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How do developers look for blocks to build on?

Discussion in 'Development' started by wylie, 9th Oct, 2015.

  1. wylie

    wylie Moderator Staff Member

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    We are close to (fingers crossed) getting our DA for townhouses. At this stage, we have too many unknowns to know if we want to take on the build or sell the block.

    We understand that if we sell with the DA, developers work to a bottom line, with no emotion clouding their offer. So, assuming we understand what a developer will pay per townhouse in our location, knowing the good and bad aspects of our particular block and how that impacts the end valuation, we can fairly accurately work out what our block is worth. Is it that easy?

    I've never sold without an agent before, but with the target market for this block working to profit margins would we need an agent? Clearly agents have lots of developers on their speed dial, but my question is this -

    Do those of you who develop, or know developers and how they source their next block, always go to agents, or do you also look for blocks privately advertised? Do you go to re.com yourselves?

    I know agents can and do get good prices but with the work involved in this type of sale being probably a couple of phone calls and one site visit, I hate the thought of handing over $25K to an agent who cannot push an emotional buyer to pay more, when we could save that.

    I guess that begs the question... do developers see good blocks and pay a little more, or do they simply work to a profit bottom line?

    If you see such a block, do you automatically assume (as I tend to) that there is a chance of getting a good deal with this vendor?

    If we do sell, we have no holding cost so we could sit and wait. So we won't be pushed to accept less than we want. Our plan was always to do the build, but I'm just checking out alternatives.
     
  2. Be Developer

    Be Developer Property Developer Business Member

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    Good questions @wylie

    Yes fairly easy!

    work out end value of project
    Minus
    Build cost
    Soft cost
    Holding cost
    other cost

    and you will get the value for your block.

    Best to you use local REA, who has run on the board for selling DA approved site!

    Local developers have good rapport with REA as they buy and sell thru them.

    Good development sites get sold before it pops up on main stream marketing platforms. (depends on market conditions)

    It is probably more work then mentioned here. yes i hate paying selling commission too. other side of the coin is that i dont have to deal with low ball offer, time wasters etc. REAs have extensive network of property developers.

    if you are still in doubt, and it is a small development, Best to Auction the site. ( you may get amateur/first time property/volume Developers paying premium price)

    Generally speaking, Developers have sound knowledge of price to pay for land component. i.e $100k per townhouse site, $80K per apartment site + they factor in any unusual building difficulties + imposed council conditions, etc.

    Yes ( feel free to check our recent post on Commercial zone in vic thread)

    That is a good situation to be in.

    Depends on your strategy and ACTUAL Profit margin, it may be worthwhile building it!
     
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  3. Scott No Mates

    Scott No Mates Well-Known Member

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    Contact Graham Millar of Millarslist.com - he specifically sells development sites.

    I have an acquaintance who has just sold his lot in inner west Sydney his intermediary got paid $400k (1%) for the deal/introduction to the developer but also achieved 25% more than was previously on the table.

    You can't begrudge him the commission.
     
  4. wylie

    wylie Moderator Staff Member

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    Thanks for the replies. I've never begrudged anyone the commission, but just wondered about this time because when I know it is $xx per townhouse it is easier to know where our value sits.

    I've been given a spreadsheet from a developer friend (he is not interested in our block) to punch in our numbers. Building certainly gives us better profit. Bigger debt too. I have a lot of homework to do.

    Thanks all.
     
  5. MTR

    MTR Well-Known Member Premium Member

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    + what @Be Developer said

    If you do decide to build need to also consider values today may be a very different story on completion of project. I guess this is the risk developers wear, we are at the mercy of market so we need plenty of fat if we go down this road

    MTR:)
     
  6. beachgurl

    beachgurl Well-Known Member

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    There are a few buyers agents in your area that look for development sites for their clients. As they are paid by the purchaser it could be a way to sell for a good price without paying comms.

    I'm sure there'd be a few of us interested on here too.
     
  7. Aaron Sice

    Aaron Sice Well-Known Member

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    Understand your planning codes.
    Backwards.
    Inside out.
    Reverse face.

    Then you can see the gems in the market with current offerings and align them with what you know sells in the area.
     
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  8. CU@THETOP

    CU@THETOP Well-Known Member

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    What suburb? Email a few developers in the hood doing something similar (use pdonline for almost completed projects nearby) on a tender basis to see what interest you get. Alternatively approach builders do the work and have them quote on it and see if you can raise the moolah.

    Very interested in the spreadsheet if it is available as I may be doing something similar in the Yeronga area in the next year or three.
     
  9. Tenex

    Tenex Well-Known Member

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    The best lesson I have learned when deciding on whether to sell a DA approved site or not is, If I had this project completed today, who will be the typical buyer who will buy it (ie: Investor, people that want to live in it or foreign investor's preference) and whether that target market will still be there in 12 months time.

    It is all nice and fine to do the numbers today because there are people in the market today who will pay those prices but will they still be in the market? Look at what APRA has done to the investors, last year this time you could borrow up to your neck, right now people are losing their deposit because bank wont approve finance. Employment market is not doing too well either. I get contacted every day by people from Brisbane and WA looking for a job in Sydney. Food for thought.
     
  10. wylie

    wylie Moderator Staff Member

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    Thanks Tenex. Our plan is to build and hold. So we won't be selling, but renting if we do the build.
     
  11. BuyersAgent

    BuyersAgent Well-Known Member Business Member

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    Good suggestion, this can work @beachgurl but as BA's we must work for our clients only. I get approached but a lot of developers but when I explain I need to see value or a discount for my client to be interested they usually leave. Most developers would rather pay the agent, and get the inflated purchase price as it will effect the rest of their resales to offer much of a discount early on.

    I guess if someone was a bit borderline distressed financially or planning on holding the rest of the stock it would be attractive to sell with BA and no fees but in practice I have had difficulty making the fit work often.

    For example I have a recent deal where developer got approval for reno and extra units in yard, completely refitted and renovated the front home first, then we purchased at a very competitive price (my client wanted nicer new investment for tax plus possible ppor one day) it hasn't settled yet but is priced well under similar (renovated not new) stock selling in the immediate area. Problem is the linen plan and final approval timeframe blew out with council so settlement has been pushed back and client (and I) frustrated trying to hold the deal together with changing financial environment. Client still wins by settling and can afford but i wouldn't rush out and do a lot of these due to potential frustrations and the associated risk of buying pseudo OTP stock.
     
  12. wylie

    wylie Moderator Staff Member

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    Why would the developer (in your post above) sell for less than a similar house would fetch? Is it because he knows he will be building behind this house which is a negative for new owner for many months? Or just to get money flowing quickly for the build behind to start?

    We have this exact scenario (if I'm reading it right). We have been offered what seems a very high price for the development block behind an old ugly house. The catch is the developer wants the front house for less then it is worth. We would save $100k shifting and lifting the house but we also miss the opportunity of making it pretty and selling for more once it is on its own small lot.

    His offer to give with one hand and take with the other is still attractive, but we are thinking we will shift it ourselves.

    We have to spend $100k to lift/shift which is no benefit to us except it clears the building block to enable us to build or sell the block with the DA.

    Does our scenario sound similar? If so, I had thought selling a clean block with its own driveway (without the house at front) would be more appealing to a developer but it seems he wants control over the street facade for what he builds behind.

    Do you think most developers would prefer to not have to deal with the old house or most would want to keep it? It will be on a separate title - not part of any body corporate.
     
  13. Planning Permit

    Planning Permit Active Member

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    How much should I pay for the development site is a question on many developers mind who may be doing a small three unit subdivision or a dual occupancy where the existing house is retained.

    The first step is to work out how many units can be built or get Council approval and the size of each unit. {mods: removed solicitation}

    Then let's take a hypothetical 850 sqm Property in a local Council where the land is burdened by a schedule to the zone which requires very large open spaces and an overlay which requires vegetation to be preserved as well as 2 new canopy trees to be planted.

    The property has several native trees over 5m in height which must be retained and new buildings to encroach a maximum 10% into the TPZ of these trees which requires an arborist's input. These council requirements “eat” into the developable portion of the land.

    The 15.5m front boundary faces north which is not ideal.

    The develop's objective is to demolish the existing house, which is in poor order and see how many units can be built.

    Experience shows three units will be the maximum number which will garner this council's support for this wedge shaped land in a court bowl.

    Each unit will be around 150sqm containing 3 bedrooms. {mods: removed solicitation}

    Recent sales in area show 3 bedroom units sold for $510,000. We are cautious so do our feasibility on a $480,000 selling price for each unit even though the front unit might command a slightly higher price.

    Gross Income from sale of 3 units

    $ 1,440,000

    Development cost

    20% developer'smargin $180,000

    Selling/legal fees say $45,000

    Building and soft cost $630,000

    Subdivision cost $45,000

    Others costs, say $30,000


    Total development costs $930,000


    Cost of property with a potential 3 lot subdivision is then $510,000 ($1,440,000 less $930,000)

    We have not taken into consideration any contributionto be paid to council and holding costs.

    Using this same formula you can work out how much is a dual occupancy site worth where you retain the existing house and build one new dual occupancy home in the backyard. Of course make sure you are allowed to subdivide the land into two lots as some Victorian Councils are or have put in place minimum lot sizes!

    Allow for some renovations, contribution may not apply for two lot subdivisions and you may be satisfied with a smaller development margin.

    This is a hypothetical example.
     
    Last edited by a moderator: 20th Oct, 2015
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