Developing in Perths flat market...

Ok, so I'm a beginner developer, and as the property market in Perth isn't flaming hot, I have some concerns.

Iv done a profitable feasibility, and have gone as far as making an offer on a property in Balga with intentions of building three smaller town houses. Iv been getting all the ducks lined up but feel worried that I may have missed something. Any ideas?

@Westminster @MTR @Be Developer

 

Ahh yes, you and every other budding developer in Perth.

Few questions
1) show us your numbers
2) whats your strategy?
3) How did you buy (which entity)?
4) whats are the terms of the offer
5) what are your concerns
6) how will you finance it

Answer these ones and Im sure more will pop up.
Blacky

 

Oh
7) why Balga? Your a couple of years late jumping on this band wagon (not to say it wont work, but you may have over paid).

 

What do you feel like you've missed?

There's always pros and cons to developing in a up or down market. In your case, I'm guessing your concerned with final sale prices mostly?

My advice would be to:

- have as much fat in the deal as possible. With less competition for your site, it gives you more power to negotiate on price
- negotiate strong terms that favour you as much as possible. My favourite is 'subject to DA' which buys me time and reduces my risk.
- get very comfortable with your worst case scenario and if you can live with that, you can go a long way towards facing your fears and charge forward
- have multiple exit strategies (sell all, keep all and rent for yield, sell two and keep one to use as equity for next development etc)
- be open minded and have multiple development strategies. I don't know your site but often think outside the box and have back up plans. I.e split the block and build two freehold houses, sell two blocks of land, two removable houses, Units.... They may not make you as much money but it's always good to have options

Most of all, remember that whether it's your first, second or third development you're going to learn a hell of a lot and that in itself is worth its weight in gold!

 

Indeed, I choose The area as it is one of the cheaper options to get started, and the market is more 'clear' (as in more sales to compare ect.)

1) i will post when i get home
But i belive them to be pretty conservative and achievable
2) plan A build and sell, plan B hold
3) owner occupied (for first home owner grants ect)
4) I currently have a short window to terminate the contract (conditons included a few things like due diligence and the like)
5)while im happy with the plan, i cant help but ask the question, will it work? The two areas i guess im not sure about are the end sale price, the build cost and then if i have missed anything
6)finace it through bank loan (broker and i have been working for several months so is in montion for construction loan ect.

Thanks for the reply! Hope these answers are not to vague

 

Iv negotiated with several owners and have found a price and terms I feel good about, (although not great), the site seems good as well.

as Im quite young, Im comfortable with my potential losses (although I try not to think about them!)

I guess thats the other reason for wanting to do a development, I have an open mind and want to see what works, Iv done fes for hold strategies ect as well, but would like to sell at least 2 props to reduce the debt and move to the next project (thinking.. Mindarie, but thats a while away!)

sorry @Blacky ... I didnt 'quote'you before, let me know if those answers are of any use

 

@superace thanks for the advice tho!
I guess as for what I have missed, Its about entering uncharted waters, questions like ''are the days Balga developments are over?" ect

 

Hey Matt, I haven't seen a deal stack up in Balga for awhile so you might be missing something in your feasibility or simply be happy with a profit margin less than many of us would be comfortable with. Most of here have 20% as our base profit margin.

If you can share enough details without giving away the site, the brains trust here will help vet your figures.

 

Thanks @Westminster, i will post numbers shortly,

from research I know most developers aimed for more than what I have right now (10%ish) but I could figure out any reason why my number could put me up to much more risk, as this is my first major development and shy of a jv i may have to wait a fair few more years before i could try anything else (project cost just over 1m, this is me 'maxed')

 

At '10%ish', that's not developing, that's disaster in the making.

If that's the best you got, I would terminate the contract asap. just my opinion.

 

Hey Leo!
do you mind expanding? If the project cost 1m, the 10% would be 100k, which is alot... at least I thought

 

It's not a lot because of the risk involved. Also unless you have a fat contingency that 10% is certain to be less in the end.

 

I understand the risks involved, at least as much as I can, and while I certainly set out to achieve more, this was simply the best I could find with what exp and money I had. I wouldn't consider my contingency to be to big.

 

ok so have a hack at these numbers @Westminster, @Blacky and others:

(if youd like )

buy: 416
closing:7
holding: 43 (at 12 months)
planning: 12
construction (x3): 165
selling costs: 15
demo: 20
demo+: 5
water c:15
electrical c: 15
telstra c: 10
retaining wall allowance: 5000
total: 1,057

sale:385 (x3)
total: 1,155

 

Good on you for giving it a go. I first started with negative deals since I didn't do any numbers and was pressured to buy something by parents. I was negative geared by the 40k losses (I had a high income) when I first started. Got burnt and it made me learn a lot and I won't make that mistake again.

 

I totally get why 100k seems like a lot - it's WAY more than a years salary for many people.

But I'm going to break it down why 10% isn't enough.

At $540k for your construction + headworks (power, water, sewer) I don't think you have allowed enough money at all. Did the $165k come from a builder?

I would estimate that all up you are looking around $600k at least for a triplex turnkey inclusive of siteworks and headworks plus demolistion.

At the end of it you will need to strata it to sell which will cost another $7-10k.

Then you will need to pay tax on the profit that is left. If you sell them both in the same financial year then you may be considered a developer as you intention is to build and sell not to hold as an investor would. Therefore there is no capital gains tax exemption but it's considered as income tax. Add the 'profit' to your taxable income and you're likely to bump yourself for that year into the highest tax bracket and you'll be paying a lot of tax of that profit. Say goodbye to around 40% of it.

With my sums I'm seeing a very very very small profit at the end. Not enough to go into it if the $385 end figure drops any lower.

Sorry

 

Thats ok westminster! I havnt signed anything yet so no issues there, (just the billion hours researching and organising lol). What would you suggest I do from here then? look for another deal? a jv partner? or just take a step back? if, that is, I do decide to not go ahead

 

There's 12k for planning, 15k each for water and electrical and 10k for Telstra. That's 52k on top
of the 165k each for construction. @Westminster Whilst the construction seems low, you don't think he will be covered with those other allowances?

Also the selling fees seem a tad low. Getting the "cheapest" agent most often does not result in the best result.

 

I didn't see a contingency estimate in your feaso. Working with a paper thin margin like 10% is extremely risky. Have you thought about any unexpected costs? If you encounter any (which you may certainly will) these will chew into the bottom line further bringing your bottom line down further. This is also before the Perth market movement has had its say potentially rendering your project profitless at best.

 

If you're happy to drop 1mill on something, pay @Westminster for her services and spend 800k on a project that will return you more than 150k.