Here are some details of the potential deal I have been working on that I have nicknamed the “Woody”.
Deal Type
1 into 2 Subdivision and Development
Current Status
Initial InvestigationDetailed Due Diligence- Offer submitted – awaiting response
How I Found It
The property was found through an alert in an area that I have been watching for some time.
Deal Summary
The plan for the “Woody” deal is the following:
- Purchase an existing block that already has a house on it
- subdivide the land into 2 lots, 1 comprising the existing house, the other vacant
- sell the existing house
- build a new house on the newly created lot
- sell the new house
The Numbers
Listing Price: Initially listed at $550,000, the list price was reduced to $530,000 after about 3 weeks on the market
Actual Purchase Price: To be determined
Total Budgeted Project Costs (approx): -$362,000 (includes subdivision and compliance costs, build costs, holding costs and consultant costs)
Expected Sale Value Existing Dwelling: $460,000
Expected Sale Value of the New Dwelling: $500,000
Selling Costs (at 3%): -$28,800
Potential Profit: between $50,000 and $70,000, depending on final purchase price
The Offer(s)
So, the deal really isn’t going to stack up for me at the list price of $530k – there may be some profit in it, but for a deal of this type, I am generally aiming for an absolute minimum of about 8% profit on costs, and to cover for any unexpected blow outs would prefer between 9% and 10%, so some negotiation is going to be needed.
Looking at the numbers on the deal, and recognising that the subdivision of the land would take some time to go through, the holding costs are a significant cost in the project. As a result, if I can minimise these, then I am able to pay more for the property and still have the numbers stack up. As a result, I decided to put in 2 different offers:
Offer 1:
Purchase Price: $480,000
Settlement Terms: 2 month settlement
Offer 2:
Purchase Price: $495,000
Settlement Terms: 6 month settlement
Both offers were submitted subject to building inspection, surveyors report, access to the property prior to settlement and the vendor agreeing to sign any documentation that may be needed as part of the development application.
Now, the danger of submitting 2 offers like this is that some vendors may be a bit confused, or frightened off by the perceived complexity. On the other hand, some vendors may appreciate the choice. More than likely, they will come back and say “I want the higher price, with the shorter timeframe…”, which is OK, as this has started the negotiating process, which is the ultimate aim. From there, we may reach agreement, or we may not. I’ll let you know.
Other Considerations
Currently, the plan is to build the second dwelling. A possible twist on this may be to sell the newly created lot as a house and land package. This would mean an earlier exit from the deal (don’t have to wait until the build is complete), and therefore would further reduce the holding costs. Should I land this deal, it will definitely be something that I will test on the market as soon as the subdivision is through.
Update
Well, this one didn’t pan out. The vendor wanted more for the property than I was prepared to pay, so back to the drawing board for me!