Land Banking
- Thread starter Peter Spann
- Start date
Mary said:
Yes. Often called limited recourse financing. The bank would enforce the mortgage/s, sell the property and if there was any shortfall it would call upon the borrowing entity (presumably the trustee co of the unit trust here) and on failure to pay would appoint a receiver (presumably there's a charge over the company too) and get in its property and wind it up.
But from the investor/sponsors' perspective all they lose is their investment in the units...
N.
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And?
To me, buying property is not all about getting a "bargain" or even paying market or under the market. I often say in my presentations that I rarely ever buy bargains. I buy premium property with considerable potential. It is rare that you will buy that type of property for a bargain price.
True, in two years time it could be worth less then I paid for it, but it might never be available then - we certainly don't intend to sell it regardless of price at that point. So, if we paid $100,000, $500,000 or even a million more than it's "real value" today (which I don't think is the case), who cares if we secured it and it turns out the way we want?
I'll stake my reputation on it that it will be worth considerably more in ten years time which is my investment window. In fact I would have paid more for it and I was under my limit.
You have valued it the way a "normal" investor would... ie: What is it worth right now and can I get my bank to agree based on comparible sales. We have valued it on a per site basis and per site we have paid less then $10,000 in today's money.
If and I don't dispute it is an if, we can get it re-zoned and development costs stay consistent at about $15,000 per site then we stand to make a profit of $50,000 per site (in today's money).
If the value of land keeps increasing at a standard rate then those blocks will be worth $150,000 to $200,000 at their peak. That's a potential profit of 2,000%. That potential upside is worth the risk as far as I am concerned.
So let’s look at the downside… Even in today's money, I have been offered $2.25M for the middle lot, and $1.5M for the smallest lot (on the day of the auction by people prepared to sign “cash contracts” under auction terms) and that would value the middle sized lot at $1.75, meaning we could "sell" today for $5.5M, or a raw profit of $800,000 (real profit of about $400,000) so we'd still be in front.
Not withstanding that, let's say the land is worth $3M as a "farm" (which is what we valued it at in rural zoning to be conservative) and we hold it for 10 years, it's got to be worth $6M. Not the best investment I'd ever made but I'd be fine with that outcome.
We’ve shared the risk amongst 20 people, all of whom could afford to lose their entire investment (not that they want to or plan to). Our goal is to forget we ever bought it for 7 years or so, wake up and see what’s happening. Even if we have to go to sleep for 20 years or 30 years before the potential is unlocked I’d be happy.
How many people know of somebody who could have, would have, should have bought a large slice of land, say on the Gold Coast, or Western Sydney, or Byron Bay or wherever in Melbourne for next to nothing 30 years ago (or heck, even 10 years ago – I could have bought 300 acres of ocean front land between Byron Bay and Ballina for $360,000 – yes it is NOT a typo – when nobody wanted "cow pastures" in 1991 – the average “dry” block price there – and yes it is now a housing estate – is $200,000, with beach front selling for up to $1.5M – that's a gross realisation of $120,000,000 - count the zeros and yes, it's not a typo either - every time I drive past I kick myself).
Your math’s may work out if you valued the property only at today’s value in today’s state but I believe that our purchase shows foresight and it is exactly this foresight, if applied enough times, with due consideration for the downside, that makes people rich.
What I believe is people have to look beyond the property today and look forward to ten years time and look for property that has a genuine chance to be worth (much) more then double what it is today (standard growth) and only buy those properties – given they can afford it and it makes sense to their risk profile. I think, in this case, our purchase is more then justified.
I may be wrong (I have been) but I guess we'll only find out in 10 years time!
OK, but even if it is "top dollar" as you say, when do you think the next time 116 acres on the riverfront is going to come up?markpatric said:I must admit I was surprised to hear how much the land was purchased for, sounds like top dollar.
To me, buying property is not all about getting a "bargain" or even paying market or under the market. I often say in my presentations that I rarely ever buy bargains. I buy premium property with considerable potential. It is rare that you will buy that type of property for a bargain price.
True, in two years time it could be worth less then I paid for it, but it might never be available then - we certainly don't intend to sell it regardless of price at that point. So, if we paid $100,000, $500,000 or even a million more than it's "real value" today (which I don't think is the case), who cares if we secured it and it turns out the way we want?
I'll stake my reputation on it that it will be worth considerably more in ten years time which is my investment window. In fact I would have paid more for it and I was under my limit.
You have valued it the way a "normal" investor would... ie: What is it worth right now and can I get my bank to agree based on comparible sales. We have valued it on a per site basis and per site we have paid less then $10,000 in today's money.
If and I don't dispute it is an if, we can get it re-zoned and development costs stay consistent at about $15,000 per site then we stand to make a profit of $50,000 per site (in today's money).
If the value of land keeps increasing at a standard rate then those blocks will be worth $150,000 to $200,000 at their peak. That's a potential profit of 2,000%. That potential upside is worth the risk as far as I am concerned.
So let’s look at the downside… Even in today's money, I have been offered $2.25M for the middle lot, and $1.5M for the smallest lot (on the day of the auction by people prepared to sign “cash contracts” under auction terms) and that would value the middle sized lot at $1.75, meaning we could "sell" today for $5.5M, or a raw profit of $800,000 (real profit of about $400,000) so we'd still be in front.
Not withstanding that, let's say the land is worth $3M as a "farm" (which is what we valued it at in rural zoning to be conservative) and we hold it for 10 years, it's got to be worth $6M. Not the best investment I'd ever made but I'd be fine with that outcome.
We’ve shared the risk amongst 20 people, all of whom could afford to lose their entire investment (not that they want to or plan to). Our goal is to forget we ever bought it for 7 years or so, wake up and see what’s happening. Even if we have to go to sleep for 20 years or 30 years before the potential is unlocked I’d be happy.
How many people know of somebody who could have, would have, should have bought a large slice of land, say on the Gold Coast, or Western Sydney, or Byron Bay or wherever in Melbourne for next to nothing 30 years ago (or heck, even 10 years ago – I could have bought 300 acres of ocean front land between Byron Bay and Ballina for $360,000 – yes it is NOT a typo – when nobody wanted "cow pastures" in 1991 – the average “dry” block price there – and yes it is now a housing estate – is $200,000, with beach front selling for up to $1.5M – that's a gross realisation of $120,000,000 - count the zeros and yes, it's not a typo either - every time I drive past I kick myself).
Your math’s may work out if you valued the property only at today’s value in today’s state but I believe that our purchase shows foresight and it is exactly this foresight, if applied enough times, with due consideration for the downside, that makes people rich.
What I believe is people have to look beyond the property today and look forward to ten years time and look for property that has a genuine chance to be worth (much) more then double what it is today (standard growth) and only buy those properties – given they can afford it and it makes sense to their risk profile. I think, in this case, our purchase is more then justified.
I may be wrong (I have been) but I guess we'll only find out in 10 years time!
Roads and stuff
Really there are two alternatives - you get the DA and sell to a developer, or you develop (put in the roads etc) yourself. It's just a matter of doing the risk / payoff maths at the time.
You can sell them "as is" but you wouldn't get much of a price.gazza said:
Really there are two alternatives - you get the DA and sell to a developer, or you develop (put in the roads etc) yourself. It's just a matter of doing the risk / payoff maths at the time.
Personally I think that your plan is rather brilliant.
4 years ago I saw a 105 acre block of land in Rutherford (near Maitland in NSW) for 350k, with just a barn on it. We were not in a position to buy at that time unfortunately. There is no question of it's future development potential - the road leading up to the block had lovely houses on 1 acre blocks that at that time would have sold for around 80k each (now maybe 200k each?).
So I understand what you mean when you say "do the maths"
4 years ago I saw a 105 acre block of land in Rutherford (near Maitland in NSW) for 350k, with just a barn on it. We were not in a position to buy at that time unfortunately. There is no question of it's future development potential - the road leading up to the block had lovely houses on 1 acre blocks that at that time would have sold for around 80k each (now maybe 200k each?).
So I understand what you mean when you say "do the maths"
OK,
So this is nowhere in the same league, but my wife picked up 40 acres just out of Bundaberg on tarred road with a permanent creek through the property, fenced all round with water and electricity past the front gate.
She paid about $20K for it about 5 years ago and its now getting offers of $100K. Its zoned rural residential so we're just going to sleep on it for 10 years and see what happens. We owe nothing on it so its all just clear capital gain and a little bit of cash flow from agistment.
Ideally Bundy will grow west a wee bit and we can subdivide in to 5 acre blocks for a tidy little profit. Who knows, we might even be able to go full residential and break them in to 800m2 or so blocks but that's long term stuff.
I'm no Peter Spann, but the idea of a nice parcel of land paid off and appreciating does hold appeal. And this one sort of fell in to our lap since my wife just bought it because she liked the idea of living on a big farm. She did so well before she met me too... Consider it a bit of a dowry.
Peter, can I get some of your next land bank action? What do I need to do to get in at ground zero on land bank number 2 (or even number 3 or 4)?
Cheers,
Michael.
So this is nowhere in the same league, but my wife picked up 40 acres just out of Bundaberg on tarred road with a permanent creek through the property, fenced all round with water and electricity past the front gate.
She paid about $20K for it about 5 years ago and its now getting offers of $100K. Its zoned rural residential so we're just going to sleep on it for 10 years and see what happens. We owe nothing on it so its all just clear capital gain and a little bit of cash flow from agistment.
Ideally Bundy will grow west a wee bit and we can subdivide in to 5 acre blocks for a tidy little profit. Who knows, we might even be able to go full residential and break them in to 800m2 or so blocks but that's long term stuff.
I'm no Peter Spann, but the idea of a nice parcel of land paid off and appreciating does hold appeal. And this one sort of fell in to our lap since my wife just bought it because she liked the idea of living on a big farm. She did so well before she met me too... Consider it a bit of a dowry.
Peter, can I get some of your next land bank action? What do I need to do to get in at ground zero on land bank number 2 (or even number 3 or 4)?
Cheers,
Michael.
Buying land is not new - I see a lot people make money of it in the last 5 years.
It is surprising to me that Land in Brisbane is cheaper than in Perth (comparable land). Some quoted $75k for a block to CBD 19k. In Perth the cheapeast to CBD in Bertram is $79000 for 364m2 (no speicial feastures such as water park or whatever). Are you quoting the right things to this public forum? I doult.
It is surprising to me that Land in Brisbane is cheaper than in Perth (comparable land). Some quoted $75k for a block to CBD 19k. In Perth the cheapeast to CBD in Bertram is $79000 for 364m2 (no speicial feastures such as water park or whatever). Are you quoting the right things to this public forum? I doult.
OK I agree Peter, as a matter of fact I have never bought a "bargain" either come to think of it and I agree this is a good general attitude to have in property.
Considering your limited risk I`d say it`s a safe bet and like I said Anstead is a brilliant area.
But I do have caution for following historical trends, given ten years it absolutely could be worth LESS!, but if you have no need to sell and little need for your investment dollars you can wait as long as you like, good position to be in.
I am wondering why you would not buy suitable acreages with houses so to get a return while you wait.
Experienced land investors I have known tend to sell for a quick turnover and move on but I suppose you get to a point where you run out of deals, don`t have the time......or have too much money.
Considering your limited risk I`d say it`s a safe bet and like I said Anstead is a brilliant area.
But I do have caution for following historical trends, given ten years it absolutely could be worth LESS!, but if you have no need to sell and little need for your investment dollars you can wait as long as you like, good position to be in.
I am wondering why you would not buy suitable acreages with houses so to get a return while you wait.
Experienced land investors I have known tend to sell for a quick turnover and move on but I suppose you get to a point where you run out of deals, don`t have the time......or have too much money.
Hi all,
Brilliant and really well informed reply Peter. Keep up the great posts.
What many forget is how governments can and often do change the zoning, according to the current theory. Usually the result is you can break up larger lots into smaller ones.
For the Victorian investors, don't be surprised when the current 30 year plan with the map for maximum extent of Melbourne gets changed/extended.
Also there are changes in the wind for properties zoned "rural residential", if you can obtain large ones, it may turn out to be a decent investment.
Of course the above is only my opinion.
bye
Brilliant and really well informed reply Peter. Keep up the great posts.
What many forget is how governments can and often do change the zoning, according to the current theory. Usually the result is you can break up larger lots into smaller ones.
For the Victorian investors, don't be surprised when the current 30 year plan with the map for maximum extent of Melbourne gets changed/extended.
Also there are changes in the wind for properties zoned "rural residential", if you can obtain large ones, it may turn out to be a decent investment.
Of course the above is only my opinion.
bye
ibeginner said:
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Hi Ibeginner,
I think Peter Spann is talking about rural land while you are talking about vacant land plots of developed land at Bertram in Perth. There are totally 2 different things. Thus, the price difference.
regards,
Kenneth KOH
Peter Spann said:
I think Peter has hit on one of the aspects of investing that I find particularly interesting, the psychology behind paying more for investments as time goes on.
Think about it. Whatever the price you paid for your first investment. Say $100,000. You watch in earnest while the price rises to $120,000. You think to yourself "everything is going smoothly, going well, some capital growth". The price continues to rise to $140,000. If you see something on the market that you can get for $120,000, its a bargain right? So you might even buy another one for $120,000 if you can.
The price continues to rise till they are worth well over $200,000 at $250,000. All the indicators for this area are still promising, lots of population growth, demand, economic propserity etc etc. All signs indicate to these properties being worth over $400,000 down the track. You see another property come onto the market at $220,000, is it a bargain?
You think to yourself "no", I remember buying these when they were only $120,000. The most I will pay is late $100's you say.
The same applies to when XYZ share was trading at $4 and rises to over $20 but you cant quite buy in as you remember how cheap they used to be.
The point is, getting one's head around paying more for a property or shares as time goes on can be quite difficult. Of course if you can't see any future potential or value then not buying makes sense, but sometimes even if you can see the value or potential it can be tempting to "wait" till prices come back down to the level you are used to.
Overall I think that what Peter is doing is fantastic and I am grateful that he shared this deal with the rest of the forum
Best Wishes
Corsa
Corsa said:
The key thing here though really is that this is a long term purchase by an experienced and wealthy investor!, with money to spare and risk spread among 50 or so investors.
It would not be good practice for a limited investor to buy properties for top dollar and believe that it will work itself out in the long run.
Peter, there's no doubting your logic.
My views for your comment:
- Landbanking is a great strategy when you can afford to sit for 10 years. Which would often mean being able to pay cash. Though your syndicate approach is a good compromise. Further, syndicate buying power opens up broadacre profits to the little fellas like us. Why should Stocklands, Devine, Mirvac and all the other biggies get all the fat profits. And as you say, you have already made $800k via offers from others the day after the sale. So, the true magic of this deal to me, is the power and opportunity opened by trusted syndication.
- Landbanking is a great strategy when you can't find better short term opportunities. Which would require probability analysis. If there is a 7% probability the council will rezone your land in 7 years, then that's 0.07*2000% return = 140% return over 7 years, less holding costs. Which sort of drives home the point why it isn't unheard of that developers become councillors, or bribe them, to push that 7% up to 97%
- Personally Peter, I would have thought you would be able to double your money on the stock market in 18 months, and every 18 months after. But as you say, you have spread the risk of this deal by syndicating.
- Landbanking is potentially a great strategy at the moment, because a lot of mid to large developers are bleeding and trying to contain losses. I suspect there will be lots of broadacre fire sales coming up over the next 18 months, with many of the pros treading cautiously re the short to mid term future.
- is it possible for the syndicate to leverage off a new valuation of the property, considering leveraging of increased equity is central to wealth creation?
My views for your comment:
- Landbanking is a great strategy when you can afford to sit for 10 years. Which would often mean being able to pay cash. Though your syndicate approach is a good compromise. Further, syndicate buying power opens up broadacre profits to the little fellas like us. Why should Stocklands, Devine, Mirvac and all the other biggies get all the fat profits. And as you say, you have already made $800k via offers from others the day after the sale. So, the true magic of this deal to me, is the power and opportunity opened by trusted syndication.
- Landbanking is a great strategy when you can't find better short term opportunities. Which would require probability analysis. If there is a 7% probability the council will rezone your land in 7 years, then that's 0.07*2000% return = 140% return over 7 years, less holding costs. Which sort of drives home the point why it isn't unheard of that developers become councillors, or bribe them, to push that 7% up to 97%
- Personally Peter, I would have thought you would be able to double your money on the stock market in 18 months, and every 18 months after. But as you say, you have spread the risk of this deal by syndicating.
- Landbanking is potentially a great strategy at the moment, because a lot of mid to large developers are bleeding and trying to contain losses. I suspect there will be lots of broadacre fire sales coming up over the next 18 months, with many of the pros treading cautiously re the short to mid term future.
- is it possible for the syndicate to leverage off a new valuation of the property, considering leveraging of increased equity is central to wealth creation?
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I think the fact that there are fifty people involved in this investment could also be seen as a lack of confidence in the purchase, spreading the risk but ultimately minimising any if any gains.
If I was confident in my investment why would I want fifty others sharing profits and affecting decisions that have to be made, I don`t see the big attraction in syndicates, especially with so many involved, it will be interesting to hear how this one pans out over time.
Peter has probably made a good investment imo but for 99% of people it may not turn out that way.
This $400-800k being talked about I venture a guess would amount to virtually nil in terms of profit had the land been onsold, considering costs and the amount of investors involved.
If I was confident in my investment why would I want fifty others sharing profits and affecting decisions that have to be made, I don`t see the big attraction in syndicates, especially with so many involved, it will be interesting to hear how this one pans out over time.
Peter has probably made a good investment imo but for 99% of people it may not turn out that way.
This $400-800k being talked about I venture a guess would amount to virtually nil in terms of profit had the land been onsold, considering costs and the amount of investors involved.
