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Comment by benj111 | Hacker News Reader

"you can get in on investment properties at a fairly low price (IIRC 40% discounts"

I've been trying to work this out, that seems like a massive discount, what's the expected profit margin for the builder? Surely not much more.

Why not get a loan? Would be cheaper, certainly on the land. I don't get it, something doesn't add up for me.

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In-process construction is pretty difficult to evaluate the value of for banks. Often times, the market will value an investment property much higher than a bank will value it, because the banks aren't always in the business of real-estate speculation. a 40% discount on the price of the finished development is sometimes more than the land may be appraised to by a bank.

It comes down to: if you are interested in real estate investment (either renting or flipping), you are going to find the property more valuable than a bank, who isn't as interested and would just auction it off if they had to own it.

In a number of situations that I have been involved in (Canada), the builder cannot get funding from traditional sources because there's no tangible asset to fund, and the builder still hasn't obtained permits from the municipality, etc (the necessary boilerplate to get going on construction). In these cases some builders will seek out a lawyer that will pool together funds from various investors and the loan rate is typically 15%-25% which makes for a nice profit, but with the knowledge that it could blow up. Once the permits are in place, then traditional funding comes a lot more readily.

I mentioned land, that's a (the?) tangible asset.

The situation you're describing seems to suggest that it would be better to split up the permitting and the building.

Company A buys land, gets permits, then either sells on to a builder, or contracts a builder.

But then I don't understand why so much capital would be required just for getting permits.

I'm guessing it's another example of different countries doing house buying/building differently, and none of them optimal.

>But then I don't understand why so much capital would be required just for getting permits.

There are lots of permits that only become available much later in the process. For example, an occupancy permit is only granted once the building is in a habitable state.

There are always permit delays of some kind or another because no matter how much research and planning you do, there are things that are simply unknown or that have to be changed (and thus re-permitted) at the proverbial last minute.

I very likely got the percentage wrong. It was in the 2005 timeframe that I was looking at doing this.

I remember that it was a substantial savings, but I can't say exactly where the 40% number came from. It was condos in a retirement community so the builder was making a big deal of "these tenants won't leave until they die..."

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