Pitfalls for subdivision???

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From: Shane .


Just wondering if anyone has some ideas of things to look out for in a deal I'm looking at.

Here's the scenario:
- 130 acres in total
- plans approved for subdivision consisting of 3x40 acre blocks and 3x2.5 acre blocks (current for 12 months) and already surveyed.
- total purchase price $450K
- approximately 150m of road works required.

The agents told me he could easily get $100k each for the 2.5 acre blocks, and around the $200k's each for the 40 acre blocks (one is a little hilly so might not attract as much).

I've done some research in the area and the 2.5 acre blocks are selling above $120k.

So, looking at the figures, it appears sound. Not having done anything like this before, I've been thinking about what could be stopping the owner doing the same and making an easy million....

My thoughts:
- hassle of development
- cost of development
- road costs
- water, sewerage and electricity availability (most in the area are septic and tank water..)

He's a little older, and has been living there for 20 odd years, so I'm not sure he's got the time or patients to go through with it himself....

Anyone got any suggestions or ideas, things to look out for etc?

Oh, and it's NW of Bris Vegas...

ta
Shane
 
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Reply: 1
From: Frank Shead


Shane,
Place your finance before you buy. on the dotted line.
Most financials are not into your scenario re giving you your finance. They will also look at your track record.
Frank
 
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"Pitfalls for subdivision??? (long post, sorry)"

Reply: 2
From: Asy .


Wow Shane!!

Good on you for doing the numbers on such a deal.

I have several suggestions for you:

1: PRICE YOUR WORKS.

What I mean is, Make sure you get written quotes for all your works, The planning approval will let you know whether you have to drag sewer or can sell with septic. Dragging sewer can be as much as $1mil/kilometer, and the sewer junction may be a while away.
Also, With water, make sure that where the closest development is (with water) can handle your development. Topographical heights can often affect water distribution. Hopefully you will be able to sell parcels of this size as "Tank water". You may come up against difficulties if you are too high (you said it was hilly) for the current water infrastructure, and you have to build a pumping station.
As for roads, 150m may not seem much, but have you looked at the plans, what road junctures are required, do you have to do kerb and channel, or is it rural edging? This will affect your pricing.

If you do the planning carefully, you will do well, but you will learn lots either way.

2: My suggestion to you would be to approach a local developer who already does small subdivisions and offer them a cut of the profit for tutoring you through it. (Even if you offer them 50%, you will learn enough from this one to do MANY more, and will meet lots of contacts, whereas if you go it alone, and have not checked a critical detail, you may have problems which may cost you more than 50% of your profit). In any case 50% of something is better than all of nothing, especially when 'something' is a cool mil.

And as you say, often the vendors of these kinds of properties have the preconception that it is too hard to do (often spurred on by RE Agents, who smell a comm) and are too scared. Good for you, not for them...

Anyhow, if you have further questions, post them and I will see what I can do to answer.

Please understand, I am NOT saying don't do it (hell, someone's gotta make the money might as well be you!!!), I am saying be careful THEN DO IT!!!!!!!!!!!

asy


"Don't forget what happened to the guy who suddenly got everything he ever wanted...
He lived happily ever after.
(Willy Wonka).
 
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"Pitfalls for subdivision??? (long post, sorry)"

Reply: 2.1
From: Michael Croft


Agree with Asy on this one - Price Your Works and not just the obvious ones!! They can kill any good looking deal on paper; sewer being one and roads and bridges being another.

Had a look at one late last year just out side of Canberra in NSW, all was going well until I spoke to council. They wanted the small single lane bridge 2 km down the road upgraded to a dual lane unit to take the extra traffic generated. Cost $800 - $1M so the figures which looked great just didn't stack up.

One of the things we were going to do (to avoid the sewer charges/connections was to "go off line" and run composting toilets and grey water re cycling systems. This was very cost effective and environmental sound. It also would have enabled us to tap into the 'green' market which is big in our area. Of course it maybe different up north as our area only gets 600mm rain fall.

Best of luck,
Michael Croft
 
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"Pitfalls for subdivision??? (long post, sorry)"

Reply: 2.1.1
From: Michael Croft


Forgot to mention to talk to Les (moderator of Caveat Emptor) as he had a rural subdivision on the go up your way mid last year. It didn't work out I think but he might be happy to share his learning.

Michael Croft
 
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"Pitfalls for subdivision??? (long post, sorry)"

Reply: 2.1.2
From: Asy .


Bridges are a good one to watch for, Michael.

I investigated a project for a client last year, and exactly as you say, the council had listed a bridge 2k down the road for upgrading. They had therefore loaded each block in the subdivision with a $2000 levy.
Doesn't sound like much until you multiply it by 600 blocks, and consider that the subdivision next door did not have the levy because they were approved prior to the council noting the bridge for upgrading.

Subdivisions can be really big bikkies, but also a place with big pitfalls.

Shane, why don't you consider offering Michael Croft a share in the deal to talk you through it? (Just a thought...)

asy


"Don't forget what happened to the guy who suddenly got everything he ever wanted...
He lived happily ever after.
(Willy Wonka).
 
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Reply: 2.1.2.1
From: Shane .


Great posts thanks.

We've requested the conditions on the approval for the sub-division (if any) and are still waiting.. I'm assuming sewerage and water requirements will be outlined on that.

We're 95% sure that the surrounding blocks aren't sewered and have tank water so same should apply - have to confirm it though.

Does anyone have guestimates of road costs. Minimal excavation required, no kerb and channel either, just bitumen???

Starting to get a little exciting!!!
Shane
 
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Reply: 2.1.2.1.1
From: Michael Yardney


In addition to the good advice from the others watch out for council subdivision fees. In Victoria they require you to leave 5% as open space or parkland or pay the council a fee equivalent to 5% of the council land valuation. Also various authority charges such electricity, drainage and sewerage as mentioned can really mount up.
Also consider what is the market like for the 40 acre blocks? I have seen rural subdivisions sit unsold for years while the interest eats up the profit.
Lastly without a track record you may have difficulty getting finance.
I agree with Asy if possible get an experienced joint venture partner.
You could check with the local surveyors or engineers as to who is doing that type of thing in your area.
I've done 2 residential subdivisions in the past and they were real money spinners. I am not telling you this because I am interested in your project, I have a strict rule of not working out of Melbourne, but just as a point of encouragement to you to investigate further.
Michael Yardney
Metropole Properties
 
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Reply: 2.1.2.1.1.1
From: Shane .


Thanks Michael,

We're pretty sure there's no sewerage etc, so we figured even if the development cost ended up being $100K (still no idea really), it would put the costs at $550K in total.

So if we sold off the 3 x 2.5a blocks @ $100K and asked $120K for the 3 x 40a blocks (an absolute pittance) - sure we wouldn't rake heaps of cash, but we'd break even (maybe even a little in the kitty for next time!) and a whole lotta learning experience in the process (which will come in real handy for next time!!). I think the learning is worth mega $$$'s

Thanks again for all the gr8 posts ;)
Shane
 
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Reply: 2.1.2.1.1.2
From: Michael G


Michael,

I once attended a developers course run by Western Sydney Uni.

In that course there was an example by a developer and their council fees were $10mil for a development, so they converted the bottom floor of their building into a indoor public pool.

Apparently this was the equivelent value of their bill, but in acutal dollars cost them much less.

The idea here, is that these fees can sometimes be negotiated with items of equivelent value.

Maybe finding out what council needs could be handy?, ungrade to a hall?, donate a community centre etc?.

Say your bill was $500k

You could;

1) Hand over $500k worth of property, the trick here, being, when, as property value will rise.

2) Hand over $500k cash, which may hurt your cashflow

3) Hand over a community centre VALUED at $500k, which may cost you $50k in land and $200k to build ?, but is valued at $500k.

Also this would now become a feature of your development?

Maybe think about some features for your estate?

- bike track
- skateboard park
- water/lake feature

Idea being to have items valued alot more than they would cost to build... then "donate" them to the council to maintain (save you maintaining them).

Instead of having a community title block (say with tennis courts, bbqs etc) and having the burden on your buyers to maintain. You build them as features and let the council pay :)

Michael G
 
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Reply: 2.1.2.1.1.2.1
From: Shane .


I realised while asleep last night that I was so excited about this that I totally missed 2 post (Frank and Michael) regarding finance and track record. I assumed because we've got the deposit and can easily finance the repayments that we wouldn't have any trouble.

Do banks frown on first time developers? I guess that's why you've been saying to get an experienced party to join???? (Penny drops!)

Thanks
Shane
 
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Reply: 2.1.2.1.1.2.1.1
From: Asy .


Shane.

Well done, I'm glad the penny dropped!
Soon Dollars will fall... :eek:)

This is exactly what I meant by "get an experienced developer to join", and it is also what I meant by using them to meet their contractors. Not just road builders, bankers too. By going in to a sympathetic banker with a known client you are legitimising your request for funding.

I really hope it all comes together for you.

asy

"Don't forget what happened to the guy who suddenly got everything he ever wanted...
He lived happily ever after.
(Willy Wonka).
 
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