Do you include selling fees in your develop-to-hold feasibilities?

Hi guys,

Interested in people's general thoughts on whether to include selling fees (agents selling fees, conveyancing etc) in your development feasibility studies when you plan to hold the final product?

My general thoughts are:

a) even though I'm holding, I still want an estimated return that would be competitive if I was developing to sell. I also want to know that I'm not 'cheating my way to a 15% profit' and make my figures comparable with those who would be developing to sell.

b) profits made from property need to be directly comparable with other potential uses of my investment capital. Whilst you can make development profits on paper and draw equity out, ultimately when comparing the profit potential of my investment dollars across several asset classes I need to acknowledge that I haven't make the money until I sell the asset, therefore this cost needs to be deducted. I would do the same for shares (brokerage fee).

On the other hand I am wondering if I'm being to hard on my feaso numbers. Given I AM holding the property, should this be represented accurately in the feaso?

 

Depends on your investing personality I think.
I’ve never paid much attention to the percentages and wouldn’t turn down a good development for 2-3%, even though you won’t even be paying those fees anyway if you don’t sell.

I think you could compare this to finding a really good property with excellent future prospects and having to spend slightly more than asking price to secure it.
In the long term the little bit extra paid upfront will be insignificant considering the future gains.

 

Then so shal I!

 

Yikes, 2-3%. My concern is the risk involved and the fact that 2-3% profit can very quickly become 2-3% loss with just a couple of cost blow-outs.

If your feaso is based on well founded end valuations, then surely without much profit in the deal you are ‘technically’ not buying a good deal under market? If the choice is based purely on faith in the location, then at 2% profit id be more comfortable just purchasing the end product and saving the risk. That being said, if it is a very tightly held pocket and picking up a low-profit development site is one of the few ways to acquire asets in that area I could see the value in it.

Always interesting to hear what others are comfortable with.

 

This is a toughie and it really depends on how fine grained do you want to go?

I personally don't include it on holding project feasibility but I also don't include depreciation either as I consider it a 'bonus' and is a tax treatment not a feasibility item.

 

I think @Ace in the Hole was saying that he wouldn't walk away from a deal if that 2-3% (which is what most REAs charge) was the only thing standing in the way. Ie if you wanted a 20% deal and you found an 17-18% deal and all that was standing in the way was REA fees for something that you're not going to sell then I would disregard the selling fees to take the deal.

 

Illogical question.

If you plan to sell then NO CGT and maybe GST. Plan to keep then it's irrelevant.

Start with a tax plan and cost it correctly

 

I’m all about the fine grain (perhaps to my own detriment)! - with so many unknowns it seems crazy to me to not attempt to accurately represent the ‘knowns’.

That being said, I don’t include depreciation either (at least in my development profit feaso; usually in my cashflow analysis though). But I would include GST if I were selling.

 

Ahhh, gotcha. Agreed in the case of a 20% becoming 18%; what is stumping me though is when 15% deals turn into a 12-13% deal!

 

Could you explain why you think it is illogical?

I’m not questioning whether to include known tax items such as CGT/GST. It’s more a hypothetical question about ‘if a cost (selling cost) isn’t incurred immediately, but will be incurred eventually, should do you include it in your feaso’.