Overview of Project
Purchase of a large block in the Hendra region in QLD. This had an old home on the block. The original site area was 1219 m2
The original concept for the project was:
Obtain DA for 3 separate titles for blocks slightly over 400m2 each
Build 3 contemporary homes – slightly higher spec to appeal to the demographic and sell for profit
Total Development Cost: $2,148,916
Gross Realised Value: $2,730,000 (1 Land sale, 2 build sales)
Gross Realised Value: $2,730,000 (1 Land sale, 2 build sales)
Profit - 27%: $581,000
Learnings: The profit is in the buying. Do the Feasibility Assessment detailed work upfront.
After an initial feasibility assessment the block was originally contracted at $1.1million dollars. Upon working closely with external consultants it was discovered that the land was actually a ‘'Widow Block’. (A widow block is one which has been subdivided such that one of the blocks does not have street access. An example: think of a rectangular block which has been divided diagonally - the one with the 'point' at the street end does not have access to the street).
As this type of block has substantial more costs to convert to 3 blocks with street access – it was suggested that the contract price be re-negotiated as this affected the feasibility substantially. The house also had to be removed from the block and shifted as the house was unable to be demolished. Working with the agent an amended contract was agreed upon at $1million. Client added extra strength to negotiations by offering an unconditional contract. This negotiation upfront dramatically improved the profitability of the project – and can be put down to doing all the research and preparation first.
Learnings: Figure out the funding first.
They key to this project was having funding plan sorted prior to the project start. By looking at clients existing position it was decided best course of action was to arm the client with an arrangement where by they would be confident to make unconditional offers in negotiation stage. By leveraging the clients existing home and investment property to 80% and making the equity available upfront the client was able to make a confident offer. A separate facility was established to cover the deposit, costs and enough funds to complete the DA process ready for build.
On Purchase:
$800,000 debt funded at 80% of purchase price of $1million
On DA Approval for the split into 3 different lots:
Client sold one block of land for $580,000. These funds refunded the debt drawn against clients home and investment loan and paid down a bulk sum of the Land loan of $800,000. This was a substantial de-risk to the project. The remaining two blocks were valued on an ‘as if complete basis’ with the build contract - and kept as two separate facilities.
IE bank was not offered cross securitisation:
Bank Valuations - 2 completed builds valued at $925,000
Funded at 80% - $740,000 each for a total of $1,480,000
This was able to pay the remainder of the debt owing on the land – fund both builds + all holding costs during the build period with surplus. This ensured the client funded the project holding costs with the project value itself – not affecting their day to day cash flow.
Learnings: Be Flexible to the original plan. Taking profit to de-risk project.
The original plan was to build 3 mid to high end properties and sell (with the ability to hold). Upon completion of the subdivision and establishing appropriate amenities to the individual blocks - 3 builders were approached for tenders.
At the start of the project we had established networks with a number of agents within the local area who were aware of the project. As a result the agents kept an eye out for buyers who were looking for property in the area. Without any campaign or listing an agent approached the client with someone who was looking for land to build on in the area. It was a motivated buyer and a contract was signed for $580,000 on one of the three blocks. This substantially reduced the debt levels and holding costs prior to the construction of the remaining two builds. While the original plan was to build three homes – this option was too good to knock back as the land offer was better than expected and de-risked the project.
They key to this project was having funding plan sorted prior to the project start. By looking at clients existing position it was decided best course of action was to arm the client with an arrangement where by they would be confident to make unconditional offers in negotiation stage. By leveraging the clients existing home and investment property to 80% and making the equity available upfront the client was able to make a confident offer. A separate facility was established to cover the deposit, costs and enough funds to complete the DA process ready for build.
On Purchase:
$800,000 debt funded at 80% of purchase price of $1million
On DA Approval for the split into 3 different lots:
Client sold one block of land for $580,000. These funds refunded the debt drawn against clients home and investment loan and paid down a bulk sum of the Land loan of $800,000. This was a substantial de-risk to the project. The remaining two blocks were valued on an ‘as if complete basis’ with the build contract - and kept as two separate facilities.
IE bank was not offered cross securitisation:
Bank Valuations - 2 completed builds valued at $925,000
Funded at 80% - $740,000 each for a total of $1,480,000
This was able to pay the remainder of the debt owing on the land – fund both builds + all holding costs during the build period with surplus. This ensured the client funded the project holding costs with the project value itself – not affecting their day to day cash flow.
Learnings: Be Flexible to the original plan. Taking profit to de-risk project.
The original plan was to build 3 mid to high end properties and sell (with the ability to hold). Upon completion of the subdivision and establishing appropriate amenities to the individual blocks - 3 builders were approached for tenders.
At the start of the project we had established networks with a number of agents within the local area who were aware of the project. As a result the agents kept an eye out for buyers who were looking for property in the area. Without any campaign or listing an agent approached the client with someone who was looking for land to build on in the area. It was a motivated buyer and a contract was signed for $580,000 on one of the three blocks. This substantially reduced the debt levels and holding costs prior to the construction of the remaining two builds. While the original plan was to build three homes – this option was too good to knock back as the land offer was better than expected and de-risked the project.
Learnings: Look at taxation implications – when to sell – when to hold
So a project that started as three builds and a sale for profit became:
1 Land Sale (earlier in the process)
1 House and Land Sale (on completion of the builds)
1 House and Land held by client and rented as an investment
Why?
This project was profitable. By taking all profit at the completion of the project – the clients tax position would have substantial capital gains to consider. By holding the third property for at least one more year the client will be able to reduce the tax burden that selling both completed houses would create by splitting the gains between 2 differing tax periods.
In the meantime the client has a property valued at $1.1million + on todays market with less than 50% leverage and a positively geared property creating additional cashflow/ income. In essence, the hold sees client in positive cash flow of ~ $30,000 p/a until they are ready to sell. A fairly comfortable end position.
