From: Nigel W
Here's a curly one for all the old hands:
What sort of premium are developers prepared to pay today to secure/control a property with a big upside POTENTIAL?
I guess what I'm asking is: what ballpark/rule of thumb type figure would a developer start from to figure out whether they are willing to buy now, on the expectation that they will be able to rezone etc, build and profitably sell?
Say a fair market price is $200K for a property. The developer thinks he can say move the house and put another on it, or put up 4 townhouses etc. Working backwards from a potential sale price of the finished properties (whatever form that may take) of say $500K, that leaves gross profit of $300K.
Out of that $300K must of course come all the multitude of costs of actual development, debt servicing, council approvals etc etc. One of the developer's expenses is securing the property. (let's ignore JV's and options for the moment)
If the owner in fact wants $250K for it rather than the $200K which it's "worth", is there enough fat left in the deal for the developer to proceed?
I guess the missing factor, which will help in deducing the answer to my question, is what net profit margin do developers work on? Is it 20% nett, 15%? 30%? Or is it purely determined by the market?
I suspect that I'm glossing over a huge number of important feasability study type issues here but I'm just trying to get a general feel for the expected returns.
thanks in advance for your responses
N.
ps. before you deluge me with well intentioned "do your due dili" concerns - thanks. But I understand that development can be dangerous to your financial health!
Here's a curly one for all the old hands:
What sort of premium are developers prepared to pay today to secure/control a property with a big upside POTENTIAL?
I guess what I'm asking is: what ballpark/rule of thumb type figure would a developer start from to figure out whether they are willing to buy now, on the expectation that they will be able to rezone etc, build and profitably sell?
Say a fair market price is $200K for a property. The developer thinks he can say move the house and put another on it, or put up 4 townhouses etc. Working backwards from a potential sale price of the finished properties (whatever form that may take) of say $500K, that leaves gross profit of $300K.
Out of that $300K must of course come all the multitude of costs of actual development, debt servicing, council approvals etc etc. One of the developer's expenses is securing the property. (let's ignore JV's and options for the moment)
If the owner in fact wants $250K for it rather than the $200K which it's "worth", is there enough fat left in the deal for the developer to proceed?
I guess the missing factor, which will help in deducing the answer to my question, is what net profit margin do developers work on? Is it 20% nett, 15%? 30%? Or is it purely determined by the market?
I suspect that I'm glossing over a huge number of important feasability study type issues here but I'm just trying to get a general feel for the expected returns.
thanks in advance for your responses
N.
ps. before you deluge me with well intentioned "do your due dili" concerns - thanks. But I understand that development can be dangerous to your financial health!
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