Who builds and sells off the plan

[MTR]

Hi all
I purchased a couple of houses next to each other with a view of developing 6-7 units, I have just been advised by my architect that it is an 8 unit site.

I am currently looking at all options.

Easiest option would be to prepare a DA for 8 unit development. No risk and in today's market should make 35% profit, I would sell after 12 months and could channel funds into other smaller developments.

I also would like to look at the option of keeping 4 and selling 4 off the plan as it would offer excellent cash flow and could access some equity relatively quickly.

I do have some concerns as I have no experience in this size project (8 units).

Would like some feedback on anyone who has gone down the road of selling off the plan. The good and bad.

Cheers, and thanks MTR

 

[Andrew L]

Off the plan is always fun, In my experience people will need to see value to buy off the plan.

This is normally capital growth they receive in the build phase. If your area has had little or no growth you may find the buyers just try and hit you hard in the purchase price.

8 units would be a great build if your secure with finance and presales. I'd be finding an experienced town planner and get a recommended project planner to run the job for you. You can be there wing man to learn on this project and maybe even have that as part of the agreement.

Best of luck with your decisions.

 

[MTR]

Hi AndrewL
this area in Melb has had incredible growth, I read somewhere that it had recorded highest growth over last 12 months. I am confident this will continue but not at the same level, but there is great demand at the moment.

My target is the lower end of the market, affordable units. The location is walking distance to the railway.

Currently I am working with the architect and RE agent to determine what will sell. I plan to meet up with the architect next month as I am not from Melb and he should be able to give me some contacts, ie project planner, builder.

I am actually thinking I should start with 3/4 unit sites and put together DAs and obtain experience from doing these smaller projects first. Finance should not be too much of an issue as I should still be to get 80% lend.

It would be interesting to hear from anyone who has been very successful with this strategy and what is considered reasonable margin. Seems 20% is acceptable.

Thanks for reply.

Cheers, MTR

 

[boods99]

Hi AndrewL
this area in Melb has had incredible growth, I read somewhere that it had recorded highest growth over last 12 months.

This may be a good time to stand back and think as to whether this growth is sustainable in the timeframe that you are thinking of building.
Have you factored in a possible correction of today's prices into your figures. Without raining on your parade, areas that have had large and fast growth are prime candidates for price drops of the same magnitude once whatever was stimulating the growth is taken away (FHOG??)

Boods

 

[MTR]

Hi boobs99
Thanks for reply, constructive advice is always welcome.

I have thought about this scenario.

Firstly, I purchased the land below market value, due to the fact that it is an irregular alotment, also cos it did not hit the market and I was able to make a quick decision.

If this particular market were to drop back my position would be to still get the DA together and continue renting the properties, I will be around $4,000 pa out of pocket. The DA would cost around $10,000.

This area is still on the rise, however I believe it will drop back and then roar ahead in mid 2010, this is my gut feeling and based on what I have been reading etc.

Cheers, MTR

 

[Ausprop]

can I ask why you want to sell off the plan? it offers no cashflow advantages and locks out any upside potential

 

[MTR]

Hi Ausprop

Only one reason, Finance.

I posted here a couple of weeks ago and was told that it would be almost impossible to get a bank loan due to my lack of experience and also due to the number of units it would be a commerical loan, 65-70% LVR.

I could build my smaller projects first to obtain experience and then move ahead from here.

I get what you are saying but I am just looking at all the options and hopefully I can fund it at the time.

Thanks, Cheers MTR

 

[Ausprop]

ok, yes that's right. Presales to at least 100% of your proposed debt levels. not easy on a small resi complex, unlike the glossy promotions the big players can put together

 

[MTR]

Hi Ausprop

I have guestimated that the cost to build including land will be around $1,920,000 completed, this does not include holding costs.

Once I meet up with architect/builder I will get a better idea of period it would take from start to end.

In today's market I should be able to sell 8 for around $2,400,000.

These are rough calculations.

So on these figures I would have to pretty much sell them all? Is that right.

If so, I would not bother and just do the DA and hold off till the next boom cycle.

Thanks for help, any other tips would be appreciated.

Cheers, MTR

 

[Ausprop]

well take your debt, so say $1.92 x 70% less GST = $1.2m. Divide that by the value of a unit (ex GST) and that's your presale requirement.

 

[MTR]

Hi All
An update, I just got back from Melb met with the architect who is progressing with a DA for 8 Unit site, his costs around $32,000, almost double costs of other quotes, but have been advised he is one of the best.

I have decided to go ahead with a DA and not develop, take the money and run.

I paid $597,000 for site and am now advised each unit will sell for $120,000 due to limited stock I think this could possibly continue to rise. I should make a profit of around $340,000, does not include CGT, but will sell after 12 months.

Cheers, MTR

 

[Ausprop]

$120k or $320k?

you plan to hold all 8 units for 12 months+?

consider your GST position

 

[MTR]

Hi Aus

Profit should be around $320,000 and yes would sell after 12 months.

Would I need to pay GST as I will not be developing just onselling with plans/permits

Cheers, MTR

 

[Ausprop]

no GST - I thought you were talkign about developing.

 

[MTR]

Hi Aus,
Yes, I was initially looking at developing this site.

Due to the time involved in building, finance and risk have decided to just do a DA.

The DA is extremely profitable without the headaches.



Cheers

 

[heathgt350]

Please forgive me for being a complete property development noob, but what does DA stand for?

 

[Joe C]

Please forgive me for being a complete property development noob, but what does DA stand for?

Development Application.

I'm curious though, why would potential developers pay so much more for DA approved sites?

Surely they can scope out a site and do their own investigation to see if its suitable for their proposed development?

Not having a go at anyone, I'm just genuinely curious

 

[Mark C]

I'm curious though, why would potential developers pay so much more for DA approved sites?

Because everyone specialises in something, building is best left to builders who might not be able to focused on getting DA's.

Finding land, negotiating it, arranging finance, putting together a DA, Council pre-lodgement meeting, changes etc time plus more time.

Meanwhile the builder has people and equipment that needs to be paid for.

Finding land, purchasing it and getting a DA will take years.

Mark

 

[Minx]

Development Application.

I'm curious though, why would potential developers pay so much more for DA approved sites?

Surely they can scope out a site and do their own investigation to see if its suitable for their proposed development?

Not having a go at anyone, I'm just genuinely curious

I know builders who won't touch DA approved sites unless it's from another builder who is selling due to finance.
Reason being is that they have yet to come across plans which they are satisfied with.
On the other hand, someone obviously buys them.

 

[Mark C]

I'm guessing builders spend their spare time at "how to complain school". I might get a few comments for that remark but from what I have experienced if you get one builder to look at another builders work you'll hear nothing but complaints.

DA's can be changed if the need arrises, community title DA sites have a host of changes that can be made under "generally in accordence with". Roads can be moved and whole building footprints can be changed. There are restrictions and each council will operate differenetly but just because a DA dose not suit your builder then that's not a reason not to buy it.