Buying Wholesale

[WebBoard]

From: Mike .


Buy 10-15% below market
From: DR
Date: 08 Nov 2000
Time: 20:58:47

I know this has been tossed around a few times already in different shapes and forms but I am interested to hear peoples opinions and experiences.

What I am proposing is to buy below market value by buying off-plan. Developers are keen to get one or two properties(townhouse/unit) sold off-plan so as to get the banks off there backs. A couple of sales is market acceptance and makes the banks who are financing the development happy.

Developers traditionally make (profit) between 15-20%. If you can negotiate a 10 - 15 % discount off list price then what next.

So lets say the off-plan purchase price is 100K ( A bit more then 15% off list price) and when the development is finished the list price is 125k.

The next step is to find a bank that will provide finance for the 100k. Then six months later when the development is finished the bank will then consider that value adding has increased the value to 120k and will lend you 80% of 125k, which comes to 100k and happens to be the contract price that was initially negotiated with the developer.

I have already discussed this with my banker and he sees no problem with this idea Too easy, hmmm.

Anyone out there had similar real life experiences or care to value add to the concept.

Cheers, DR

 

[WebBoard]

Michael Yardney

Reply: 1
From: Mike .


Re: Buy 10-15% below market
From: [email protected]
Date: 11 Nov 2000
Time: 09:20:21

I know this topic of going to a developer and getting a 10 - 15% discount is bandied around a lot - esp by the likes of Henry Kaye. Its not as simple as these inexperienced people tell you.

I'm a developer - we build 5 - 6 projects a year. The profit margin I aim for in a development is usually about 20%. Currently it is hard to get over 15% margin. I wouldn't and haven't given away 50% of my margin to someone - why would I? Those that give you a such a big discount have usually inflated the original price to accomodate these discounts. So what is importnat is working aout what the real value of the property should be and getting a discount off that.

So don't fool yourself. Going up to a developer and asking him to give away half his profit because you want to buy ONE unit won't work. Sure if you buy the whole development, or half the units any developer would talk to you about a significant discount.

THE ANSWER: - get together in a group and bulk purchase, or do what we are doing with a few groups of investors. Form a syndicate and develop the properties wholesale for the syndicates. Then you are the "armchair developer" and make a profit.

If anyone out there - in Melbourne - would like to discuss forming a syndicate, and putting some of the things you are talking about into practice, please let me know. Michael Yardney - Metropole Properties [email protected]

 

[WebBoard]

Gee Cee

Reply: 1.1
From: Mike .


Re: Buy 10-15% below. Fairy tales+ hard to find
From: Gee Cee
Date: 11 Nov 2000
Time: 19:44:52

Michael

Agree 100%. All these story book theories look so good. (Bit like the white board at a marketers free seminar) Get out in the Real World and try and find them. Right OK they are there but as you said the price is inflated to start with.

In reality developing takes on a lot of risks and a fair amount of work. It can make you good $$$ but it can also send you broke very quickly.

When the bubble deflates or Bursts there will be some developments going for auction at great prices. Although that is when no one will want to touch property.

My opinion, Gee Cee

 

[WebBoard]

TN

Reply: 1.1.1
From: Mike .


Re: Buy 10-15% below market
From: TN
Date: 09 Nov 2000
Time: 15:38:58

That is an ideal case, however, finding a bank that agrees to lend on valuation and not on contract agreement is very difficult. I am very interested to know which bank you are dealing with, because I have not met one yet!

Thanks

 

[WebBoard]

Gee Cee

Reply: 1.1.1.1
From: Mike .


Re: Buy 10-15% below market
From: Gee Cee
Date: 09 Nov 2000
Time: 20:20:58

Just keep a close eye on where we are on the property cycle.

All those paper profits can soon turn into real big $ wallet losses.

As well I ask what actual protection is there should the developer go belly up?

Are you left with a half finished box of air ten stories up and a bunch of bankers chasing anyone that has anything to do with it?

Gee Cee

 

[WebBoard]

Owen

Reply: 1.1.1.1.1
From: Mike .


Re: Buy 10-15% below market
From: Owen
Date: 09 Nov 2000
Time: 13:36:08

Hi DR,

What bank are you dealing with? Finding a bank that will loan on valuation compared to contract price is a rare thing. Hang on to them.

What you have described is definitely the principal. All advice is that you have to go in to negotiations very well prepared with your cheque book in hand to get these discounts. Proving real market figures on comparable properties in the area and selling the developer on that fact is important. I guess buying really early in the planning stages would help convince them too.

I'd be interested to know if anyone has achieved this too as I want to give it a go on my next IP. Time to put some confidence in my own investment knowledge and get those big returns.

 

[WebBoard]

DR

Reply: 1.1.1.1.1.1
From: Mike .


Re: Buy 10-15% below market
From: DR
Date: 10 Nov 2000
Time: 19:54:51

Aaaaahhhh, I hear some people are interested in making a wholesale purchase.

Ok, what I have found out to date is that there are a couple of options.

One is to go thru AMP, they will lend on valuation price if you borrow over 80%, this forces them to do a valuation for LMI purposes. So you need to negotiate the sale price down whether it be off-plan or established.

The other option is NAB. They will let you buy off-plan at wholesale(discount) prices. When the development is finished 6 months later and prices have risen then they will adjust the original lend approval based on the new price. Your initial contract with the developer will have the reduced price on it. Atleast this is how Im told it works.

I am yet to find someone that has done this so until there is some real evidence I must remain a little sceptical.

Cheers, DR

 

[WebBoard]

???

Reply: 1.1.1.1.1.1.1
From: Mike .


Re: Buy 10-15% below market
From:
Date: 10 Nov 2000
Time: 11:33:20

Here is another idea I came across by accident which you may get away with. I bought two properties from developer for about 7k each less than list (85k) prior to site construction. Once they were completed and they were rented for a good 10% gross I happened to be chatting to my banker and saying that since they were rented for 175$/wk they HAD to be worth $120k each as that gave them around an 8% return. It just occured to me to ask for that as if they were commercial property that would be how they would be valued. So whilst you almost certainly won't get 10-15% discount (unless you bought the lot) you may be able to achieve similar with a combination approach.