessing. If rates move against me over the next five months, that's the buyer's problem to solve with their own lender and not mine to eat in a price cut. And 24,000 assumes I actually get 455, which is a number I made up from three houses.

The case for finishing it and listing: 24,000 is more than half my expected profit on the house. Buyer selections during construction are a change order machine and I've watched people spend two weeks deciding on a backsplash while the tile guy sits idle. A contract at framing also hands the buyer inspection rights all the way through, and every walk-through generates a punch list I didn't ask for. A finished house shows better and draws people who aren't trying to negotiate a discount for taking construction risk they don't actually take.

I've heard both sides argued hard by people who build more houses than me. The builders running volume mostly want the pre-sale. The ones running two or three a year mostly want the open market. I can't tell if that's about capital or about temperament.

What would you do on house one, and would your answer change for house two if the first one sold either way?

megan_doyle15 · Answer

New enough that I had to look up dried in, so take this for what it's worth. The thing I don't understand is why the buyer gets a discount at all. They're not paying anything until closing either way, are they? What are they taking on that's worth 24,000 to you?

Rena Guide · Answer

rigging, the discount is real and it comes from a few different places.

A pre-sale buyer is agreeing to a price today for a house that won't exist for months. If the market moves up, they got a deal and you gave up the gain. If it moves down, they may still be able to walk depending on how the contract and their financing contingency are written, so the risk isn't symmetric. They're also buying something they can't fully see, which people discount by habit.

On the other side, compass gets a signed contract with earnest money, which reduces the chance of finishing a house with no buyer and paying carry on it. Carry is the monthly cost of owning the project, mostly loan interest, property taxes and insurance.

A few mechanics worth understanding before comparing the two paths. A build contract with selections usually includes allowances, which are dollar figures set aside for items the buyer hasn't chosen yet, and overages get billed to the buyer if the contract says so. Contract forms and what a builder must disclose to a buyer of a home under construction vary by state, and some states have specific new home warranty statutes that attach on sale, so that's a question for an attorney licensed where the house sits rather than something to settle in a forum thread.

The part that decides most of these arguments is how confident the 455 number is. Three comps is thin evidence. Compass is weighing 24,000 of possible gain against the chance that the finished house takes longer or sells lower than the model says.

omar_haddad · Answer

I've eaten this exact mistake on the renovation side, so I'll say the unglamorous part plainly. The 24,000 spread isn't the whole trade. Buyer selections cost you schedule, and schedule is 2,900 a month.

What happens is they take the pre-sale, and then week six they want the island moved 14 inches, and it's a 900 dollar change that costs eleven days because the electrician already ran the floor boxes. Do that three times and you've handed back a third of the certainty you bought. I'd only sign at framing if the contract locks selections to a written deadline with a per-day charge after it, and if allowance overages get paid in cash at the time of the change instead of rolled into the closing. Otherwise you're financing their granite.

Also, compass, I'd want to know how they're paying. A pre-sale that dies at appraisal in month four is worse than never having signed, because by then you've built their house instead of the neutral one you could sell to anybody.

stephen_ok9 · Answer

The way I'd size it is as a price on time, not as a discount.

24,000 over five months against 2,900 of carry means you're being paid roughly 4,800 a month to keep the risk. That's 1,900 a month above your actual holding cost, and that gap is the premium for the chance the market gives you less than 455 or takes longer than 90 days to give you anything.

So the question is whether you'd take a 1,900 a month payment to insure yourself against a soft spring. If your local inventory is climbing and the three comps closed six months ago, that's cheap insurance and I'd take the contract. If those comps are recent and there's basically nothing else new in that pocket, you're paying a lot to avoid a risk you don't really have.

What I'd push back on in your framing is treating the two houses as one decision. Selling house one at framing gives you a data point about what a real buyer will actually pay, and it de-risks the loan on both. I'd rather learn that on house one and price house two with a live number than hold both into the same market and find out about both at once. harrow's point about appraisal is the one I'd chase first though, because a pre-sale that can't close is negative value, not neutral.

Buyer wants to sign at framing for 431. I modeled 455 finished. Which risk do you actually want to own?

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