Advise on selling development site with neighbours

Discussion in 'Development' started by Morris, 12th Dec, 2017.

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  1. Morris

    Morris Member

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    Hi,
    Over the last few months I have been involved with 12 other neighbours to discuss amalgamation of our properties and selling to a developer via an agent.

    We have a range of block sizes ranging from 300sqm to 800 sqm, so the question of how we would distribute proceeds from any sale amongst the neighbours has come up as something we need to agree on for an MOA.

    Any advice on how to tackle this? I know that going by sqm seems standard but the smaller blocks aren’t happy because they want to double their market price. So is doubling your market price realistic? And how else could we split the proceeds?

    Any help appreciated.
     
  2. thatbum

    thatbum Well-Known Member

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    Why would what they want be relevant to any calculation of how the proceeds are split? Does the calculation change if the owners of the bigger blocks want triple the market price?
     
  3. Morris

    Morris Member

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    Ok let me elaborate more on the situation. The development site is roughly 6,000 sqm. As a group we think (we dont know as we haven't been to market yet) that the site can fetch around $30M based on feedback from agents and other sites in the area that are on the market. I should so say that rezoning hasnt been announced until q1-q2 next year, and the expectation is that you could go 6-8 floors high.

    Now if we distribute that $30M (ignore fees etc), then its roughly $4,800 p/sqm thus small blocks of 300 stand to make $1.4M and the largest block $3.8M

    The small block owners are adamant that they are only interested if they double their market price. A small 3 bedroom townhouse on 300sqm block can fetch anywhere between $1M - $1.3M on the retail market thus these small blocks want to receive $2M-2.4M from a development sale.They can get that if the site sells for more than $50M which is not going to happen.

    We have 6 of the 12 blocks that are small and all wanting to reach a magic double their market price.

    So the issue is that its clear that distribution od proceeda by sqm wont work. Most reluctantly for the larger blocks, The only way to get ths to work is to come up with a different way to distribute the proceeds so the small blocks roughly double their price which they are demanding..of course that means that the 6 large blocks need to be content with roughly 500-700k less than what they get on sqm. Ro confirm as well, the larger blocka are happy with distributing on sqm.
     
  4. Marg4000

    Marg4000 Well-Known Member

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    If a townhouse on a 300sqm block would sell for up to $1.3m, why would they agree to your plan to POSSIBLY receive $1.4m? That's only a $100K premium, before fees (legals may be considerable), commissions, delays etc. and even if a sale is successful, it may involve a long settlement. Add to that the possibility that they may prefer to hold.

    So, if one of the smaller properties was mine, I would not agree either.

    Just because a block of land is twice as big as its neighbour does not mean it is automatically worth twice as much. Clearly houses of varying sizes, condition and value are built on each block. Of course the owners of the larger blocks want it split that way - it is to their advantage.

    A fairer way may be to get each property valued and suggest distributing proceeds in proportion to value.

    The reality is that unless you can reach agreement the project cannot proceed.
    Marg
     
  5. Scott No Mates

    Scott No Mates Well-Known Member

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    The developer does not want the house or the improvements (they don't care if you've got gold plated flush buttons on toilets, Armani wallpaper, or rising damp), the factors which affect their decision is how big is the land ie m2, what the development control plans which haven't been passed will allow, and ultimately the price that they need to make the deal fly for them.

    A valuation (yes a real one not a freebie from the local agent) will act as a guide to each owner what value should be attributed to each parcel of land remembering that the zoning has not yet been gazetted. Smaller blocks sell at a higher value/m2 due to the improvements on the land which cost as much if not more than on a larger block.

    Is it better to wait until you have certainty or will the market turn?
     
  6. Mel Morgan

    Mel Morgan Sydney Property Manager Business Member

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    Given you're effectively selling at land value only, is it worth looking at the valuer general's annual land valuation and using that to apportion? Its easy to access and unbiased in theory.
     
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  7. Something_Wrong

    Something_Wrong Well-Known Member

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    how much would one of the larger blocks sell for on its own if the 300sqm blocks can sell up to $1.3m?
     
  8. Morgs

    Morgs Well-Known Member Business Member

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    SQM is not going to be perceived as fair because there is a baseline value to each property and having a 3 bedroom on 300sqm vs. a 3 bedroom house on 600sqm may not mean that it is worth double.

    Get a completely independent party (e.g. agent, valuer) to provide valuations on every single property in the group. That'll apportion a % of overall project to each property and you distribute the sale price based on these % splits.

    Regardless of the methodology you'll need watertight alignment with all parties to ensure that everyone thinks it is fair. Good luck!
     
  9. neK

    neK Well-Known Member

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    Agreed with what others have said.
    In this circumstance, sqm isn't going to work.
    Independent valuations and proportioning based on this will probably work best.
    But if the ones with larger land sizes don't agree on this method and the smaller blocks don't agree using the sqm, then there is no point pushing forward.
     
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  10. Mel Morgan

    Mel Morgan Sydney Property Manager Business Member

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    I would expect that your agent should be doing the hard work on negotiating with all the parties till they are happy with the deal.
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    get 3 registered valuers in to value all the properties. Then average the 3 valuations. Then work out what each property is as a % of the total.
     
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  12. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Morris - The real estate agent may guide this.

    The vendors need to ALL agree on the basis and many will apportion based on m2. This tends to avoid disputes. However if all agree there may be exceptions. For example Mrs Jones may be the one critical site and she will not sign without her proceeds being $1.9m where under the m2 basis it would be $1.75m.

    One of the issues that will be key will be the essential character of some specific lots. Some may be desirable to the developer but unnecessary eg those on edge of site. These vendors need to take care they dont get cut from the deal. Where a central lot may be essential.

    There are all matters the agent needs to sort as part of the deal to get it over the line. Some vendors may even want an apartment at a discount.

    My son does many of these deals and they can take a LONG time to resolve. There is always one or two owners who thinks they know more than the developer and the agent and anyone else they encounter. Their mate knows. They feel that they can get a better deal and they will do more harm than good. They need to be carefully managed - Thats where experienced REAs who do this regularly can avoid inter neighbour feuds and try to find a deal that works for everyone. The good ones have developers who pay them to find sites !

    Good knowledge of what all want is a start. And there is a huge difference between a $2m sale on cash terms with settlement at 30 days v's a $2.5m option.
     
  13. Morris

    Morris Member

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    Larger blocks tend to be 4-5 bedroom houses that range between $1.5M - $1.85M
     
  14. Morris

    Morris Member

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    Hi all, thanks for your views. As i expected there are varying views. The challenge for us is that we have a diverse site of highly varying sizes. There are some ideas to explore such as using land valuations, and land and house valuations. I feel like land valuations will give a similar result as uaung m2 but probably a little less variance between large and small blocks, house and land valuation will provide a much closer variance between blocks.

    I tend to think some sort of land based objective proportioning is fairer, based on the fact that it is sqm that drives the price a developer pays but that will not be sufficient for smaller lots. So we need to come up with something that will satisfy all and that will be extremely tricky for our block. One thing is that of all 4 commercial agents we are evaluating, they all focus on the marketing and none said they help broker negotiations between owners, yes solicitors come to play but its best if we can try and agree in principle how we apportion and then take to a solicitor to make it legally binding as part of mou.

    I also feel we need go wait till nsw planning make announcements on the rezoning and look to plan out the sale by the time its gazetted. But smaller blocks are pushing to move quicker.

    Any more ideas and comments welcome.
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    What if one block had a crappy one storey and another block had a mansion with gold plated toilets (they could take them with them i guess).

    I think you won't get people to agree to this.
     
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  16. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Real estate deals = art of negotiation. Contracts need not be "fair". They just have to be mutually agreed. By all 12 or however many people and all their external advisers (family, friends etc) who will throw in their two bob. And you can expect another REA will try to muddy the waters and throw a spoiler in.

    You want a expert developer property negotiator not a local agent who flogs off existing houses. Once its agreed in principle then it goes back to all legal teams for contracts and signing. Then IF it gets past that stage exchange may occur. With mutual agreement conditional clauses...Any one says no then none of the contracts are operable. Walking the dog then becomes awkward.

    And throw in development consent issues sometimes.
     
    Last edited: 13th Dec, 2017
  17. Morris

    Morris Member

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    Youre right, i dont think the small blocks will agree thats why im here looking for advice. Using m2 is generous to large blocks, but using market price is generous to smaller blocks, so something in the middle is needed. The process is complex!
     
  18. Morris

    Morris Member

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    Do you have any recommendations on a property negotiator? Do they help navigate the process and also mediate negotiation between the owners?
     
  19. Marg4000

    Marg4000 Well-Known Member

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    I think market value is the fairest way to go. Owners are NOT selling vacant blocks so will expect to have the value of their houses factored in, even though they will be demolished.

    Add into the mix the position of each block. Clearly the middle blocks are essential and therefore those owners may argue their blocks are worth more, while those on the very ends may be dispensable.

    I guess this is why big sites are so valuable. Getting owners to agree is difficult.
    Marg
     
  20. wylie

    wylie Moderator Staff Member

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    There are a number of deals like this if you google something like "multiple blocks sold to developer".

    At first read I thought the logical thing would be to apportion sale price purely down to square metres, but reading further, it really won't work. It is true that (in most suburban areas) one house of similar quality build on 400 sqm isn't worth half of the same quality house on a 800 sqm block.

    We have a house with a value about $900k that will be moved onto a newly created small block and likely will be worth about $750k. So clearly there is more to these deals than simple land size.

    But the houses will be bulldozed, so it doesn't matter what is on the land really.

    All these issues will have been worked through by the people who have brokered these other large multi-owner, multi-property deals and I'd be looking to find one who can work through this for you and your neighbours.