Why are builder buy-backs risky?

Why are builder buy-backs risky?

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SmartOwner
Anonymous answered
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SmartOwner

Real estate developers are typically highly levered with high assets and liabilities relative to their own capital. They depend on a strong market and adequate sales velocity in order to repay their sources of funding. If sales velocity is very low, some developers have been known to not fulfill their buy-back obligation and, thus, the seeming protection offered by a buy-back agreement proves illusory. On the other hand, if the market is strong and prices have appreciated considerably, the buy-back agreement allows the developer to buy your property back at a predetermined price and thus reduces your ability to profit from the price rise. Given this asymmetry in risk and returns, we find it better not to enter into such agreements.

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