I was doing some research for one of my clients this week who is interested in getting into a pre-sale construction project for the purpose of selling the property shortly after the construction is complete next year. While this may have been a lucrative practice a couple of years ago, the current data for 2200 Westlake investors tells an interesting story.
Specifically, there are 31 Westlake condo units on the market as of this post. Morever, 12 of them have been on the market for over 90 days and 7 of those have reduced their initial asking prices (price drops ranged from $20,000-$485,000). Regardless of whether one thinks flippers ought to make outsized profits or not, it's interesting to try and figure out what's going on. What has led to this challenges of all those pre-construction buyers who snapped up vulcan units, descended on grand openings, and listed their units for sale moments after they got the keys?
The bar chart below shows flipped units on the market by days on market -- less 30, 31-90, more than 90.
Why are so few units actually selling and so many sitting on the market for months? Here are some factors:
- Developers took a lot of future profits off the table. By forward pricing the units at pre-construction (charging above-market prices for the pre-construction units approximate to expected market prices when construction is complete), pre-construction condo buyers are unable to further mark up the price of their units to make material gains. This phenomenon is demonstrated by many flippers asking for above-market prices on their resale units and not getting contracts after nearly 100 days for sale.
- There are more flippers than buyers. Simply a matter of supply and demand, condo buyers today have more choices than they used to where they can consider older resale units, other pre-construction projects, or other flipped units.
- The current reality is less exciting than the pre-construction vision for South Lake Union. Many of us are ecstatic about the presence of Whole Foods and most will agree the quality of the construction has been very good. Nevertheless, after you've bought your dry-aged Rib Eye and take the elevator back to your unit, you still need to deal with the traffic congestion and lack of a formal residential community feel to the area.
If you are an actual resident of one of these units or about to become one, shouldn't you be alarmed? Not really. The good news is the flippers will sweat it out a little, drop their prices to match the market, and perhaps take a small financial lump or rent out their units to make a normal return a few years out. Actual residents on the other hand should rest assured that while their units didn't spike in value the moment they took posession, they're still worth about what they just paid for it (most real estate works this way) and they'll enjoy material, reasonable, and steady gains over the next few years.