How much profit will a developer want before he says yes to the project?

I have the unenviable task of costing a development project for my father. He has a 1350sqm block 30m x 45m and I am trying to estimate how much profit each dwelling will realise when sold.

We need to do this as a JV, as my dad has no way to get this finance on his meager super (he is 73 years old). He would like to keep TWO Single story dwellings for himself.

Here is what I have come up with so far, bare in mind I am a COMPLETE novice:

1.The no of dwellings I think will fit is 6 (mix of ss and ds)
2.The block has a mish-mash of hoarders rubbish, giant shed made of asbestos, rundown 2br house with bungalow = expensive demolition.
3.My estimate is based on a fictional 819sqm total building area, and $1500/sqm cost guide leading to a whopping $1228500 plus the addition of:

Subdividing 6 allotments $30k
Bulldozing $30k
Plans/Permits $60k
Services: Gas, Elec, Water $30k

So, in addition to the construction costs, I have to factor in a further $150k, grand total $1,378,500.

Now this block is in Croydon VIC, walking distance from main St, trains, bus stop literally at the doorstep, 5 mins from Eastlands shopping centre and Eastlink Tollway.

I have to figure out how much the developer wants to make on each unit for them to go ahead with it. After all, the cost is quite a nip in the pants. Also how long would all this take to build?
I also presume it will need a strata title and costs involved with that?

Many thanks for all your helpful comments.

 

Step one in an exercise like this is to have a Town Planner tell you what you can do on the lot. This is not too expensive and is the basis for everything else you want to know.

I'm doing a similar exercise and a lot of the requirements around setbacks and parking will determine what you can build.

Without knowing this the rest of your assumptions could be way off.

 

Hi Tonibell,
Do I engage the Town Planner before the developer? Where do I find the Town Planner - at the council? How much do they charge for an assessment of the property?

Thank you

 

An assessment of the site would cost around $500 with a written report of the options you have. There are some good threads on this in the development section.

Best to get a private Town Planner - but you can learn a lot of it yourself through the council website and talking to their planners.

I don't have anyone I know in a if to recommend.

 

from what you have stated above I would look at the numbers on a DA, shorter timeframe, minimal/no risk

I am currently developing in Croydon, vic
If your father has owned the land for a some time he should make a killing, as in last 3 years land has soared in this area and developers are screaming for DAs

This way you don't need to source finance, dependent on DA, design you may achieve as much as 250k per site.

I started a thread on Croydon deve, if interested

Phone local draftees/townplanner in first instance, and then move forward from this

Also building a 6 unit deve for first project with lack of sufficient funds and no experience is very high risk IMO
Could very easily lose money

 

Great to get your feedback MTR, I am unsure what "DA" is? Developmental Approval perhaps? Sorry but I am really green at all this,and yes I agree it is high risk, but I am doing this for my dad as it was his only wish to redevelop the block he lived on since 1982, I was raised on this land, and now in his retirement he has stopped procrastinating and wanted to go ahead with it (although it will cause him great emotional pain to demolish the block as he is a hoarder).

So I understand your reference to "getting DA"means it will increase the site's value from maybe $1m currently, to $1.5m.
I cannot sell it, only as a last resort. My dad wants to live inside one of the units to be built, he doesn't want to leave. I will try my best to achieve that for him.

 

In Victoria the 'DA' will be called a planning permit.

 

approved plans and permits.

This could take 6-18 months, .?as this council are tree huggers

He can buy my lovely single storey villa, in nice location

Seriously, start with finding out what can be achieved and phone council to find out zoning, overlays and discuss with appropriate professionals.

 

I really need to get a wriggle-on with this, it is a long road ahead. I have two IP of my own, one in croydon (2br unit on Bayswater rd) and a 4br house in Griffin QLD, as well as a House in Mitcham, but we live in Wonthaggi for work purposes. I would love to see this project through and at least know I gave 100%, it may be risky but I am going to buffer my risks as much as possible, this forum is the start of my due diligence. My Dad would not be able to afford you beautiful villa, thanks for the offer

 

..but his property would have be worth big $ today with or without a DA. What is the size of the land? Have you phoned RE agents in area
pm me if you like and perhaps I can help you

 

Just reading the heading: 20% is the typical builders/developers margin

 

You made a huge mistake in your opening comments, "your father could not afford to do this deal" is complete nonsense, you can do this deal from beginning to end. If your father owns the land with no debt and he has access to a small amount of cash to get a Development Application into council then the rest is easy. I agree with all the other comments, you need a town planner before you make any decisions.
Building 6 town houses is a commercial deal and you will need finance from a commercial lender. The basis for this type of loan is the lesser of either the total development cost (TDC) or the end sales value (less GST). You do not need to service the loans in either case because the interest is capitalised on the loan. The bank will want security for the loans which they will take in the form of the equity in the land and/or pre-sales.
For example, mid to high end townhouses in Croydon are selling for $650k x 6 = $3.9m less GST so let us assume $3.5m as the end value. The banks will lend you 60% of that value and provide a separate fund for GST payments. On this basis the bank will lend you $2.1m but that may include the interest capitalisation. Nevertheless this is an amount far in excess of what you need for construction. The security will come from a revaluation of the property after the DA is in place and you may have to get 2 or 3 presales before commencement.
Talk to a finance broker who does commercial deals.

 

We can only assume 6 unit site, in reality could be way less.

Last thing I would worry about is finance.

My head hurts thinking about someone with no experience even considering a 6 unit development.

 

I would engage an experienced and proven "project manager" to assist you with the process. The money spent will be well worth it as opposed to you going alone.

Not sure what the eastern seaboard is doing but a deal like this in Perth with unencumbered land may still require some pre sales?

 

And someone with no experience, using a relative's money who isn't living in the same city as the project

 

Just having a quick look around Croydon: Linky approx 1300 m2 Site with DA yielding 4 x 3 bedders. That knocks a hole in your numbers straight away. Asking $970K+

Sales prices: Linky - selling OTP for $640k

Back of the envelope calculation:
Selling: $640k x 4 = $2,560k - Marketing/Selling Costs @ 3% $77k - Land $1,000k - Build $950k (4 units not 6)

This leaves about $400k on cost.

 

Ideally novice developers should start by reno (you may already have experience in this) or splitter block. Strongly suggest for dev this size you engage a project manager with experience per above comments- they should have: contacts in area for architects and builders, experience in similar types of devs, experience/ knowledge of local council etc etc. Take care!!

 

Totally agree. And don't just go with what an architect or designer suggests. The key is good, solid planning advice from an experienced professional (preferably not a start up)

 

Get some good planning advice, talk to architects, get some prices. Take it through the planning process. This will value add. If approved the numbers will become less rubbery. Let the professionals work with you and act on your behalf