House flipping has a new business model: the model home. While it has been used almost exclusively by builders in new housing developments, the Baltimore Sun reports that real estate investors who buy, fix then sell distressed properties are beginning to incorporate model homes into their business plan.
At least three companies in Baltimore have decided that having a model home available for prospective buyers to walk through could have enough advantages to offset the cost of having to carry a finished home on their books for a year or more.
It is a sales model for house flipping that really hasn’t been tried before but appears to have advantages for both buyers and sellers. Most house flippers buy a house then fix it up hoping that buyers will like the choices they make. Having a model home allows buyers to get involved in the process and choose things like floor coverings, cabinets, counter tops and light fixtures. Buyers can also get a feel for the skills and quality of work they can expect from the seller instead of having to imagine what things might look like based on computer generated images. Buyers shouldn’t expect to save money on the purchase price but getting a house that is exactly the way they want it means they won’t have to spend money to change things after closing.
The Baltimore rehab companies in the linked story above are spending upwards of $400,000 on their model homes with the idea that the return on that investment will come in the form of faster sales and reduced carrying costs. It also should reassure potential buyers that they are not a fly-by-night rehab operation. Another benefit to the seller of having a model home is being able to eliminate the guesswork of trying to figure out what design elements will appeal to some buyer the seller hasn’t met yet. A model home could also create the opportunity for the seller to be able to pre-sell a home before rehab work has even begun.
This business model appears best suited for other large metropolitan areas where investors can find large numbers of similarly designed homes in need of repair. Would this work in Bend, Oregon? Maybe but in all likelihood the model house wouldn’t have the same (or even similar) layout as the house that was being sold and it might be on the other side of town. The other challenge would be finding enough houses to flip to create economies of scale. The companies in Baltimore plan on flipping 25 – 30 houses a year which is a number that could be tough to duplicate in Bend.