All Topics / Value Adding / Someone wants to buy my investment property for unit development…What is a fair price here?

Viewing 18 posts - 1 through 18 (of 18 total)
  • Profile photo of marsmacmarsmac
    Participant
    @marsmac
    Join Date: 2009
    Post Count: 21

    Hi everyone,

    I have a local developer who is interested in purchasing my investment property to eventually develop units. We have no idea of a fair price and whether a normal 6 week settlement is suitable or to take an option settlement (1% now and the rest in 12 months time). He has offered a higher option settlement of $550,000 or $500,000 for a 6 week settlement.

    The house is in the Parramatta area of NSW, it is 700 sqm, near a railway station, shops. We are currently renting the house out at $250 per week. Agents we have spoken to have said we can develop 6 units on our land??

    We assume that the developer will eventually purchase the two houses next to ours as they are also zoned for unit development.

    Can anyone give us an idea of how to work what is a fair price for our house? And is it better to accept a lower price (but get the cash in hand) OR to go with an option 12 month settlement?

    Thanks everyone in advance for your replies,

    Marsmac

    Profile photo of Scott No MatesScott No Mates
    Participant
    @scott-no-mates
    Join Date: 2005
    Post Count: 3,856

    2 trains of thought – if you are not pushed for a sale ie not currently looking at selling (and not fussed either way if you do or don't sell), then a premium of 10% ie $50k may be worthwhile as a trade off for not selling to anyone for the option period. The risk is that they don't exercise the option (no great loss if you don't need to sell & an extra $5k in the pocket).

    On the other hand, if you want certainty, the quick sale (on the standard settlement time – 42 days) would suit. This is a 'no-risk' sale, provided the buyers sign a S66W (no cooling off period).

    You will need to satisfy yourself of the value of your block – you will need to ask a few agents how much development sites for x number of units sell for in the area (ie cost per site). In your case you will need to determine, is $80-90k/site a low-ball or realistic figure?

    You will also need to confirm with council the number of units that you can get on your block (or on two blocks). If necessary work backwards – ie selling price of units less 1/11 for gst. Then assume profit/overheads margin of 20-25% (so divide by 1.25 or 1.3). Subtract the construction cost, say $180-$200k per unit. What is left is the cost of the site. So, say a 3 bed unit sells for $440k, you get six on the site. Gross realisation is $2.64m, incl $240k gst. Take out profit, 25% or $480,000. Construction cost, 6 x $200,000 or $1.2 m. This results in a land value of $720k or $120k per site. If you know how much new units sell for in the area, adjust the price accordingly.

    Gut feel, there is alot more in this deal, get the purchaser up around the $105-110k/site on a quick sale (or $120k + for the option) and run.

    Profile photo of keikokeiko
    Participant
    @keiko
    Join Date: 2008
    Post Count: 513

    Have you counter offered yet? if not he will pay $550k and settle in 6 weeks. thats my thoughts anyway, its less than $10k extra per unit to him.
    Play ball with him and see how far he will go, but don't muck around thinking to long, he's in the game to do fast and quick deals and make money.

    thats my thoughts anyway

    Profile photo of christianbchristianb
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    @christianb
    Join Date: 2009
    Post Count: 386

    For the developer, this is an exercise in the control of time and money. One of these will generally be compromised for the benefit of the other. Time allows the developer to improve the value of the property through completing the town planning process (and picking up a little CG) whilst a lesser price is just that. It's business for a property developer.

    Profile photo of kaleidoscopesskaleidoscopess
    Member
    @kaleidoscopess
    Join Date: 2009
    Post Count: 15

    Hi Marsmac

    Scott No mates has hit the nail

    I recommend you get an independent valuation done on the property that also considers the development potential of the site

    Also, speak with Council as well to confirm the development potential

    Second idea is, have you ever thought about undertaking the development project urself?

    Cheers

    Town Planner and Development Consultant
    [email protected]

    Profile photo of j hallj hall
    Member
    @j-hall
    Join Date: 2009
    Post Count: 32

    so it has no d/a now?

    also,yeah,if u dont need the money now,then take the option.

    as a developer he is trying to reduce holding costs during planning period and d/a period.then build once thats all done.its ideal for him.

    and as someone said,he is trying to produce atleast 20% gp in the deal,preferably heaps more,so as long as u keep ur pricing theoretically inside that margin for him then its doable,however he may look for deals with 30% + for eg.

    if ur paid up with pricefinder or rpdata u can ask him for a previous development address he has done as proof of who he is,then search that address,click on his name as search his previous deals.try and use that to get a feel for the strategy he goes for,whether he pays good money for his blocks(in your opinion,or search similar sites) or if he seems to try and buy properties and very low prices at the right times.(all this only takes a few minutes if he has been building in area u know)

    Profile photo of marsmacmarsmac
    Participant
    @marsmac
    Join Date: 2009
    Post Count: 21

    Hi everyone,

    Thanks for your replies.

    We are going to make a counter offer for $550,000 with 6 week settlement as we prefer to get the cash now so we can invest it elsewhere. Having a 1 year option is too uncertain and locks in today's price.

    The reason why the developer offered a higher option, I think, is because he still needs to buy my 2 neighbours' properties…I think buying our house will be the first step…hold onto it…then in 6-12 months time buy the next door and so on. Not sure….

    According to Scott No Mates' calculations….

    Value of units in area – $370,000  (give or take)
    Number of units to build – 6 (subject to council)
    Construction cost per unit – $180,000
    Profit – 20%

    $2,260,000      Total value of development
    ($201,818)       GST
    ($1,080,000)   Construction costs
    ($403,636)       Developers profit

    $534,545         Land value or $89,000 per site

    Not sure whether the developer is keen on a 20% profit or can build units costing $180,000???

    What is a rough cost estimate for a 2 b/r unit and a 3 b/r unit? In my about estimates I've assumed $180,000 for the cost of a 2 b/r unit as the develop should be able to build 6 x 2 b/r units….

    Again, thanks for your advice,

    Marsmac

    Profile photo of j hallj hall
    Member
    @j-hall
    Join Date: 2009
    Post Count: 32

    if its a townhouse probably 1200-1250 per square meter from flat grass to turn key move in ,but it depends on headworks on the block and council etc,does the block slope away to the back etc etc etc.

    so if ur building 6 x 130sqm t/houses thats:
     6 x 130 = 780sqm
    780 x $1200= 936k for construction + headworks + strata costs  + da + ba + any sewerage mods or anything else the block may need. your maths of 1.08mil maybe close to the mark.

    Profile photo of Scott No MatesScott No Mates
    Participant
    @scott-no-mates
    Join Date: 2005
    Post Count: 3,856

    I had one site cross my desk the other day, about 40 units @ $67k/site located at Merrylands (near Parramatta).

    Profile photo of secureserver1secureserver1
    Member
    @secureserver1
    Join Date: 2010
    Post Count: 13

    marsmac, as a rule of thumb 3 level walk up unit blocks will typically cost between $1,400 and $2,200 per square metre to construct depending on the finish.  So you can multiply this by the number of square metres you expect the units will have. 

    As you might know, the floor space ratio's (FSR) for some of the zoning's in Parramatta council have recently changed.  One site I am working on has changed so we can now build three times as many units on the property, which obviously has effected the site value. 

    Another property I'm working on in the upper north shore is worth about $1 million more when we combine with the neighbour.  This is because the LEP allows for a higher FSR once the site goes over a certain size.

    A bird in the hand can be great but there may be other ways to get more out of you sale – if you are in no hurry to sell.   Good luck

    Profile photo of drainoskydrainosky
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    @drainosky
    Join Date: 2006
    Post Count: 6

    Hey, moral to the story is get the da done yourself then sell. Adding value is the way forward.

    Profile photo of Ultra PropertyUltra Property
    Member
    @ultra-property
    Join Date: 2011
    Post Count: 54

    I would get an independent valuation just to make sure your not under selling yourself. A developer will buy at a certain price only if he or she can have some profit in the end that is worth while.

    I am not familiar with the Parramatta local plan, but I would check to see local plans or a town planner to see if zoning could change in the near future. Currently you property can build 6 x units, but what if zoning is about to change to medium or high residential?

    Profile photo of OceanArchitecturalOceanArchitectural
    Member
    @oceanarchitectural
    Join Date: 2011
    Post Count: 31

    The advice in this thread is spot on. Something that I would also do is find out some details about the developers business, so that you can negotiate more effectively. A strict developer who employs a builder will be all about margin. A developer who is also the builder is about margin, plus keeping himself/his crew employed, and because hes doing more work/will make more money, he might pay more per land parcel than would a strict developer.

    To be honest, I would develop it myself. It isnt as hard as you might think, and because the property is generating an income, you arent bleeding money in interest during your planning/presale stage as you would on a naked block.

    Profile photo of ABMYBOYABMYBOY
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    @abmyboy
    Join Date: 2011
    Post Count: 1

    1% ??? This guy wants it all his own way. I was in the same position as yourself and was offered the development price of the land which was nothing compared with what the value was after I had sub-divided it. Take a little time to learn what you need to do to before you part control. Ask a Planning officer in the Council to give you some advice then go to a mortgage broker to see what options are open to you. If you don’t want to do it yourself, then get your money now and invest it in another area. At 1% if inflation is running at say 8%, which could be conservative, then you’ve lost 7% of your money even before you have received it!!.

    Profile photo of Scott No MatesScott No Mates
    Participant
    @scott-no-mates
    Join Date: 2005
    Post Count: 3,856

    Abmyboy, when was cpi last running @ 8%?

    1% on options is not unusual, it is typical, the trick is keeping the option period down to 12 months & strike a sale price which covers some growth/pain but nothing which makes the deal unviable.

    Profile photo of marsmacmarsmac
    Participant
    @marsmac
    Join Date: 2009
    Post Count: 21

    Hi everyone,

    Thanks for your replies. We didn't sell in the end although we were really really close to it. The buyer was very insistent and didn't resist too much when agreeing to our original offer. Did it have something to do with the rezoning in my area?

    I wanted to give an update with what has been going on with the local council. The council has recently released a draft LEP and DCP and the property zoning and site configuration has changed. I think it's positive in terms of the value?

    The specs are:
    Zoned B2 Local Centre (use to be 2c zoning). Allows mixed use development usually flats on top of retail downstairs

    F.S.R = 2:1 (use to be 0.85:1)

    Height = 17metres (use to be 12.5metres)

    Setback = 0metres (use to be 8metres)

    Site coverage = 30%

    Minimum lot frontage = 20metre (meaning we'll need to consolidate with a neighboring property)

    My land size is 700sqm, frontage of 17metres.

    Average price of a new 2br unit in the area is around $370,000

    Any ideas on how many units can now be built?

    Any ideas on the value of the land now?

    Thanks,
    Marsmac

    Profile photo of Scott No MatesScott No Mates
    Participant
    @scott-no-mates
    Join Date: 2005
    Post Count: 3,856

    Sounds pretty poor to my way of thinking. For 2:1 will allow 2800 m2 development on 2×700 m2 lots. But with only 30% site coverage you will have a 6.7 storey building which is about 12 m deep.

    Profile photo of marsmacmarsmac
    Participant
    @marsmac
    Join Date: 2009
    Post Count: 21

    Hi Scott No Mates,

    Thanks for the pick-up. My bad. The 30% site coverage is the old zoning. Not sure what it is now though.

    Marsmac

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