Never developed before - any hints or things to watch out for?

[wylie]

Have you factered holding costs (interest, land tax, rates etc). Also add in some contigency. What about finance cost and convayencing?

Forgot to answer some of this. Land tax will be dealt with by putting the middle block into four different entities. I've got RPI looking into this for us.

Interest must be met as we shift and raise one existing house to allow access. We have a tenant who is interested in staying put but she may leave. If that happens, once we lift and connect up services, we will rent this house out again whilst the build happens.

Interest will be met by us borrowing from a family trust. We will borrow more than we need in order to meet the interest for six months whilst the build happens. Then we would rent out, refinance and draw out funds to build the second two. Doing a staged DA means we can rent out the first two whilst the second two are being built.

Conveyancing I don't see as a big issue as we plan on holding (if you meant conveyancing if we sold?)

What are the end values of these properties?

Going by sold prices on real-estate, I would guess the end values of each townhouse would be somewhere between $500K and $600K. There is a huge range in sold townhouses, mostly seeming to be depending on area and quality of finishes.

Currently the houses "as is" would be valued at $650K(ish) (possibly more) each on the big blocks.

So, our equity position wouldn't change. The bank/s would own it all .

These figures may change as the market changes, and I do all my numbers using fairly conservative figures. I prefer a nice surprise over a nasty shock if I use bigger numbers that fail to eventuate.

 

[Blacky]

Ok - Im trying to piece together your thread.

You have two blocks valued at approx $500k and $530k respectively. Total current value is $1,030,000.

Add build cost of $1,250,000 for a total development cost of $2,280,000.

From this you will end up with 4 townhouses, plus two blocks (albiet smaller than what they are now).

The end value of this will be
4x townhouses @ $450-650k each = 1,800-2600k
2x blocks of land @ $350k each =$700k (66% of $1,030k - assuming you cut the blocks equally).
Total = 2,500-3300
or 9%-31% profit.

Massive variance between the top and bottom possibilities. So you really need to do your home work in regards to end valuations.
Also need to add into the expenses column your holding costs, plus contingency.

Im not keen on your idea of borrowing the interest, which would indicate you cant afford to hold the properties. It places you at risk. Make sure you have a massive buffer built it.

Your friends advice is sound. Aim for 25% profit, if it doesnt hit 20% then you need to re-plan. If you cant get it to 20% profit, then dont do the development. This has more to do than simply drawing out the profit for the next project. It is prudent for risk mitigation.

By the sounds of it, you will not be selling. Therefore tax shouldnt be an issue - however, check with your accountant.

It is sounding reasonably positive. You just need to do your homework.\

Best of luck with it.

Blacky

 

[Aaron_C]

All I'd say is it will always cost you more and take you longer than you anticipate.

 

[wylie]

Thanks Blacky. I may have confused things with the figures I used. I quoted $530K and $500K as value but that is UCV for the blocks. If we marketed these houses "as is" with the houses sitting on 906 sqm blocks, we would likely get $1.4M together or $750K each. Last bank valuation was $700K and $750K but that was pre-GFC, so I prefer to do all my figures on $650K just to be safe. The nearby blocks that sold together for $1.4M were split, front houses resold on tiny blocks for $540K each so the back yards could be developed as townhouses. These townhouses are being marketed for $680K (4x3) and it will be interesting to see what they sell for, as that is our closest comparable. $680K seems stupidly high and I don't think they will sell for that.

You have two blocks valued at approx $500k and $530k respectively. Total current value is $1,030,000.

It seems not to matter too much in our local area how big the block is. For example, another block in the street with the same house as one of ours, but built under so it is 4x2 (ours is 3x1), was split from the back yard. A new house was built in the back yard and the front house sold for $671K.

Also in the street, (one year later) a much nicer queenslander (3x1) on 906 sqm sold for $685K.

Prices haven't moved much since the GFC (until now, when things are looking a bit rosier), so these houses on big and small blocks selling in the same street for very similar figures regardless of block size, do confuse my efforts to work out what these houses are worth "now" and what they will be worth once they are on tiny blocks.

Add build cost of $1,250,000 for a total development cost of $2,280,000.

From this you will end up with 4 townhouses, plus two blocks (albiet smaller than what they are now).

The end value of this will be
4x townhouses @ $450-650k each = 1,800-2600k
2x blocks of land @ $350k each =$700k (66% of $1,030k - assuming you cut the blocks equally).
Total = 2,500-3300
or 9%-31% profit.

The townhouses in a similarly good street, but not battle-axe that I linked to as having the "wow" in a previous post sold for $648 (3x2). I don't think we will "lose" as much due to being battle-axe with townhouses, because unlike a freestanding house, those buying townhouses are not expecting a block of land or driveway to themselves, nor expecting necessarily a street frontage, so I'd like to think if we do a reasonably high spec as per the "wow" link we would achieve $650K sale price, but I'll do the figures on achieving $600K value once finished. Without the higher end spec (nice bathrooms, stone kitchen bench etc) I believe we would be looking at sale prices like the other link.

So, copying your figures from above, I'll amend them to what I would "hope" we can achieve.

The end value of this will be
4x townhouses @ $600k each = $2,400,000
2x small blocks of land with a house on each @ $600,000 each =$1,200,000
Total = $3,600,000


Also need to add into the expenses column your holding costs, plus contingency.

I probably am missing something, but holding costs will not change until we start having to borrow to get the DA through, plus starting the first part of the staged approval, as we are "holding" the land already.

Right now, we tip in money to the mortgage. We've been doing that for a while, and managing, but building four townhouses in the back yards will mean the extra rent pays for the whole thing (assume expenses don't blow out hugely).

Im not keen on your idea of borrowing the interest, which would indicate you cant afford to hold the properties. It places you at risk. Make sure you have a massive buffer built it.

We are not working, so we have to borrow the interest. The plan is that first stage is lift and shift the old cottage facing the street to allow driveway to the back yards. Once services are hooked back up, we will rent this house (or keep the current tenant). So we will lose the rent whilst the lift and shift happens, but should go back to how things are now once it is rented again.

Once (or if?) DA approval comes through, we continue on with building two townhouses. We will have to meet interest whilst this happens, and we would be using family loan money. We will be paying interest on this, but can capitalise it whilst the build happens.

Once built, we would obtain occupancy certificate and rent these out.

Go to a bank, refinance these two rented townhouses, and use that money to repay our family loan, and use the remainder to go towards building the second lot of two. Our loan broker says he sees no issues with getting finance (low doc) as we don't work, but we do have other income from a family trust and my casual work, so I'm not too concerned about this. If we hit problems, we work through them, sell one house, get a job, plenty of options.

Your friends advice is sound. Aim for 25% profit, if it doesnt hit 20% then you need to re-plan. If you cant get it to 20% profit, then dont do the development. This has more to do than simply drawing out the profit for the next project. It is prudent for risk mitigation.

By the sounds of it, you will not be selling. Therefore tax shouldnt be an issue - however, check with your accountant.

It is sounding reasonably positive. You just need to do your homework.\

Best of luck with it.

Blacky

Thanks Blacky. I really appreciate your taking the time to do these figures. We are progressing, and it is exciting, but a bit scary .

 

[Blacky]

Hi Wylie

Your numbers are starting to clear up for me.

Your total development cost is $2,650,000 ($1.4mil current undeveloped land + $1.25m Construction).

End value of $3.6mil
or 26%

Which is fine.

I must admit I am still a bit concerned with your funding plan. Please please please make sure that you have a massive contingency. Run some numbers on delays, cost overuns, price increases, unforseen events... etc etc etc.
Developments chew through cash like you wouldnt believe. Any delays can and will cost you a lot of money. Remember that a 10% variance isnt a significant percentage, but will cost you $125,000. Where is this coming from?

Build in a lot fat into your numbers, esspecially on time frames. Everything will take longer than expected. Build fat into your build price, and your end values, and seriously consider your 'what ifs'.

For you this is esspecially important, as you will be borrowing interest, and therefore have limited capability to absorb delays/cost overruns. it is very difficult to get additional funding half way through a project.
However long you think this will take - double it. If you dont have this capacity, I would seriously re-think.

Also talk to your accountant regarding taxes.

Good luck
Blacky

 

[Blacky]

oh - and keep us updated with your progress

 

[wylie]

Thanks Blacky.

Without sound flippant (because I'm not), we are fortunate that we have access to a LOC through a family trust. We have enough there for me to borrow it for the lift and shift and to build the first two townhouses. Then when I refinance and repay the costs to that stage, we will regroup and look at things again before tackling the second build. If we have overspent a LOT, then we have the option of waiting, or selling down one of the old houses on small lots.

That would be an option also if the rent return from the first two is less than anticipated, or if the cost blows out (time or money) and means we have to recalculate anything.

I plan on repaying whatever we borrow from this LOC, but should things go really pear shaped, it is half my money anyway, in that I could pull out a capital distribution, or worse case, my brother and I can dissolve the trust and take our half share each of the assets held (which support the LOC). We prefer not to do that at this stage, but it does give me breathing space.

I do take on board though, that this LOC and trust back up does not give us carte blanche to spend, spend, spend, and that we need to keep a tight control on what is spent, and try not to overspend.

We also met with another friend who has done some developing, and his most recent project ran over time and over budget due to unexpected hold ups, so I'm aware we need to keep on top of this. I had assumed the builder would project manage, but this chap has pointed out that our builder will build what is on the plan and that we need to either project manage the rest of the project ourselves, or pay someone to do it. Of course, we can pay someone to project manage it, but we give away money to do what we could do ourselves.

We've project managed many renovations, so I'm confident we can at least look at the complete "to do" list and order things need to be done and inspected and either approach the builder to project manage the whole project for us for an extra fee, or engage someone else. The builder we hope to use does his own townhouse developments so he might look at arranging the things that he doesn't cover (power, sewer, driveways, certifying things on time without holding up builders/plumbers/anyone else).

I guess first up we need to get the DA in and see if we get it approved. If not, we change tack and look at two or three houses instead of four townhouses.

 

[ozk]

Ensuring everything runs smoothly (and avoiding delays) is my advice for keeping down costs and ensuring a stress free development.

1. Design Plans: Make sure you are happy with the plans. Try and get as much included in a fixed price contract as possible (eg. painting, double power points, your level of finish of fixtures and fittings etc). Making changes later costs $. Try and negotiate based on volume of build. Also make sure that the plans are likely to be approved by the council planners first go, having 'borderline' plans which require modification and resubmission costs time. For my development I spoke to the builder and council planners before submitting the plans to make sure it was likely to be approved.
2. Ensure finance is lined up, and have a backup plan if it falls apart or there is a funding shortfall. For my development, my development loan at 80% LVR and no other conditions turned into 65% LVR with multiple conditions which were difficult to meet, necessitating going to a second bank for finance. Five months after my application to the first bank I had finance approved approved by the second bank.
3. Its worthwhile paying extra to avoid delays. For example, my bank and builder flew in valuers/certifiers from Perth to certify each stage of works and completion rather than wait for council. This saved a few weeks. It was worthwhile paying the $1,000 each time rather than paying an extra 4+ weeks of interest for delays. In the end it ended up being a utility company which held up completion by two weeks which ended up being an extra $6500 or so in extra interest payments (for those two weeks) without rental income.
4. Be aware of cost overruns and variations. A 10% construction variation is possible when you take into account headworks, variations, delays, unexpected construction costs etc. It doesn't sound like much, but on construction costs of say $2,000,000 it is $200,000. A significant amount if you have limited contingency funds.
5. Ensure your income can finance the loan WITHOUT the rental income of the completed units (if possible). This gives SANF - if your income doesn't cover the interest payments and there is a delay in completion or delay in renting out the units, interest costs can rapidly chew through savings and contingency funds.
6. Agree with the builder on a completion date. With agreed penalties for overruns not attributable to weather conditions, natural disasters, acts of god etc.

 

[Cruskits]

Blacky oh - and keep us updated with your progress

Hey blacky,

I have seen on a previous thread that you may have built a development with Integrity developments. I was looking at doing a development and have talked with these guys. I was just wondering if you could let us know how your experience was. Maybe you could just PM me.

Cheers in advance

 

[wylie]

We found it best to have a look around at prices first, eg: check for a range of tiles that you like and use that price a a guide when instructing builders before quoting.

If you can give price guidance on a various inclusions you will get more accurate quotes as you are comparing apples with apples when comparing builders prices.

Great advice. If we get approval, before we ask for quotes, I will choose the tiles I would prefer and give this to the builder to allow for in his quote, or at least one of the same price and size to allow accurate quote for laying time.

Word of advice: high liquidated damages amount for if it runs overtime and make the last instalment payment a big one- ours was 5%- so it was not even profitable for the builder to finish the job. Try for 15%.

Good advice too. We found this ourselves on our pool build. By the time the job was 80% complete we had paid 95% of the total. Builder had no reason to come back in any sort of hurry. Lesson learned.

1. Draw up plans and get them valued by REA and/or valuer. It is easy to be on the generous side when doing your own numbers and then specing up too much which erodes your profit.
I like this idea. It is better than me "guessing".
2. Know your tax situation before you start. Factor this in to your numbers at the start incase you have to sell sooner then later.
Good idea. We are fortunate that we can prepay interest to offset any unexpected gain if we have to sell one house due to cost overruns or simply to reduce our debt. We will certainly see our accountant before we get too far along, but assume we need to know if we are likely to get approval first.
3. Spend more time 'planning'. The more detail that can be given to the builders to quote on the better. Write a document outlining your expectations of the build and do up a spredsheet for all your choise ie. PC items, tiles, benchtops etc.
Good idea. We will do this. We found just in having deck quotes done recently, that we were not comparing apples with apples, but tried hard to specify what we wanted. Without our guidance, builders were quoting different finishes, different levels of insulation etc, just for a simple deck.
4. Do up a plan for the landscaping, driveway, paths etc so the quote will accurately cover all that you want.
Not sure if the builder will quote on this, but will keep it in mind.
5. Put a finish date on the contact which you and your builder think is fair. This way you can sit back and let them worry aout making it all work on time. This would have to be my number one 'desrtess' tip.
Good luck with your build. It has been stressful, frustrating, exciting, and educational for us as it will be for you. Rather then pull my partner and I apart I think we are closer for it which is hard to put a price on.

Thanks for those tips. The finish date is a big one we also learned the hard way during our pool build. We didn't have a finish date, though it was discussed at time of quote, somehow it didn't make it into the contract and we missed that. Lesson... read the contract thoroughly and don't rely on verbal assurance .

4. Take advantage of being the owner of 2 of the bordering properties - where you would normally need permission granted from a neighbour to 'push the envelope' do it on your borders.

5. Constantly ask "what is NOT includes" rather than "what is included".

I like your whole post, but these stand out as very good advice that I hadn't thought of before. Thank you.

Scope out what your headworks cost will be. Ie Power, Sewer, Water, Gas.
For me the sewer turned into a biggy. Even tho it required no piping changes, beyond an internal T-junction inside property, I was charged 6k for each additional connection to the sewer line.

I'm prepared for this, but don't think I can influence it in any way. But knowing it might cost us more than expected at least won't be a shock.

It's taken 4 months for a power dome connection to be approved at the corner of my current block. Local rules say all new connections have to be underground. Overhead power line so the dome is just going at bottom of pole, simple job you would think. Note that's 4 months to be approved, still not actually installed yet so glad started the process myself immediately.

This also was an issue with a friend we spoke to. I do know some owners who were asked if the build next door could be done using power from their house in exchange for a cash amount. I think this was for the power to run the equipment for the build, rather than for power that would run to the house once built. In our case, if there is any sort of hold up to get power to the back blocks for the actual build process, we could take on the power account for one of the houses we own, and for the six months or so of the build, we "could" pay for the power, with tenants agreeing to pay a minimal amount to cover their usage. That is a risk (they could leave the air-con running for that six months) but as a fall back position, would that be worthwhile considering?

I highly recommend getting a soil test done first. That way all groundworks can be accurately quoted rather than PC sums. Just check who the builder you are thinking of uses so it will be accepted.

Definitely we will get a soil test. It is part of what we already have in train. Are there some soil test companies whose reports would not be accepted?

Stress builds from delays and issues that arise during build. I caught several things during the build that could have been major if left unresolved by visiting site afterhours. A good supervisor helps keep things moving.
You have to be decisive.

I'm unsure if we should pay for a project manager or not. We've project managed many renovations, but never a whole build, and never had a whole build crew perhaps sitting waiting for us to make decisions. I will discuss with our builder (if we get approval) to gauge this and perhaps the builder himself will take on the role of project manager for an extra fee. That way, he can coordinate all that needs doing, one time, in the correct order.

...on that subject be aware that too many downlights and you might have to double roof insulation to make up for the penetrations. Personally I went with nice oyster lights, cheap and easy for tenants to replace bulbs.

I love my LEDs but know that if one fails, we need to replace the whole fitting. I'll see if I can find something nice that looks high spec without the high spec price, but is easy to replace globe and not whole fitting and use it everywhere except a feature light or two.

Remember the builder is there to make a profit. Sure they can provide a turn key solution but their markup goes on top of everything.
You can save a lot by organising painting, floor coverings, landscaping etc yourself. Some specific things they can offer deals on but be wary of cost cutting such as carpets with no underlay.

We have a painter as a tenant. I would hope to ask for painting cost as a separate amount, show our painter and if he can do it cheaper, we would leave the painting out. We have a good carpet place so we could do the same with any carpet in the quote, and we can do the landscaping ourselves.

Edit: Possibly the biggest thing. Don't cut budget too close. Make sure you can afford a few months delays as builders always have wiggle room in contracts, ie x numbers delay wet weather.
No idea of your financial situation but perhaps design all 4 then build 2 first, followed by 2nd 2 after.

Our plan is to do the lift/shift, get that rented again, build the first two, get them rented, and build the second two. That gives us breathing space if the first two run into problems and we don't have so much money tied up in building four together.

I'm learning so much from this. Thank you to those who have responded. I'm happy to hear anything more that you think of.

It seems that it will likely be twelve months before we start the build, allowing for time to get things ready for the DA, time in council waiting for approval (fingers crossed).

 

[MTR]

I am also loving this thread and learning a lot.

 

[Blacky]

Any update Wylie?

 

[wylie]

We had the designer who our preferred builder uses draw up basic plans, send them to the town planner. Planner is ex-BCC so hopefully he knows what may or may not get through. We were told that this pre-lodgement meeting often brings up issues that will slip through if we go directly to lodgement of a DA.

I ran this past the town planner, who said that knowing our block and the issues we have, he believes in this case a pre-lodgement meeting is justified. Some costs will be able to be transferred if we go to a DA.

The initial plans were changed after advice from our ex-BCC town planner and I believe we will be going to a pre-lodgement meeting very soon. I'm just waiting for the call.

We were going to try for a three level townhouse at the top of the sloping block which would give a very nice city view, but the advice is that we will not be allowed a third level. We will still get nice views, but there is no assurance that the neighbour will not one day develop his own block and block those views somewhat, so we want to angle any outlook and views in a way to ensure any future build doesn't completely stuff up our outlook.

Things don't move very quickly at all . But with one son selling and buying, another son buying it's not like we are sitting and twiddling our thumbs.

I've been painting at two different houses for two of our sons this past week or so, whilst paying a painter to paint our own house... something not quite right there .

I'll update this thread once I have some news to tell.

 

[MTR]

Don't you love it, the painting thing, that's exactly the sort of thing we would do for our children.... something not quite right

 

[wylie]

Update...

BCC pre-lodgement meeting went well. We didn't attend but bought the town planner lunch afterwards and discussed it. He said council was very happy with the plan, were looking for this sort of development in our area.

They gave us a very strong idea of what they didn't want to see by pointing to a nearby development that they would not want to see repeated. Why did they approve it? Perhaps it was pushed through the courts to be approved? Anyway, we know what to avoid.

Definitely no third storey allowed. Less reports requested which means some money saved.

Next thing is to have the designer who did up the concept plan outlines flesh out some ideas, draw up internal divisions and draw up plans for the DA.

We spoke to a friend who is a developer and asked him about speaking with the neighbours. He said a most emphatic "yes" to visiting all neighbours. It will not stop the objections, but is better than just seeing a notice sign go up one day.

Hubby has the gift of the gab, so he will do this part of it.

I'm gathering photos and clippings of external finishes and styles I like. We must stick with some sort of "character" but that doesn't mean "fake queenslander" (thank goodness).

Will update when I have more info.

 

[hobo]

Did I miss a suburb or do you prefer not to say?

Enjoying following this thread - good luck!

 

[wylie]

Did I miss a suburb or do you prefer not to say?

Enjoying following this thread - good luck!

Suburb is Coorparoo.

Thanks for the good wishes. I'm equal parts nervous and excited.

I keep thinking "what can possibly go wrong?" (just kidding).

Reading the Mona Vale thread and a few others has me more than a little nervous. Give me a straightforward existing old house to renovate and I'm confident. This development caper and "build from scratch" is all new to me though, and I just don't know what I don't know.

 

[Blacky]

I just don't know what I don't know.

Dont stress about this - you will find out soon enough

Blacky