Small Subdivision Opportunity

There is a property for sale in an outer suburb of Adelaide.
It's a very fast growing area.
The property is 200m from a cinema, across the road from a large park, 400m from a high school, 500m from shops, and buses to the city go past the front gate.
There's a decrepit building on the land, which is 2800sq. m.
the house is currently rented to longterm tenants for $250 per week. They don't ask for any repairs because the rent is cheap, and they are happy to stay or go.
Council has approved subdivision into 3 lots of 800sq m each, subject to a few standard conditions, such as paving driveways and connecting to utilities. The agent says that council would probably approve subdivision into 4 lots of 600sq m each + 400 sq m for the shared driveway.
Around the corner, a 600sq m block sold for $171K last December.
Two weeks ago the asking price was $395K.
I inspected the property and offered to buy a 12 month option on it for $423K.
The owner's response was to ignore my offer and lower the asking price to $370K.
I'm interested in investing in this with a silent, moneyed partner. I would do all the work re organising subdivision contractors, with the other partner putting up all the cash.
Here is how it could pan out, assuming it took a year to subdivide and sell:

Price
Price of Land $370,000
stamp duty $18,500
Land Broker Fee $1,000
Subdivision Costs
Crossover $1,000
Sewerage Connection $15,000
Electricity Connection $15,000
Pave Driveways $10,000
Planning & Development Fund Levy $15,600

Council Rates – 1 year $6,000
Emergency Services Levy $800
Surveyor Fees $2,000
Town Planner Fees
Development Application Fee $1,000
Community Title Lodgement Fee $500
Subtotal $456,400
Interest – 1 year @6% $27,384


Advertising $2,000
Selling Agent Commission $13,000

Total Cost $498,784

Income
Sale of 4 blocks @ $157K each $628,000

Profit $129,216

Split
Investor $64,608
Manager $64,608

Investor's Return on Equity 12.95%

If you had a spare $500K, would this be an attractive opportunity for you?
 
is one year the timeframe?

what contingencies are in place should the lots not sell in time?

do you have more than one exit strategy? what are their returns?

cheers.
 
You'd be surprised how costs and time can blow out on subdivisions-

I've dealt with the Onkaparinga council doing a simple one block into 2 divide, it took exactly 2 years and 3 months to have the new Titles in hand, the land sale can not settle without the new Titles for the allotments, so I would double your expected time frame, obviously that would add on holding cost.

Also I can't see anywhere in your post costs to demolish the existing house/shed/trees etc- My understanding is that new titles can not be issued untill the existing dwelling is removed and new water meters are installed to each allotment, (correct me if I am wrong) and again this will add to your holding costs.

Have you rang SA water and asked for a sewerage drain layout plan? Do you know if this block will need a sewer main extension? This may not be the case but overlooking it may result in additional unexpected cost, for example a 20m long sewer main extension will set you back approx $10,000 and another 3 mth delay.

Just a bit of food for thought, good luck :)
 
Thanks for the comment Erica.
It's a good thing you didn't sign up with me yesterday.
I co-incidentally remembered about the demolition this morning.
There are also a few dead trees that need to come down.
Now the figures look slightly less attractive:

Price of Land $370,000
stamp duty $18,500
Land Broker Fee $1,000
Subdivision Costs
Demolish existing house $25,000
Community Title Lodgement Fee $500
Council Rates – 1 year $6,000
Crossover $1,000
CWMS Levy
Development Application Fee $1,000
Electricity Connection $15,000
Emergency Services Levy $800
Pave Driveways $10,000
Planning & Development Fund Levy $15,600
Remove Dead trees $3,000
Sewerage Connection $15,000
Surveyor Fees $2,000
Town Planner Fees
Subtotal $484,400
Interest – 1 year @6% $29,064


Advertising $2,000
Selling Agent Commission $13,000

Total Cost $528,464

Income
Sale of 4 blocks $628,000

Profit $99,536

Split
Investor $49,768
Manager $49,768

Investor's Return on Equity 9.42%

I haven't rung SA Water or ETSA. I just estimated the sewerage and stormwater connections, and figured they would be minimal on account of being close to the existing ones that the house uses. (Possibly a dangerous assumption!)
I was just musing about ball park costs and returns.
To do it properly, of course, those figures need to be accurate.
I thought that pricing the blocks at $157K, $14K less than market value would help shift them quickly.
If the issuing of the titles blew out to 2 years that would be $30K off the profit.
It would be also be very uncomfortable waiting for the council to respond to each communication, not to mention how I'd feel about pressuring SA Water, ETSA and tradies to work sooner faster.

Aaron, not sure what you mean by exit strategies, but I expect it's got nothing to do with leaving the country to avoid creditors.
It's difficult to require the market to adhere to a timetable, so failing to sell the lots within one year of borrowing could easily happen.
Another possibility is building townhouses or courtyard homes on the lots, which would add to the time and money involved.
If you mean marketing procedures, I would build a website, run a Google Adwords campaign, as well as list with 2 agents, list on real estate sites, and advertise in local newspapers.
 
You'd be surprised how costs and time can blow out on subdivisions-Have you rang SA water and asked for a sewerage drain layout plan?

Good luck with SA Water............seriously,nice people to talk to,but getting information before 1980....forget it.
 
Two weeks ago the asking price was $395K.
I inspected the property and offered to buy a 12 month option on it for $423K.
The owner's response was to ignore my offer and lower the asking price to $370K.

Lesson learnt.The average person doesn't understand options when selling property,including me to a point.If i were you,buy @ 370k and save yourself 50+ K.
 
Thanks for the comment Erica.
It's a good thing you didn't sign up with me yesterday.
I co-incidentally remembered about the demolition this morning.
There are also a few dead trees that need to come down.
Now the figures look slightly less attractive:


I haven't rung SA Water or ETSA. I just estimated the sewerage and stormwater connections, and figured they would be minimal on account of being close to the existing ones that the house uses. (Possibly a dangerous assumption!)

IMHO estimating sewerage and stormwater connections is very dangerous. I know here in Perth subdividing can be very expensive and electricity and sewerage are per extra block and can really add up.

If you are proposing this be a business venture with you (and you getting the managers cut) then you need more accurate figures.

If you just want to explore this as a learning exercise then disclose where it is and ask for help on how you would ascertain figures to make a deal like that work - if it could.
 
There is a property for sale in an outer suburb of Adelaide.
It's a very fast growing area.
The property is 200m from a cinema, across the road from a large park, 400m from a high school, 500m from shops, and buses to the city go past the front gate.
There's a decrepit building on the land, which is 2800sq. m.
the house is currently rented to longterm tenants for $250 per week. They don't ask for any repairs because the rent is cheap, and they are happy to stay or go.
Council has approved subdivision into 3 lots of 800sq m each, subject to a few standard conditions, such as paving driveways and connecting to utilities. The agent says that council would probably approve subdivision into 4 lots of 600sq m each + 400 sq m for the shared driveway.
Around the corner, a 600sq m block sold for $171K last December.
Two weeks ago the asking price was $395K.
I inspected the property and offered to buy a 12 month option on it for $423K.
The owner's response was to ignore my offer and lower the asking price to $370K.
I'm interested in investing in this with a silent, moneyed partner. I would do all the work re organising subdivision contractors, with the other partner putting up all the cash.
Here is how it could pan out, assuming it took a year to subdivide and sell:

Price
Price of Land $370,000
stamp duty $18,500
Land Broker Fee $1,000
Subdivision Costs
Crossover $1,000
Sewerage Connection $15,000
Electricity Connection $15,000
Pave Driveways $10,000
Planning & Development Fund Levy $15,600

Council Rates – 1 year $6,000
Emergency Services Levy $800
Surveyor Fees $2,000
Town Planner Fees
Development Application Fee $1,000
Community Title Lodgement Fee $500
Subtotal $456,400
Interest – 1 year @6% $27,384


Advertising $2,000
Selling Agent Commission $13,000

Total Cost $498,784

Income
Sale of 4 blocks @ $157K each $628,000

Profit $129,216

Split
Investor $64,608
Manager $64,608

Investor's Return on Equity 12.95%

If you had a spare $500K, would this be an attractive opportunity for you?

Howdy

So let me get this straight from where im sitting...

Someone to put in all the money and take on all the risk in exchange for the other partner orginising the subdivision?

Some reasons why this wont work

- one person is taking on all the risk and the other person can walk away at anytime not loosing anything but time especially if costs blow out
- no one will want to invest money with someone who is new to the process and doesnt know the area and exact costs and timeframes ( usually from previous experiences and projects)
- they could just pay a proffesional to orginise and manage who does this all day everyday for probably less than 10k and have alot more to profit.

The only way it usually works is both partners need to be in invested equally ie one has the land and one pays for the subdivision costs or build costs. Or the profits are split differently.

Hope that helps

Cheers
 
OK people, help me get my head around the tax implications of subdividing and selling...

From the ATO web site: "if you purchase land to subdivide and resell for a profit, or use the subdivided land in a business-like way, the proceeds may be treated as ordinary income and you may need to register for GST."

My understanding is that the project described above would definatelly be deemed as 'a buisness like manner' since it is purely for realising profits, so subject to GST and income tax (yay, I love paying tax;)

So of the $99,536 profit, 1/11th of the margin would be payable in GST (using the Margin Scheme) so loose = $10,949 to ATO

Then the remaining $88,587 is subject to normal income tax
(assuming the OP has a day job earning the Aust Ave wage of $72,00, bringing total taxable income to $161,387 which is in the 37% tax bracket plus 1.5% medicare levy) so loose another $34,106 to ATO

Total cash in hand from this project= $54,481 (10.3% return on all money in $528,464)

Howz my math?
 
***GST?
Dang! I knew it was component of the contractors' and Utilities fees, but where else do I need to add it?
Is GST really payable on the profit, or is there another method of calculation?

***RISK
The only way to have no risk on either the return or the capital is in a bank account, earning 4% interest. Even then, there's a risk of tax.
This deal wouldn't suit an entrepreneurial partner who is prepared to advertise for someone to hire, then instruct them every step of the way on what to do.
It would suit someone who is time poor, but asset rich, who can tolerate a little uncertainty. The payoff for this tolerance would be the likelihood of a greatly enhanced return with the security of well-located real estate underpinning the investment.

Perhaps it would be more commercial if the manager got 40%?

***ACCURATE UTILITIES COSTS
Point taken. I'll look into that next week.

***CONTINGENCIES
What if it costs more? What if there aren't enough buyers soon enough? There could be infinite variations of these questions. Generally speaking, the answer to all of them is the same. The profit will be less.

***OPTION
It now seems as though my request for an option at $423K was too generous. I emailed the agent and withdrew it.
 
depends whether you register for the margin scheme at purchase, or not.

you can obviously claim back all GST paid on improving the land but one eleventh of all sale proceeds will be paid in GST.

the difference is net payable / refundable.

60/40 is a pretty common split. the person stumping up the cash should always get the lion's share, but then, if you're finding the block for them and organising sales, 50/50 is actually pretty generous!
 
***CONTINGENCIES
What if it costs more? What if there aren't enough buyers soon enough? There could be infinite variations of these questions. Generally speaking, the answer to all of them is the same. The profit will be less.


Have you heard the story about the chicken and pig that decide to set up a restaurant together? Think bacon and eggs, and the commitment required from each partner: the chicken can walk away at any time with little inconvenience. The pig has lost everything.

In your proposal, you are the chicken.

If this deal is good, get an investor to loan you the money for the deposit, like 30% or whatever. You then borrow the rest of the money from a bank. The return for the investor is the interest. You get to keep all the profits. Both you and the other investor now have "skin" in the game, both of you have compelling reasons to make the deal work.
 
***CONTINGENCIES
What if it costs more? What if there aren't enough buyers soon enough? There could be infinite variations of these questions. Generally speaking, the answer to all of them is the same. The profit will be less.

.

going into a development with no contingency is asking for a lot of trouble. there are no infinite possibilities or outcomes here. the one outcome is that your profit will absolutely be less, if there is a profit at all.
 
You have allowed interest, but seem to have also required the investor to put in the full cost amount, which would imply no interest is payable.... or are you intending to pay the interest to the investor plus their 50% share of the profits?
 
depends whether you register for the margin scheme at purchase, or not.

you can obviously claim back all GST paid on improving the land but one eleventh of all sale proceeds will be paid in GST.

the difference is net payable / refundable.

60/40 is a pretty common split. the person stumping up the cash should always get the lion's share, but then, if you're finding the block for them and organising sales, 50/50 is actually pretty generous!


Glad you see it my way, Aaron
 
Have you heard the story about the chicken and pig that decide to set up a restaurant together? Think bacon and eggs, and the commitment required from each partner: the chicken can walk away at any time with little inconvenience. The pig has lost everything.

In your proposal, you are the chicken.

If this deal is good, get an investor to loan you the money for the deposit, like 30% or whatever. You then borrow the rest of the money from a bank. The return for the investor is the interest. You get to keep all the profits. Both you and the other investor now have "skin" in the game, both of you have compelling reasons to make the deal work.

I think your chicken and pig analogy is flawed.
If I walk away from the deal, it is I who is left with nothing, not the investor. The investor still owns the land plus the value of all the approvals I have achieved up to the date of my exit. If I leave prematurely then I have wasted all my time up to that point for no return. The incentive for me to stay is pressing. As for the investor, of course there is some risk, but if the deal is sound then it's hard to see how they could lose. The joint venture agreement would allow me to be replaced if I don't/can't perform.
 
going into a development with no contingency is asking for a lot of trouble. there are no infinite possibilities or outcomes here. the one outcome is that your profit will absolutely be less, if there is a profit at all.

It's also possible that I've overestimated the costs and underestimated the subsequent market value, so the profit could be higher.
 
One week ago, the agent advised me to put in an offer as she said another written offer had been received, which she believed the owners would accept.
However, the property is still listed as for sale on the agent's website.
Queried this with agent.
Awaiting reply.
 
Top