Buying land and building houses amongst Friends

Hello All,

Hope all are well.
We have been thinking this from past year. Now that hopefully it will be buyers market in coming months, we are planning to buy 1-1.5 acres and build houses .We hope a total of 10-12 houses wil lbe built in that land size. This way it will be cheaper since we are in Sydney.
I am not sure where to get started with. Is there a company which specialises in these kind of projects.
We (our friend circle) has around 20-25% deposit and I hope that will be good enough to get started with.
The obvious risk of doing it ourselves is everybody is busy with work and hence delays can happen as well as conflicts in decisions. We have a financial advisor and they are ok with the idea provided we find a proper company for end to end work.
As per our estimate, we can get new decent houses including everything for 600-650k. It is not a estimate by any company but from our brainstorming sessions.

Please guide if you have any thoughts.

Thanks,
Vish

 

This seems like a terrible idea. What's the point of it - to save a few bucks? What about all the risks? Do any of you have any experience in property developing?

 

Not a good start, often these 'brainstorming' sessions sound good in theory, in reality they're not.
What's you profit margin on each house?
How much will the land cost?
How much to subdivide?
Who's going to fund the builds?
Have you done a feaso on this idea?

Less risky would be buy the land, subdivide and sell the block for profit, building the houses then selling them leaves you more exposed IMO

 

Ofcourse. Can we construct multiple houses in a single title. I guess no (except granny).

 

The main benefit is living with group of friends. The savings will be huge as well, probably 100-150k per house. Although we dont have first hand experience in property developing, we have some friends who did but on a small scale, like subdividing one house into two etc not an estate type development.

 

We are not selling for profit, but building for ourselves.
From our estimate land costs ~2mil. We allocated 50k for each house to subdivide, sewer and other utilities.

Land cost : 2 Mil
Utilities (sewer,road ) : 50k per house = 750k
Who's going to fund the builds? : After subdivision, each one of us will build on their own.
Even if developer takes 50k per house as his fees, we will be saving around 100-150k.
I have read developer takes 20-25% margin for new estate developments.

Not sure how loan works in initial phase till subdivision.

 

Ok, thought this was to sell and take profits.
How many people would be involved?
Lots to think about here, legally and financially initially. Once everyone has their own separately titled block that simplifies things for the build part if each funds their own build.

 

We are 12 currently.Yup I agree there are lots of legal and financial things. Thats why we are looking for a single company specializing in subdivision and development and maybe building as well.
Nobody in our group owns a house and has good borrowing power. So we think this is the best time.

 

What you need to do is find a legitimate development manager to help you, they will be cheaper than a JV with a developer.

While i dont know nsw very well, i would be factoring in a lot more (prob 100k+) for your development costs. The construction costs (site dependent - prob 60k+) for services and roads are just one part of the cost, there will also be contributions, finance, admin etc. The good news is you will save on selling/marketing costs so thats about 4% of sales value saved.

What you are trying to do is pretty much become a medium scale land developer, its not an easy thing to do for someone with no experience. You always hear people tell you to surround yourself with experts when property developing, for you it will be especially necessary. Start with speaking to a few development managers to see if they get excited by what you are doing, make sure you speak to development managers with land subdivision experience, as a lot of them may only have townhouse/apartment experience and that is quite different to land.

As you arent selling, a lot of the risk is gone, you actually have effectively 100% presold, which should be helpful. Although 25% deposit might not be big enough, depending on the site and settlement timing. If you can, try to time your land purchase settlement to when it is shovel ready (so all planning and engineering design has been approved, and you are ready for services/roads construction - this will likely be 18 - 24 months in depending on the site). This will allow the smallest deposit for the land and construction finance. But you will have to self fund all the soft costs (prob 200k-400k) that get you there, and likely a 5-10% deposit to the vendor.

Good luck and keep us posted.

 

Thanks a lot. You have valid points. I will check for a development manager with land subdivision experience.
I did some search and came to conclusion of 50k cost per site as development costs, but we can stretch a bit. although 100k seems too much.
I will update when we have some progress.

 

One question might be, what if you budget 50k and then it balloons to 100k?

 

25% of the 2mil purchase price, or 25% of the total costs including purchase/stamps?

 

Including stamp duty and other charges, meaning for 2 mil property, 600k as deposit. (~95k for stampduty and 5k for other charges)

 

We have gone through various forums/posts and arrived at 50k. Should we expect that much variation?

 

No idea. But with that many partners, what if there is a cost overrun?

 

Significant cost overruns will be risk. Have to ask financial advisor on the buffers.

 

I would stay away from reading what others are writing about subdivision and development costs, each site is different, and each poster has there own view on what is a subdivision cost, construction costs etc. Also, what you are doing is a land subdivision, which has different costs then a small scale townhouse development, which is what most developers on here and other forums write about.

When you are looking at sites, imagine what the end layout will be, maybe do a quick sketch or design. Perhaps look online for a free CAD software so you can draw your own plans. In vic, local road widths are about 14 or 16m wide depending on whether footpath is required on one side or both sides of the road. NSW will likely be similar, as this road width allows two way traffic and all the services to be constructed in the road reserve. To minimise the cost of the development you want to have the smallest length of new road to get the largest number of lots. You also want to have lots abutting both sides of any road you create. This will reduce the cost per lot. Trust me when i say the cost per lot for just the construction costs will prob be 60k+. Unless its a medium density site (smaller lots so the road/services construction is spread over a greater number of lots), or you find a site with a long frontage so your new lots come off an existing already built road, meaning you have less or no new road construction costs.

 

Do you have rough dimensions of a block you are looking at?

Between the 12 of you, you have the 600k?

You may not be able to borrow 75% due to your intention to subdivide etc.

How will you fund the subdivision costs if your funds are completely used to purchase the site?

Possibly you could all go onto the title with a deed of partition, but they would be extremely messy and complicated.

You could get everyone to lend one person the money for the purchase on private agreements, but the servicabilty of the individual would have to be high enough to fund the purchase, then you need to find a way to collect the funds to complete the subdivision.

@Terry_w could it be completed within some form of trust structure, where the beneficiaries would be the 12 parties and the trust would be wound up on the receival of parcels of land? Would this still incur stamp duty?

What happens to the lender that holds the title to the original property, they will have to sign off on the sub division and will then want portions of the debt paid down to then release the title to one of the 12 beneficiaries.

All in all sounds like an absolute nightmare to manage and have a successful outcome.

 

I get your point and sounds good. The lot which we looked is rectangular in shape which means we can have a road just in middle of the plot and lots on both sides. New estates have 8m road width and 3m footpath on both sides. So 14m seems reasonable.
Dimensions are 60x180.
Appreciate your inputs. I will keep posted.