What would you do? Sell or hold

Hi PC,

I've found myself in a bit of a positive predicament.

We have been approached by a developer to sell our block along with the neighbours so that they can build a child care centre (or so we have been told).

We only purchased our place a couple years ago, and its an older house. We were cognisant of the fact it would need some renovations and repairs when we bough it and this was something we were keen to do over the years. Nothing major needs to be done at present, but eventually it will need a new kitchen (<~5 yrs) and laundry, the windows are all old and ******, and there's many other smaller cosmetic jobs to be done. It is also not the most energy efficient place. All of these costs are also in the back of my mind.

No one on this site is unaware of how prices have boomed everywhere since 2020, so we literally bought at the bottom of the market (2019, in part mostly to luck, but i have to credit myself somewhat for doing a LOT of homework too and busting my ass for many years to save up a deposit). Without getting a proper valuation done, our place is probably worth 150% more than what we paid for it. Not to mention the premium on a market value that would be included for securing both properties.

As a young couple i'm aware of the effect that this may have on our future wealth building if we are to sell now and either;

A) Upgrade to a nicer suburb/nicer house within current suburb with the same amount of debt. House would be sold tax free, and we could instantly acquire greater equity and capital growth options in a nicer house/area.

B) Move sideways and keep excess cash for shares/investing outside of property. Invest in index ETF's and have them working till retirement whilst utilising compounding growth through DRP at a potentially faster rate than CG through residential real estate.

However, there is two sides to every coin. Buying in the current market is a nightmare, and i wouldnt want any potential gains to be wiped out buy buying in a hyper competitive market. We may have a windfall on this property however only find we need to use all of it to purchase somewhere else in the same suburb. The way things are going, it doesn't seem to be slowing down anytime soon either. Factor in border openings and other COVID uncertainties that are prevailing in the next couple months, selling now might not be the best option.

In my opinion, the worst case scenario for both of us is that we don't sell our house and we keep on living in it as intended. If it doesn't happen it doesn't happen. There's also the age old saying of not to take the first deal that comes knocking, however there is also a window of opportunity for these types of deals and I wouldn't want to miss out on achieving a premium on a sale.

What would you do? There is so much nuance to this that im sure its going to be impossible to give a straight forward answer, but general advice from experienced investors would be greatly appreciated. Have you ever sold to developers? How was the process? Did you manage to achieve enough of a premium on the sale that is was worth the hassle of rebuying? Would it be too risky to try to buy again in this market considering current demand?

Some other points to note:
- Us and the neighbours are on good terms.
- We are both of the sentiment that we are open to the opportunity however it would have to be for a very attractive price.
- Property is located in Perth
- Let me know if there's anything else that you may want to know without me giving away too much identifying information.

Regards,

 

Agree with your neighbour a price point that is high enough to make it worth your while to move. Don’t let the developer persuade you to sell at anywhere lower than market value. If the price is not high enough don’t sell. Remember that you and your neighbour can decide to sell later at open market. I have developer friends who do this and they have tricks to try to get land at below market value.

 

Yeah this is just a price thing right? If it's sufficiently higher than market, then away you go. Otherwise, pass.

 

We sold our previous Brisbane inner-south PPOR to a developer for a childcare centre in 2017. From our experience, the developer will be making a highly conditional offer (subject to council DA) and there is a risk that the timeframes push out. So yes to your point you may have 'sold' at a great price but have to tread water waiting for the proceeds. We sought (and obtained) a non-refundable deposit and monthly contributions (non-refundable) to keep them honest as part of a max 6 month option agreement. Most developers would reject this I suspect, but may be worth considering if you decide to go ahead. It looks you have identified some of the key issues and lots of experience on this forum, so best of luck with your deliberations. We also negotiated a 6 month rent-back post settlement while we looked for a new place.

 

Thanks for the comments. How did you structure the monthly co payments? Was this a small fee or % of purchase price that tied into final purchase price? We were considering something along those lines.

 

Indeed it is. But would you sell your current PPOR is someone offered you cash today? Why/Why not? What would you do with it

 

Assuming you get a good price, be honest with yourself: are you cheap asses? Or can you see the bigger picture?

If you are cheap asses, stay put. You will not be able to compete in this market, Perth is on fire.

If you have a sense of perspective, sell and go in hard with your next purchase. Don't pull any punches, throw offers 10-20% above market value, or whatever it takes to secure your next one.

 

This is the dilemma. Im not sure just yet how much leeway the developers will have in terms of purchasing price for our blocks (which im working on), but are they just going to walk away at a request of 30-40% premium? Otherwise us going hard and offering 10-20% over MV for another house will just use all of the extra cash we've just received if that makes sense. That is also assuming we can find somewhere first...

 

but 10-20% shouldn't be "all of the extra cash" if you're saying this deal puts you 150% ahead. I don't get it. Unless you're eyeing a huge upgrade to your next house? In which case: you can't have your cake and eat it too.

 

Monthly payments were only $5k and went toward purchase price at settlement. (Or forfeited to us if deal did not proceed). So our worst case including deposit would have been circa $60k in our favour. Prices have changed a lot since then, but we wanted the developer to have hurt money upfront to avoid them negotiating us down later. If you think the Perth market is about to boom as a number of this forum suggest, then I would tread very carefully. If I was doing this again today would be looking at $50k deposit plus $10k month min. The offer would also need to be well over market value, given stamp duty on a new place, moving is a PITA . . .

 

I should clarify. I don't know what the offer is yet. We havn't progressed to that stage yet because we are still assessing options. So i wouldnt be 150% ahead thats just what i think our current MV is compared to what we paid for it. However given every other house has gone up as well, its not like we are soley banking the premium and no one else is

For example (figures are skewed and hypothetical): Current PPOR MV : $1M + 20% developer premium = $1.2M
We want to buy in same suburb, houses are $1M. In normal times could offer this and bank 200k. Current market having to offer 10-20% over just to secure it, end up with only small gain and no certainty of finding another place. Im also just spit balling, i dont think they would be willing to go 50%+ over MV for our place which is really all that would make it worthwhile for us. Hope that makes sense

 

I think for me it would purely be a function of how unique/irreplaceable my PPOR was against how much extra coin they were willing to pay above market rate.

But tax free capital gains are pretty sweet.

 

For sure

 

You’d need to have a long term plan and then include a mortgage broker to give you an idea of what you shouldn’t do to prevent you from future finance to achieve that plan. Taking into account things like future income, time without work or career changes, family planning etc. You may or may not be the type of people that want 10+ properties or carry lots of debt. So what will give you what you want and let you sleep at night.

With all that being said, I would take the chance to get into a PPOR that is in a better location but one where the house is good but the purchase is mostly land value. Like Jaybean said though, don’t hang around in the market worried about spending what you’ve made, use your cash to secure the right property as buying the right property is the whole purpose of this, not saving $20k on the purchase price. Doing well in your PPOR may really make a difference on you achieving your plans. The homes that are more desirable and in better locations than your current home may get further away as time goes on. Also, if lifestyle is important to you, life is short and can be shorter than you think, so nice homes aren’t too bad if you’re not stressed while living there.

 

I would sell my mother for the right price. Only Jk. I'd give her away for free

On a serious note, every property I own is always for sale if the price is right. I would do 2 things. 1. Try to determine what is the development value of your assets to the developer. 2. What number would you need to make it worth your while. It needs to be a significant number imo. You need to take all costs into account plus market risk. Then you need to add the bonus money for you to sell. Then some more fat for the unknown. Yes it will be a big number but thats what it will take. Otherwise unless you need to sell, its likely not going to be worth it if the offer isnt high enough.

 

My best guess is its on a corner block on a thoroughfare road through a gentrifying suburb with high demand for childcare. My brother is looking for a spot for my niece who is not even 1 yet and it was a min 6 month wait to get into the one down the road. I think they are looking at a couple other sites also in perth metro

 

If the suburb is gentrifying, which it sounds like from your windows, I'd stay put. You've already done the research and hit a bulls-eye. Give yourself some credit and be nice to your windows. Probably all they need is some paint.
Developers be dammed.

 

Haha thanks mate, had a good chuckle at that. Yep i suppose we just need to shoot for the stars i guess and see if they accept or knock it back!

 

It’s not just the price offered, it is the conditions.

Most developers put purchases under some sort of contract/option while they get appropriate approvals which can take many months.

Markets can move quickly, and by the time you settle, comparable properties can have increased to the point that you can no longer afford what you had planned to buy. People can, and do, get priced out of the market.