Development Site Selection - Due Dilligence

[Tano]

Hi Guys
How many of you developers get a soil test done on a site before signing the contract or do you normally just source sites that are not known for having clay soil?

If you get a soil test done, do you write in the contract 'Subject to due dilligence' or 'subject to a satisfactory soil test'? And if so, does these extra clauses deter the vendor from accepting your offer?

The 4 unit site im building on currently has about 95k in additional site works costs due to the clay soil and this is a charge i wish to avoid in the future. Total is 222k site works, titles and brick paving for the 900sqm block.

 

[boeman]

Normally you can pretty much name a suburb and an engineer can tell you whether previous geotechnical reports in surrounded projects were M class sites or similar.

Can request a Site Investigation Report from a major engineering group, cost circa $1500 and get it done, then stipulate subject to SIR? Most sellers would just presume this is a basic inspection anyway.

 

[westminster]

There is a few things you can do

- certainly subject to due diligence and you can do all sorts of things during this time however it's not always popular and weakens your offer
- subject to Geotech report and give yourself 5 working days - bit more specific and slightly better
- ring Structerre who do most of the geotech in Perth and ask them if they have done a soil test in that street and they will tell you over the phone. I rang them this morning and chatted to a lovely person who told me that they hadn't done that street but had done one a couple of streets away and it was A class. It's still a punt but slightly better than......
- wing and a prayer
- don't buy anywhere that might possible have clay

 

[Tano]

Thanks Guys, lessons learnt .. too late.

 

[MTR]

Thanks for sharing Tano, I really feel for you.

I am a wing and a prey type of gal, so far so good...... but perhaps I am silly too. Perhaps I should consider a DD clause when buying development sites. I do contact a couple of builders I know who have an idea on where not to buy to avoid this, however there are never any guarantees.

I will not buy in specific areas that are known to have clay, ie Midland, Gosnells etc.

Now, the big question, will you still make a profit??

cheers
MTR

 

[stumpie]

Hi Guys
How many of you developers get a soil test done on a site before signing the contract or do you normally just source sites that are not known for having clay soil?

If you get a soil test done, do you write in the contract 'Subject to due dilligence' or 'subject to a satisfactory soil test'? And if so, does these extra clauses deter the vendor from accepting your offer?

The 4 unit site im building on currently has about 95k in additional site works costs due to the clay soil and this is a charge i wish to avoid in the future. Total is 222k site works, titles and brick paving for the 900sqm block.

hey Tano

could i ask what suburb your site is located?

 

[Tano]

Thanks Marisa, i have learnt alot these past few years but not quickly enough. The site in Midvale settled for 410k in may 2013. There is a development next door so i had some false confidence in assuming its 'A' class sandy soil.

The profit seems quite high so im quite sure im missing something like GST and holding costs. Plus i also loose on CGT tax or income tax if i sell so i will rent them out and use the equity in the next development.

I should get 415k per unit based on current market rates. No selling costs since if i had to sell i would use my wife who is a PA for an RE Agent (she is licenced).

REVENUE Amount
Sales revenue $1,660,000.00
Less selling costs $0.00
Less settlement costs $0.00
Net sale proceeds $1,660,000.00
Total revenue $1,660,000.00

COSTS Amount
Acquisition $410,000.00
Stamp Duty $13,490.00
Settlement costs on Block $1,500.00
Construction $840,000.00
Contingency $42,000.00
Demolition $17,000.00
Design Consultants Fees $0.00
Statutory fees (land tax, rates)
Interest (capitalised) $0.00
Transfer Fee $250.00
Mortgage Registration Fees $320.00
Sub total $1,270,000.00

Development profit (total revenue-total costs after GST adjustment) $424,925.00
Development margin (development profit/total costs) 33.46%



Do you guys include holding costs, selling costs and tax payments when calculating the min 20% return? eg >20% return profit in your hands?

 

[HD_ACE]

Thanks Marisa, i have learnt alot these past few years but not quickly enough. The site in Midvale settled for 410k in may 2013. There is a development next door so i had some false confidence in assuming its 'A' class sandy soil.

The profit seems quite high so im quite sure im missing something like GST and holding costs. Plus i also loose on CGT tax or income tax if i sell so i will rent them out and use the equity in the next development.

I should get 415k per unit based on current market rates. No selling costs since if i had to sell i would use my wife who is a PA for an RE Agent (she is licenced).

REVENUE Amount
Sales revenue $1,660,000.00
Less selling costs $0.00
Less settlement costs $0.00
Net sale proceeds $1,660,000.00
Total revenue $1,660,000.00

COSTS Amount
Acquisition $410,000.00
Stamp Duty $13,490.00
Settlement costs on Block $1,500.00
Construction $840,000.00
Contingency $42,000.00
Demolition $17,000.00
Design Consultants Fees $0.00
Statutory fees (land tax, rates)
Interest (capitalised) $0.00
Transfer Fee $250.00
Mortgage Registration Fees $320.00
Sub total $1,270,000.00

Development profit (total revenue-total costs after GST adjustment) $424,925.00
Development margin (development profit/total costs) 33.46%



Do you guys include holding costs, selling costs and tax payments when calculating the min 20% return? eg >20% return profit in your hands?

Hi Tano

I agree that a DD clause is the best way to protect your interests during an offer. This also gives you confidence and time to check all other aspects while you temporarily have the property secured.

Yes holding costs should be included in working out the margin. And any selling costs. And usually other costs ie like taxes etc. This would give you your net profit. Or exclude taxes to get your gross profit.

Also it seems you have missed

-subdivision costs? Water corp, western power, surveyor, wapc fees etc
- is your construction include all site works? And turn key, fencing landscaping etc.

 

[Tano]

Construction costs are for standard quality turnkey including titles except internal paint, a bit of colorbond fence, and landscaping (there is Prob only 10sqm,) to landscape.
Includes evap, blinds, tiles, clothes line, antenna, paving, Letterbox, front brick walls to all units (all have street frontage on the corner block)

 

[HD_ACE]

Construction costs are for standard quality turnkey including titles except internal paint, a bit of colorbond fence, and landscaping (there is Prob only 10sqm,) to landscape.
Includes evap, blinds, tiles, clothes line, antenna, paving, Letterbox, front brick walls to all units (all have street frontage on the corner block)

Thats good. Make sure includes soak wells, crossovers, driveways etc.
But i would say your ontop of all that.

 

[Tano]

Thats good. Make sure in

Yep, thanks, includes all those. But site works is preliminary. Still getting working drawings created.

I think i have calculated this correctly including sales commission, holding cost, gst (margin) , tax at 35% on profits and 5% contingency.

REVENUE Amount
Sales revenue $1,660,000
Less selling costs $41,500
Less settlement costs $0
Net sale proceeds $1,618,500
Total revenue $1,618,500

COSTS Amount
Acquisition $410,000
Stamp Duty $13,490
Clearing Site (driveway, trees) $0
Settlement costs on Block $1,500
Construction $840,000
Contingency $42,000
Headworks $0
Strata Fees $0
Demolition $17,000
Design Consultants Fees $0
Statutory fees (land tax, rates) $1,000
Interest (non capitalised) $45,000
Transfer Fee $250
Mortgage Registration Fees $320
Sub total $1,270,000
Total after GST adjustment (margin) $1,230,925
Development profit (total revenue-total costs after GST adjustment) $387,575
Tax (35%) $135,651
Net Development Profit $251,924

Development margin (netprofit/total costs) 19.84%

 

[poordeveloper]

I think it's also important to take into account the duration of the project when calculating returns - i.e.: annualise the return:

annualised return = ((cost+profit) / cost) ^ (1/duration) - 1

where duration is measured in years.

e.g.: a project which returns 20% over 3 years is only 6.5% p.a.

 

[HD_ACE]

Yep, thanks, includes all those. But site works is preliminary. Still getting working drawings created.

I think i have calculated this correctly including sales commission, holding cost, gst (margin) , tax at 35% on profits and 5% contingency.

REVENUE Amount
Sales revenue $1,660,000
Less selling costs $41,500
Less settlement costs $0
Net sale proceeds $1,618,500
Total revenue $1,618,500

COSTS Amount
Acquisition $410,000
Stamp Duty $13,490
Clearing Site (driveway, trees) $0
Settlement costs on Block $1,500
Construction $840,000
Contingency $42,000
Headworks $0
Strata Fees $0
Demolition $17,000
Design Consultants Fees $0
Statutory fees (land tax, rates) $1,000
Interest (non capitalised) $45,000
Transfer Fee $250
Mortgage Registration Fees $320
Sub total $1,270,000
Total after GST adjustment (margin) $1,230,925
Development profit (total revenue-total costs after GST adjustment) $387,575
Tax (35%) $135,651
Net Development Profit $251,924

Development margin (netprofit/total costs) 19.84%

Why no subdivision fees? Headworks alone i would say would be around 7k per lot. Power dome wont be subsidised for a four lot development so how many thousands? Wapc fee 3k+ surveyor for titles etc 5k?

Cheers

 

[Tano]

Why no subdivision fees? Headworks alone i would say would be around 7k per lot. Power dome wont be subsidised for a four lot development so how many thousands? Wapc fee 3k+ surveyor for titles etc 5k?

Cheers

The WAPC, headworks, Power etc are included in the site and build costs (840k)
6k for the dome/switchboard.

 

[Scott No Mates]

Pull out the allowance for tax. Add back gst which is payable (1/11 of sales or margin scheme).

 

[sanj]

Why are you going the evap option?

 

[Tano]

Why are you going the evap option?

Hi sanj. That's what they quoted in contract. I'm swapping it for reverse cycle split at pre start

 

[MTR]

Tano

What can I say, I am impressed. It makes a massive difference when you get more villas/units on the site.

I think your build costs are pretty cheap.

How did you establish the end price of these villas for this area, recent sales etc.
Is this market now going sideways, I understand you are not selling, however the valuations will be important to access the equity. I would monitor this closely

Cheers
MTR

 

[Tano]

Hi Marisa. These are low spec villas with no fruit. I think the build costs are okay but the sitework costs are very expensive due to the soil. Gemmill sent us someone else's costings (by mistake) for a 4 unit site and their total build cost was 780k including 10k council contribution (we didnt have to pay this) plus some nice features eg 31c ceiling, soft close drawers, full height tiling etc.

I think you mentioned that you were getting 'all the fruit' with your builder in Spearwood for about 580k? which seems like a much better deal. My units are single garage and 105sqm internal due to site coverage constraints.

Hardly any new sales in Midvale in past year. There seems to be alot of building now so we will have to see what the market prices these units next year.

 

[MTR]

Hi Tano
Yes, I think my build costs were pretty damn reasonable for Spearwood and the villas are closer to 145-150 sqm.

So will you continue to develop, am curious whether you are eyeing off anything at the moment??

I start Melb later this year, but I think my next 2 projects/buys will be in Melbourne just as a way of mitigating the risk a little, that's if I can secure the sites.

Cheers
Marisa