Short term finance to buy and then sell land - is it worth it?

[Evgen]

Hello all. I'd love to get your advice for my situation.

Basically, I put down $300 deposit for a block of land in one of the new Sydney estates. It's still in development and that land is going to be registered around July next year. It's in the last land release in that estate so the land supply is quite limited. My initial intention was to build a house on that land and I even paid for the house tender fee to one of the builders.

However, recently the same builder listed a new house and land package in the same estate with more land and at very good price which was too good to miss. Thus, I put down a deposit for that H&L. The land for this package is going to be released around September next year.

I'm now considering what to do with the initial block of land I put down the deposit for. I did not sign the contract yet so if I decide not to proceed I only loose $300 which is ok. However, I think the block has good potential to grow in value in 10 month time as it's up the hill and will be overlooking the reserve (which is not there yet and going to be created as land gets developed).

From the finance point of view, I would not be able to obtain loans for both the initial land block and the new H&L package. Thus, from what I can see there are basically two options:

1. Not to proceed with the land contract.
2. Proceed with the land contract and pay 5% deposit. When the land is registered (July next year) get a land loan, pay for land and immediately sell it as I'll need to get finance for the H&L package in two months (September next year). Sounds a bit risky.

Considering the second option I'm more or less positive that I will be able to sell the land at a profit as the demand is there (I know it's not guaranteed to be the same in one year though).

What kind of CG will I need to cover buying/selling/stamp duty (which is btw $3310) costs?

Please share your thoughts. Which option would you choose?

 

[vaughan]

... I'm more or less positive that I will be able to sell the land at a profit as the demand is there (I know it's not guaranteed to be the same in one year though).

Make sure you have enough cash to hold both blocks of land for an extended time while you wait for the sale to conclude, or to be able to cover costs if the capital gain does not eventuate.

Is this your first property investment?

 

[Evgen]

Hi vaughan. Yes, it's my first IP.

I don't need much cash to hold the blocks since at this stage I'm only about to pay 5% (comes from my savings). It's when they are registered in 10 months and 1 year time that I'll need to pay 100%.

However, the problem is that unless I sell the first block quickly I'll not be able to get finance for the second H&L which registers soon after the first block in two months. Thus, won't be possible in this situation to hold the first one for extended time.

 

[Rolf Latham]

Is ur finance inability due to deposit ?

Ta

Rolf

 

[Evgen]

Hi Rolf,

Not really. One of the lenders I had a chat with told me that my current borrowing capacity will be just enough to pay for the H&L package. However, it won't be enough to pay for both first land block and that H&L package. At least that's my understanding. I'll be looking to have a chat with a broker to double check.

 

[tobe]

If you cant afford the house and land, you cant afford the land only.
Each lender is slightly diferent in their calculations, and not all brokers/bankers think the same, so just cause one guy says no doesnt mean its impossible necessarily.

Most estate have preclusions about 'flipping' blocks, as do the state revenue office (in victoria anyway).

My advice is to either pull out of the contract, or try an get the build done, and then rent it out for at least a year or two before trying to sell. If you make your money back in that time, I would be happy. New estates arent known for capital growth.

 

[Terry_w]

'flipping' blocks, as do the state revenue office (in victoria anyway).

.

Please explain?

 

[Evgen]

Hi tobe,

Just to clarify things a bit. We are talking about two properties: land block (1) and house and land (H&L) package (2). I have enough capacity to borrow for H&L (2). My intention for H&L is to build it and rent it (long term buy and hold, not intention to sell any time soon). I've recently got it for well below what it's worth on the current market.

In addition to H&L (2), I've put down $300 deposit on the block of land (1) which registers two months before the land in the H&L package. I'll not be able to borrow enough for both land (1) and that H&L (2).

Now I'm just trying to decide what to do with the land (1).

The first and easiest option is to pull out of the land (1).

The second option is to sign the contract for land (1), wait till it registers and sell it immediately so that I can still get finance for that H&L (2) which registers two months after land (1).

In any case, I'll be proceeding with H&L (2).

 

[Evgen]

Regarding the estate, as per the contract I'm free to do with the land whatever I want. No obligation to build. Can put it on the marker next day after it registers.

 

[albanga]

Hey Evgen,
What happens in the event that you cannot sell the land when the h@l becomes available? Can that settlement period be extended? Or do you lose your deposit on that?
If not then From what I am personally reading I just do not see how this is possible? You are talking about trying to sell a vacant block of land in an estate and settle all in 2 months time.

 

[Evgen]

Hi albanga,

If I can't sell the land I won't be able to get finance for the H&L. I don't believe the H&L settlement can be extended. If I can't get the finance for H&L in time I'll be paying some kind of penalty interest rate and in the end loose my 5% deposit if no finance obtained after some time.

I'm not sure about the timeline and whether it's at all possible to settle this within two months time. Am I dreaming here?

Considering the risks/time limits I'm now leaning towards pulling out the land and just proceeding with that H&L. Thoughts?

 

[Evgen]

What's be the typical time to allow for land settlement in NSW? Is it 42 days?

 

[albanga]

Hi albanga,
Considering the risks/time limits I'm now leaning towards pulling out the land and just proceeding with that H&L. Thoughts?

The settlement is one part to it and I could not tell you the average settlement time It would vary depending on the buyer. We are also talking about a sale as well here though, you are going to try and attempt to sell a vacant piece of land and then settle all in 60 days. I am sure it can be done but the risks are huge if it means you miss out on the house and land and that's your ideal choice.

I do not know the area you are talking about and the estate but my guess is there is lots of other vacant land as well so on top of your already hard task you are in a market where buyers ultimately have choice.

So my guess is if you put yourself in this position and a sale is the only way to get out to buy the H@L then your basically desperate for the sale. So if a buyer comes in with a lowball offer and its the only one you have had then you seriously may have no other option but to accept it. This now means your speculative value estimation has changed and you may end up with very little, none or actually lose money plus all the stress you have put yourself under.

Unless one of the great brokers on here has some clever ideas I would personally be inclined to cut the loss of $300 and focus on the H@L.

 

[tobe]

cut and move on. to make a profit on a flip, you need to cover your costs, which are stamp duty and CGT. Just because the next stage in a development has higher sticker prices than yours doesnt mean you can sell yours at a profit.

 

[Evgen]

albanga,

The land is not longer available in that estate so no supply of new land. The demand is also there so far.

However, considering the short amount of time to sell the land it's probably not worth the risks. I'll likely be concentrating on just that H&L. Thank you!

 

[Evgen]

Hi tobe,

Taking into account the costs (CGT, stamp duty of $3310 and conveyancing costs) I think I'd still be able to make some profit.

However, it's the time constraint though that does not make it realistic to do this.

 

[jeromanomic]

if the cash flow allows it

If you can afford to finance both one vacant land plus one house and land package, then it sounds like a good idea.

I don't understand why you are looking for such a short turn around.. if you can afford to hold the land, then I'd keep it for a bit longer, unless you have other plans for your investment funds..

If you sell after more than 12 months I think you will pay less capital gains tax, but check that with an accountant as i'm not 100% sure

 

[Evgen]

Hi jeromanomic,

The problem is my borrowing capacity will not allow me to have both.

E.g. my capacity is X, the H&L price is X as well and the land price is approx. 0.5X. I've only got approval for X but not for 1.5X.

Thus, would need to sell land fast to be able to get finance for H&L. Sounds risky and does not work in terms of timelines from what I can see.

 

[albanga]

Hey Evgen,
Let's try a different approach. Taking into account all buying costs and selling costs if this was achievable then on your sums what is your worst and best case scenario figures you are looking at?

 

[Evgen]

Hi albanga,

Worst one would be selling at a loss in 10 months time. I can't imagine it though considering the current state of the marker. Anyway, let's say -5%.

In a good case (not the best one) I'm thinking at least 10% profit would be quite achievable.