Property Developers Margins

[rich ando]

Hi..

My sister in law is currently being offered $ for 2 1/2 acres of land as are her neighbours. The purchaser ia a developer who plans to do a subdivision into 500-1000 sqm blocks.

In order to gauge what the developer may pay I am curious to know what margins they generally operate on. eg If they were to pay $1m for the 2 1/2 acres what would they look to realise in revenue for the final blocks...$2m???

Anyone with experience in this area?

Richard

 

[Freedom]

I understand that they must achieve at least 25-30% projected net profit after alol costs.
You need to do a back of the envelope feasibility study.
Selling price of each lot xx
No of lots
Total Sales

Cost of raw land
Cost of legals
Coas of marketing
Cost of consultants
Subdivision/engineering costs
Council fees
Total Cost

Then Total Sales less Total Costs = projected net profit, which needs to be at least 25-30% of total sales

 

[asy]

"Normal", if there is such a thing! rule of thumb is:

30% Land cost,
30% Development cost,
30% profit
10% fees (council, agent, surveyor, etc).

What I find a lot of land owners do is say, well, I have 3 acres, the developer can get 6 blocks on here (at just under 1/2 acre each) and each one will sell for 200k, so, the developer will get 1.2 mil, so my land must be worth 700k to give him 500k profit... *ahem* doesn't work. (I'm not saying you think that way, but in many years of Real Estate I have seen MANY ppl who do).

So in your sisters case, if the developer is prepared to pay 1mil for her block, he's probably expecting somewhere between 3-3.5mil for the end product of her block.

But don't forget, it's really like 30% land, and 70% fees, development costs, INTEREST component, and profit, so the longer the holding, the more the costs, and the steeper the block and further they have to drag sewer the more that will cost, which will all take from the profit.

hope this helps.

asy

 

[Kristine..]

Hi Asy

As you know we can all apply Turner's Hypothetical but at the end of the day the lone objector can add $000,000, to holding costs, road construction, levies, a slump in the market, all these things are grist to the developer's mill.

I had an enquiry over the weekend, a local chap 'buying a block of land and building a house to sell'.

After five questions I realised he had done no homework whatsoever and really didn't like that I asked him basic stuff such as:

What is the estimated costs of Engineering, paving and draingae

Have you received indications of Contributions to Council, water and draingage authorities, the water, gas and electricty supply companies?

Do you realise you cannot 'sell' the property ie receive any money from the sale until the Certificate of Completion has been issued by the Council and the Plan of Subdivision has been registered?

Have there been any objections?

What is your estimated holding & construction time?

What margin are you costing in to the development?

Have you had local Agents give you market estimates of the finished property?

etc etc

In this case, the existing owners are asking $90,000 for the 'dirt' (a backyard), with the purchaser taking all the risk and assuming responsibility for completing the subdivision.

With Richard's sister, the developer is taking a much larger risk but if his sister is at all concerned about being offered fair value a standard Valuation should only cost about $500 to give her peace of mind regarding the price offered.

The end selling price may eventually provide a small margin for effort, but they have to at least start with the premise that they will see a gross 30% clear of all other expense.

It ain't easy, being green!

Cheers

Kristine

 

[juzz]

Just thought I'd revisit this one,

The Profit margins for development funding usually need to be a minimum
of 20% preferably 25%. If it's under this it starts becomming too hard.
Most financiers won't touch it. You need to inject more capital and add extra
securities etc.

During construction the LVR on a first mortgage could be only 65% on costs.
Then on completion the product now exists & Refinancing this to
give the construction lender an exit needs to be at 80%LVR if a
20% profit margin exists.

Justin