Selling OTP, arms-length?

I am looking into doing a 3 or 4 unit development. Intention is to sell 2 of them as soon as they are done. End goal is a high-yielding asset and some profit on the 2 sold units.

Can I sell them Off-the-plan as soon as I get a BA?
Do OTP sales have to be arms-length as well? I've 2 interested buyers (a friend and a cousin).
How can such a development be structured? Can it be something like this - Buy land at max LVR. Get DA approved. Sell OTP. Get BA approved. Convince Bank to extend the loan to include a 3 or 4 unit development with high LVR. Construction completes and properties are handed over to the new owners. I get to keep the remaining 1 or 2 units.

I only have $50k in cash, a recently bought PPOR with 95% LVR and not much else. My income is $90k and have $15k of debt.
 
I doubt you'll be able to get this off the ground with $50k cash if you have no other things to secure againt. What will you use for holding costs? For a 3 unit development it will cost around 1.2m and you will need at the very very least 5% probably 10% deposit PLUS money for holding costs to pay mortgage on land and draw downs on construction loan.

BA? Building Approval? Technically I think you can sell once you have DA but it's probably best to waiting for Building License.
 
By selling OTP, significant part of the construction cost will be born by the new buyers? Wouldn't their respective lenders be releasing money into the project as development goes on? Sorry, I am new to developments.

I've a bit over $3.5k of usable income left each month. That can help with the holding costs only if the OTP thing works and the entire loan burden doesn't fall on me.
 
the loan burden ALWAYS falls on you, you are the developer. if the buyer renegs you might have cause to sue them or take their deposit but ultimately you are the one responsible to pay the bank back, not them.

imo you have no chance of pulling off the acquisition and development of a 3-4 unit site with $50k. $100k would be too tight imo, let along $50k
 
The purchasers deposits can be released to you and can be used to help fund a property development, but that's as far as the buyers assistance goes until the project is completed. They only pay for the rest at the completion of the project.

This only applies to commercial development funding. For residential funding they won't recognise pre-sales in any capacity.

There's some further funding challenges you'll face:

* One of the major criteria for commercial development funding is demonstrating that you've got the experience to pull it off. Given your only experience thus far is your own home leveraged to 95%, I suspect you will be viewed as far to risky to meet this criteria.

* This deal could be done far cheaper and easier as a residential deal, but $50k as seed money probably isn't going to get it off the ground. You'll probably spend almost this much money on getting plans and approvals, leaving you with nothing for deposits, stamp duties, etc.

The bottom line is that any sort of development under either residential or commercial terms, requires a significant input of cash or equity to get the project rolling.



Rather than trying to do this as a developer yourself then selling it to family, consider doing it as a joint venture. Each party contributes to the deposits and other funds required. Each party ends up getting a property out of it. You'd have to give a lot of consideration to how the project is managed and split up, but this is likely to be far more feasible.
 
By selling OTP, significant part of the construction cost will be born by the new buyers? Wouldn't their respective lenders be releasing money into the project as development goes on? Sorry, I am new to developments.

.

Nope, you will get a deposit which will be held in trust and the balance once title and Certificate of Occupancy is issued.

You will have to finance the whole development yourself with a lender who will make progress payments to your builder.

You are confusing a House and Land Package with an OTP purchase. The units will not have separate title so the bank cannot secure a mortgage for an individual unit until individual titles are issued.

If you get individual titles first and sell the land with an accompanying Building contract, they are considered to be spit contracts and the bank will in all probability still not lend on a house and land basis for the purchasers.

cheers

RightValue
 
Say 4 units upon completion are worth $400k each, end value $1.6m.

Valuation of 4 units on one title will likely be around $1m.

Bank will lend you say 80% of that, so $800k.

You will need to show you can service that debt and with a $90k income with another property geared at 95% it is doubtful if you will have the serviceability.

If however you own the land outright without a loan against it then you may well have sufficient equity and, you may well be able to do it, but it is doubt due to serviceability issues based on your income.
 
50k is def not enough....just enough to cover maybe stamp duty ...still need deposit + council fee + building cost + marketing...

- Build up equity or get more cash
- find an equity partner ( Cash or land)
 
You could possibly get the ball rolling by looking to purchase a future development site with existing rentable house circa 400k and land bank it.

Sit on both properties and if history repeats have some equity gain and more savings and then revisit the development project when the figures stack up.
 
Thanks for all the replies, guys.

I didn't realize that lenders ignore presales for resi developments and I am too cash poor to do a full-blown 4 unit project at this point in time. I was just trying to think outside the square :D

Perth market is so hot that it would be foolish for me to just buy regular properties and expect decent CG anytime soon. I am not skilled enough to undertake renos by myself so that just leaves properties(which I can find none) with good CG potential or developments with manufacturable CG.

I started looking to buy real estate on and off for more than a year now. I've seen perth market take-off like crazy with many suburbs realizing double digit CG in a short time. Sydney is even worse and Brissie is getting there.

Melbourne is pretty flat at the moment but what are the chances of it taking off like Perth in the next year or two? If I can somehow find a property that gives 10+%/year growth in the first 2 years, it would greatly help to kickstart my acquisition phase. Land banking is probably an option too.

I just started researching Melbourne suburbs. Any suggestions for sub-$400k properties with potential for good short-term CG? Thanks everyone.
 
Melbourne is pretty flat at the moment but what are the chances of it taking off like Perth in the next year or two? If I can somehow find a property that gives 10+%/year growth in the first 2 years, it would greatly help to kickstart my acquisition phase. Land banking is probably an option too.

I just started researching Melbourne suburbs. Any suggestions for sub-$400k properties with potential for good short-term CG? Thanks everyone.

I don't think I'd say the Melbourne property is flat at the moment. It's been a fairly interesting year and whilst the market hasn't had huge increases, there has been plenty of competition for good quality stock. I think next year will be another good year for Melbourne.

I also think you're going to have trouble finding anything sub-$400k in an area with good CG prospects. It's possible, but very rare at this point. I'd also think twice about banking on short term capital gains. If you're in it for a quick buck, then property investment is very risky.

If you are really keen on development, look back to my previous suggestion and see if you can't find a way to do it via a joint venture with your family, rather than you as the developer and them as the purchaser. This could work much better for everyone.
 
I'd also think twice about banking on short term capital gains. If you're in it for a quick buck, then property investment is very risky.

If you are really keen on development, look back to my previous suggestion and see if you can't find a way to do it via a joint venture with your family, rather than you as the developer and them as the purchaser. This could work much better for everyone.

I am aiming for short term gains in hope that it'll accelerate my acquisition phase and don't plan to depend on it as a bottom line but I get what you are saying.

It's my understanding that an average real estate investor has to wait a couple of years before he/she sees usable equity from CG. Generally speaking, booms seem to be particularly well suited for accelerated CG followed by flat-ish growth so I can enjoy the growth sooner rather than latter if I buy "right" or buy with option for manufacturable CG.

With a joint venture, say we all setup a trust and buy land and use equity in the land against the deposit for a construction loan(assuming that we can do that) and complete the project. Once its all done how can we transfer the units to our individual names without triggering stamp duty and LMI for a new loan? Thanks, PT_Bear.
 
There's no way to transfer property from a trust to your own name without incurring stamp duty that I'm aware of. There are ways of structuring the deal right up front in a way that can work for you on an ongoing basis however. This is something you'd be best to get advice from an accountant specializing in property.
 
Back
Top