Model homes are designed to reduce the uncertainty over what prospective buyers can expect in a future residential subdivision. But at a planned Kaua'i project, a developer is offering model units for sale — complete with furniture, plants and dinnerware — before they've even been built.

Brookfield Homes Hawai'i has sold two of four planned model units at PiliMai at Po'ipu, a project slated for 191 townhomes and duplexes.

Under the arrangement, the developer will receive full payment for the homes when completed, and will pay the buyers monthly rent as long as the models are needed for display.

The sale/leaseback deal is a fairly uncommon strategy in Hawai'i, but allows Brookfield to get payment sooner on several homes in a slowing real estate market with fewer buyers.

Typically, model homes are the first homes built in a subdivision but the last sold, a lag that can be a few years for projects with hundreds of homes.

Collectively, the four PiliMai models represent about $3.7 million in sales proceeds for Brookfield.

Brookfield has pre-sold about 20 standard units at PiliMai, but those homes will take longer to be built and paid for.

"The big issue is how to get sales when there's few buyers," said Ricky Cassiday, a local housing market analyst who said other big local developers have considered the idea but haven't implemented sale/leaseback programs.

Model unit buyers typically receive extras, including high-end finish upgrades and furnishings, at a discount in return for buying a home subjected to high volumes of visitor traffic.

Brookfield's rental payments aim to more or less offset a buyer's mortgage payments, which could be $2,500 to $4,000 a month based on PiliMai home purchase prices ranging from the $600,000s to $1 million.

The developer also is paying the homeowners association dues for the rental period, which could be two or three years depending on the pace of sales at the project.

Model home sale/leasebacks aren't unusual in the home building industry nationally, but the practice hasn't been used much by major builders in Hawai'i.

UNCOMMON IN HAWAI'I

Gentry Homes and Haseko Homes — two of the largest homebuilders in the state — haven't sold and leased back model homes. The state's largest homebuilder, Castle & Cooke Homes, did not respond to a question about model home sale/leasebacks.

Another major local developer, Schuler Homes, on one occasion about a decade ago made a model home sale/leaseback deal with a company that bought all six models at Kapolei Knolls to more quickly return capital to Schuler.

"If you have a large project, you have models a long time," said Mike Jones, president of what is now the Schuler Division of Dallas-based D.R. Horton. "Sometimes you like to have cash sooner than later."

Bob Brant, president and CEO of Gentry Homes who previously worked for a Mainland developer that had a model home sale/leaseback program, said such programs don't necessarily mean a company needs cash or an early sales boost. "It's just a business decision," he said. "Some (developers) do it, some don't."

However, guaranteeing prospective investors rental income for a couple of years becomes an added incentive to attract buyers in a market where sales have been slowing in the past few years.

AN ATTRACTIVE OPTION

Also, in a market where home values are flattening as they are in Hawai'i, selling model units at the start of a project is more attractive financially because a developer usually can't sell models for a higher price later if property values don't appreciate.

Brookfield is advertising that it has lowered prices at PiliMai and two other Hawai'i projects, and is also offering to waive lender fees and throw in upgrade packages valued at several thousand dollars.

Gopal Ahluwalia, research vice president with the National Association of Home Builders, said there are no data on how prevalent sale/leaseback deals are for large subdivision projects nationally, but he said selling models before they're built is an interesting strategy.

"That is new," he said. "Everything is very tight, and builders don't want to hold the liability (a completed but unsold home) on the books."

Jeffrey Prostor, Brookfield Homes Hawai'i president, said selling and leasing back model units is something the company has done at other local projects in recent years during Hawai'i's real estate boom. These include The Coconut Plantation, a 270-home subdivision at Ko Olina Resort & Marina on O'ahu developed in 2001, and the nearly sold-out Nihilani comprising 102 townhomes at Kaua'i's Princeville Resort.

Prices for PiliMai models are higher than standard units because of the upgrades and furnishings, though Prostor said the models represent a better deal than if a buyer purchased a standard unit and added the same upgrades and furnishings.

"It's still a good value ... because we're not adding 100 percent of the retail value of the upgrades and furniture," he said.

Prostor said Brookfield initially planned to build only four models, but may decide to build three more based on three other floor plans available at PiliMai.