A question about property development and Market Timing

[Property Meister]

Was wondering if fellow experts could give me their opinion...

ive got a good friend who has been doing property development for about 15 years, and is damn good at it, and has done EXTREMELY well out of it. Basically he is a gun!

I am/are/have considered getting into property development full time like him (please do not turn this into a whether I can do it or not type thread)
he has recently informed me that he is going to/ selling all of this 10 or so projects given the current market, and he will be looking overseas to do the same thing.

Now my question and advice that would be apprecaited is, should I let the market settle for at least another 1-3 years, before I venture out and do it.

I will be starting slow and small however, obviously his formula has been working for the past 15 years, but he thinks it may not, however, I don't want to go out and use a formular that won't work for the next 1-3 years but might work in time for the next boom, and to use it during the next 1-3 years....

hope this makes sense!

 

[ianvestor]

Firstly, make your own formula. Or spend time adapting someone else's, but don't just rely on copying what someone else has done straight out.

I wouldn't wait. Just because you purchase a development site now (and even get development approval), doesn't mean you have to do the construction yet.

Have you had a stand-alone house built before? Even that is considered development.

p.s. I bought a dev site in Feb of this year and am in the process of getting approval now for 4 or 5 townhouses. At this stage, I plan to construct as soon as it's approved, but that may change as my options are always open.

 

[super_sam]

Keep in mind it could take 6-12 months to find a site, up to 12 months to settle maybe longer if you wish, another 12 months to sort out DA and presales if required, then anywhere from 9-48 months to construct. Which could mean it's a good time to start working on a large development. Even with a small one it wouldnt be too bad a time to start if so called experts are tipping rising prices in 2-3 years. Getting over the finance hurdle might be tricky at this point though unless the deal is super clean with real equity

 

[BayView]

he has recently informed me that he is going to/ selling all of this 10 or so projects given the current market, and he will be looking overseas to do the same thing.

What is his specific reason for selling all his projects now?

 

[sue78]

I think probably because cash is king atm. It's ok to sell off some projects..take a break and return when the market picks up.

 

[banahers]

Was wondering if fellow experts could give me their opinion...

ive got a good friend who has been doing property development for about 15 years, and is damn good at it, and has done EXTREMELY well out of it. Basically he is a gun!

I am/are/have considered getting into property development full time like him (please do not turn this into a whether I can do it or not type thread)
he has recently informed me that he is going to/ selling all of this 10 or so projects given the current market, and he will be looking overseas to do the same thing.

Now my question and advice that would be apprecaited is, should I let the market settle for at least another 1-3 years, before I venture out and do it.

I will be starting slow and small however, obviously his formula has been working for the past 15 years, but he thinks it may not, however, I don't want to go out and use a formular that won't work for the next 1-3 years but might work in time for the next boom, and to use it during the next 1-3 years....

hope this makes sense!

Take your time. There are going to be some great bargains in the next few years. Don't jump the gun and remember that this is a property investment forum so your so called experts often have a vested interest. Be wary

 

[Property Meister]

What is his specific reason for selling all his projects now?

Thanks for your responses everyone! apprecaite it.

the main reason he is selling is because in his opinion, melb property prices will fall substantially in the next few years, and we have just started...

This is just his opinion... so hypotehtically if this were the case, getting started now would probably be a bad idea...wouldn;'t it...

 

[Mark C]

the main reason he is selling is because in his opinion, melb property prices will fall substantially in the next few years, and we have just started...

He might be right, or not.

I look at the numbers and make decisions on what I understand.

I understand as a developer the costs associated with supplying land to the market make it financially restrictive to sell it for lower than say $300K per lot.

The market at present also makes it hard to sell raw land for this price.

Costs to produce this land are rising and from what I am reading we don't have an over supply but are seeing a slow down in production of land.

The current conditions are tough and prices are falling in some suburbs but I believe "the floor" under house prices is the fact that raw land is not going to get any cheeper in the future nor will building costs.

I also believe that prolonged downturn and reduced supply will eventually drive demand.

I'm buying now, planning on 24 months or so to get approvals and being in a good position to capitalise on the potential in the market 2 - 3 years from now.

Mark

 

[Mamaof3]

we do property development and we wouldn't personally sell off our stock or stop developing because of the current climate.

we instead have made our criteria for what would be a 'potential' deal alot stricter to accomodate for the changing market.....for example, we used to allow for 12-18mths holding costs but when we do our numbers to see if a deal is worth pursuing, we factor is at least 2yrs....we also slightly increase our build cost estimates (e.g. $50/m2 more than what we currently pay our builder at the moment).....everything gets upped and if the bottom profit figure is still healthy, then and only then we would pursue it.

so i guess everyone's way of dealing with the current/changing market varies...some would sell off a portion of their stock (possibly to pay down the debt and reduce the LVR on his other buy and holds - if they still have debts on them)....some would adjust their criteria for a 'potential' deal....

just my 2cents worth!

 

[Property Meister]

thanks everyone, that has been a good help

I guess my current concern is that obviosuly the formulae for my friend has been working ,and I am also looking at following a similar formulae, I know in a booming or rising market, the formulae works great.... however I am not sure in todays market how successful it will be, I don;t want to get into it at say the worst time, and to fail, when I know it is a successful formulae,

by the way, my friend doesn;t trade any land, as far as I am aware.

it is generally, buy a big block of land with an old crappy house, tear it down, and build units/TH/apartments,
and if he becomes a bit too busy, or gets a good offer, he will sell with permits and plans,

I know that he was getting overwhelmed with some projects and decided to sell a property which he had done nothing to, and held it for something like 8-14 months, and even to his surprise, made an absolute killing, made something close to 40% from doing nothing...so he is quite happy.........

but this I would say is quite an extreme and rare example!

 

[Mark C]

I know that he was getting overwhelmed with some projects and decided to sell a property which he had done nothing to, and held it for something like 8-14 months, and even to his surprise, made an absolute killing, made something close to 40% from doing nothing...so he is quite happy.........

but this I would say is quite an extreme and rare example!

This is not as rare as you would think.

What I'm asking myself is why so many people on this forum want to build units when they are not builders?

As an investor I can control the purchase, to some extent the DA process and have civil works carried out at relatively low cost. But building costs a bomb and is filled with delays, variations and ie RISK.

Lets look at some numbers on a unit subdivision:

10 Lot subdivision

Scenario 1
Buy raw land $50K per lot $500K
DA $50K
Civils $100K
Build @ 150K per unit $1,500K
Interest costs, fees+long wait $450K
RE & Marketing fees $200K
GST on sale $318K
GRV @400K per unit $4mil

Profit $840 or 22% of GRV

Lets turn this 10 unit subdivision into a land subdivision by drawing titles on the units once the services are in and then on selling to 1 or 2+ builders to complete.

Scenario 2
Buy raw land $50K per lot $500K
DA $50K
Civils $100K
Interst costs, fees short wait $125K
GST on sale $90
GRV @ $150K per lot $1.5mil

Profit $635K or 42% of GRV

Yes it's less profit, its also less time, no RE fees as your just going to sell it to builders probably from an ad in the local paper and most importantly its less RISK. Why build?

How much easier is it going to be to get finance on a 42% profit deal then a 22% with more risk? And you can take a bigger hit on the market and still make a decent % of profit.

Mark

PS of cause the numbers I have used are not all costs involved and may not even be accurate but are selected to prove a point.

 

[eggnog]

Hey MarkC. I know your figures are just for illustration purposes but how did you calculate the GST component for both scenarios based on the figures you provided

 

[Mark C]

CFP,

I presumed GST was paid on the original purchase price but not refunded as it was not purchased from a GST registered entity ie a GST credit.

I divided the GRV by 11 then deducted the GST credit.

GST is a major cost of developing just like contribution fees which I did not include.

Mark

 

[eggnog]

Thanks Mark. So to go off track again but is this correct - to calculate GST its 1/11th of the GRV minus any GST credits that were not claimed during the purchase and construction.

 

[Mark C]

Any GST incurred through construction is usually claimed on a monthly basis and is not included in the final GST payment.