Builder JV option

[Andrew L]

Hi everyone,

With the turn in the finance market I've become unable to fund a duplex DA I have in Sydney. After a rather nasty spat between the builder and myself re the start date of the building contract and the inability to show funds to complete Ive thought of a new way to sort it out and would like others experiences and opinions prior to approaching the builder.

At the moment the site is worth 500k with a debt of 400k. House is renting at 29k PA.
The contract for the build is $415k + $50k for landscaping and finishing items.

The builder has said his profit on the deal is $70k from the $415k contract.

My idea works like this, due to my lack of funding ability I dont want to pay another cent until completion. The builder fronts all build costs and subdivision costs to enable the sale of the properties. Now the benefit for him is outlined below.

Original Contract to build $415k = $70k profit

My idea is he sorts out the funds for the build (415-70) 345k +50k for completion = $395k

On completion the builder is given ownership of one of the duplex's current value is $640-$650k

deal one is - 70k profit to the builder with no risk
deal two is - 240k profit for fronting 400k and building the duplex

Any thoughts on this?

Cheers
Andrew

I can hold the property as its cf+ my issue is a breach of contract and possible legal action up to 70k from the builder + legal fees. The above "deal two" increases my equity position 20%, removes any legal risks and allows for a win/win for both parties? Thats how I see it anyway.

 

[Aaron Sice]

here's another scenario.

you do nothing, and make nothing.

no risk carries less rewards.

that said, i don't think you've explained it properly.

for example. is the total Dx build $415k? or just one?

 

[Ausprop]

I wouldnt say his $70k is risk free... many builders go broke thru margin erosion, under quoting etc.

I would think that your proposal doesnt carry enough reward for risk, or more to the point reward for cash. you are asking ofr a decent wedge of cash here.

 

[Andrew L]

here's another scenario.
for example. is the total Dx build $415k? or just one?

total cost for entire build is $415k build contract + $50k for landscaping.

I would imagine he use finance not cash to minimize his risks, 60% return for investment I would think would be quite good?

 

[Ausprop]

I would imagine he use finance not cash to minimize his risks, 60% return for investment I would think would be quite good?

banks lend for developemnet (ha ha in itself) on the basis that you must be obtaining a 100% return on equity - so you are asking this builder to stump up the money from wherever, whilst carrying the building risk, to return less than he could get by gettign another builder to do a devy for him and he could go sit on the beach for 12 months.

 

[Aaron Sice]

it sounds whacked out, maybe coz it's friday and i can't wrap my head around it.

you're giving awaya HUGE chunk of equity and $250k worth of land that you're still paying for, by the sounds of it.

i would be saying "buy the land back off me at cost, and you can have what's left over - equity and all".

 

[Andrew L]

banks lend for developemnet (ha ha in itself) on the basis that you must be obtaining a 100% return on equity - so you are asking this builder to stump up the money from wherever, whilst carrying the building risk, to return less than he could get by gettign another builder to do a devy for him and he could go sit on the beach for 12 months.

so I'm presuming by your 100% return if you put a dollar in you expect two back, Is that right?

this is a simple duplex site eg 2x 4bed houses joining wall side by side. Not a 30 t/house site or a 5 level unit complex. If the builder puts in 1 dollar he gets 1.60 back. I would have thought that was a great return - your investment returned with 60 % growth in 6-9 months and the timing is controlled by him the builder.

 

[maloo]

you make it sound like you have 2 deals.

Your deal 1 is no good because you can't raise the cash. x that off.

Your deal 2 is not a very ideal situation for you but then maybe thats better than losing the lot if that is deal 3. I think your builder will jump at deal 2.


The other option is raise 70k and send him on his way and wait till a time you have the access to the funds. I tend to think that is a better option than handing over the title on one of the townhouses. 70k send you broke?

what was the cost to subdivide? or is that in the build? Is there a time limit in which to proceed with current plans?