"Lease Back Guarantee" of 10%?

I'm sniffing around some towns in the Surat Basin, and I've come across an off-the-plan townhouse that looks very promising. The developer is offering a "lease back guarantee" of 10% of the purchase price annually for 5 years.

I asked them a heap of questions, and found out that this isn't an option - it's compulsory if you purchase these townhouses. When I asked why this was so, I was told "the developer expects to make a profit leasing it to a third party, even after paying your 10%."

What am I missing here? Why shouldn't I purchase now, settle in 12 months and sell 3 years later, still with 2 years to run on the guarantee, when prices have (hopefully) gone up? Are they expecting rents to boom in that time, while they only have to pay me 10%? Personally, I'd be more than satisfied with 10% and no risk.

Any advice appreciated.

Cheers

Ricky
 
no risk?
The risk is during the 5 years the property value decreases. at the end of the 5 years you cant find a tenant (at any price) and you cant sell for more than half what you paid.

Now, how can you manage that risk?

Think about how the developer has managed their risk? build for x dollars, sold to you for y dollars, locked in tenat for x dollars, only has to pass onto to you y dollars. After the sale little downside risk, especially if the head lease is to a major miner, even if they break the lease, the profit at onsell offsets the risk.
 
What am I missing here?

Let me give you an example Ricky.

Let's say I'm the developer (which I'm not).
It cost me $300K to develop a property and sell it to you at a profit.
But in reality, I sell it you you for $345K and the promise of a 10% yield for 3 yrs.
(The true yield is, let's say, 5%).
I rent it to tenants at 5%. The tenants pay me $15K pa = $45K over 3 years
I drip feed your $45K overpayment to me on the purchase price over the next 3 years.
You think you have died and gone to Investor Heaven with your 10% yields.
I move on and sell my overpriced properties to another pidgeon, penguin, bunny etc etc.

No-one is any the wiser unless you come to sell in 3+ years when you can't get your original price paid - I'm long gone to the 'next hotspot'. :rolleyes:

*edit* tobe is on the same page as me. Run away, do not look back.
 
Yes I agree with the above posts. I have spoke to many people who have brought these properties and it never turns out good. After the guaranteed time, they usually end up losing $50 per week plus in rent.
 
Let me give you an example Ricky.

Let's say I'm the developer (which I'm not).
It cost me $300K to develop a property and sell it to you at a profit.
But in reality, I sell it you you for $345K and the promise of a 10% yield for 3 yrs.
(The true yield is, let's say, 5%).
I rent it to tenants at 5%. The tenants pay me $15K pa = $45K over 3 years
I drip feed your $45K overpayment to me on the purchase price over the next 3 years.
You think you have died and gone to Investor Heaven with your 10% yields.
I move on and sell my overpriced properties to another pidgeon, penguin, bunny etc etc.

No-one is any the wiser unless you come to sell in 3+ years when you can't get your original price paid - I'm long gone to the 'next hotspot'. :rolleyes:

*edit* tobe is on the same page as me. Run away, do not look back.

ok im a bit confused, so Prop is the developer, he basically paid $300k for land + build + other bits, and he sells it to Mr Guillable for $345k, thats $45k profit,

in 3 years he gets $15k pa =5% in rent so thats $45k, however, has promised Mr Guillible 10% which is $30k pa or $90k in 3 years, so Prop is $45k out of pocket, from his $45k profit which leaves nett =0

???
 
ok im a bit confused, so Prop is the developer, he basically paid $300k for land + build + other bits, and he sells it to Mr Guillable for $345k, thats $45k profit,

in 3 years he gets $15k pa =5% in rent so thats $45k, however, has promised Mr Guillible 10% which is $30k pa or $90k in 3 years, so Prop is $45k out of pocket, from his $45k profit which leaves nett =0

???

build cost 300, sale price 350. profit 50. real rent average 15kpa, rental guarantee 20kpa for 5 years. Developers profit is 50k, minus (5K times 5 yrs) 25k over five years, net profit 25k plus a bit of management fees along the way and the interest on the profit as it is drip fed back to the investor.

The point is, this profit is a lot more 'risk free' that the investors, as the investor is still holding an unrealised asset of unknown value at the end of 5 years.

The developer probably doesnt have the option to hold the property on their own, their finance, and business model is about turning over properties, not investment. The profit margin (in this example 8%) might be standard for developers.
 
I'm sniffing around some towns in the Surat Basin, and I've come across an off-the-plan townhouse that looks very promising. The developer is offering a "lease back guarantee" of 10% of the purchase price annually for 5 years.

I asked them a heap of questions, and found out that this isn't an option - it's compulsory if you purchase these townhouses. When I asked why this was so, I was told "the developer expects to make a profit leasing it to a third party, even after paying your 10%."

What am I missing here? Why shouldn't I purchase now, settle in 12 months and sell 3 years later, still with 2 years to run on the guarantee, when prices have (hopefully) gone up? Are they expecting rents to boom in that time, while they only have to pay me 10%? Personally, I'd be more than satisfied with 10% and no risk.

Any advice appreciated.

Cheers

Ricky

This sounds like some of the adds you see in the Gold Coast weekly papers and with the number up there it seems to work well,just walk away..
 
Ok, ok - I'm walking away!

like I said, just sniffing around, learning the trade...
We are all still learning,and with my limited knowledge and understanding on how to value a business,something like this is like any protection both come with a price,just depends on who is left holding the can..
 
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The only thing guaranteed is that the developer will do everything to avoid paying. Ever wonder why builders and developers go out of business one day and are open again the next under a new Pty Ltd and ABN with the same directors?
 
ok im a bit confused, so Prop is the developer, he basically paid $300k for land + build + other bits, and he sells it to Mr Guillable for $345k, thats $45k profit,.....

No, in my example, I was making a profit (a reasonable one) if I sold at the true retail end price of $300K. I jacked it up an additional $45K to cover my outrageous promise of a 10% return each year for 3 years.
 
In my experience, the wood ducks taken by these schemes are often paying more than $45K too much.

I know 'anecdotally' of 'investors' who paid $480K for brand new builder grade 2/2/1 units in a low density housing stock area.

They came with an insanely high rental guarantee of $420pw (the developer pays the difference in rent for 12 months).

12 months later (now), the rental guarantee has expired, the units are rented for $360 - $370 and a realistic sales value is now $350K-$360K.

The developer's profits that you all have been mentioning are very very conservative. In reality, the wood ducks often have no exit strategy, and used all the equity in their PPOR to get into this predicament.

They will be waiting 5-7 years in this suburb to be able to break even (ignoring holding losses). Uh-Oh. Some things really are too good to be true.
 
I asked them a heap of questions, and found out that this isn't an option - it's compulsory if you purchase these townhouses. When I asked why this was so, I was told "the developer expects to make a profit leasing it to a third party, even after paying your 10%."

If you purchase, why isn't the lease transferred to you as the owner? ie how does the developer still hold the lease and is able to earn a profit rent for the balance of the lease term?

The vendor should not be entitled to any rent once the property is sold - you've realised, this is one to walk away from.
 
I spoke to someone this morning that brought one of these properties in QLD. He told me that after the guaranteed rent return period was over he lost $60 per week in rent and the property was last valued $35,000 below what he paid. Youch…
 
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