Forum Replies Created
Marc – you have gone off on a tangent, in terms of the role emotion plays in the decision making process.
The “subconscious” plays its part of course – as it does in any decision, but when it comes to investment decisions [as per the question] it is more black and white.
Investment strategies are either contingent upon the numbers – regardless of what the property looks like or the amenities it offers.
Or the investor will “consciously” ignore what the numbers tell them and purchase for other reasons.
If emotion “dictates” the decision making process [a conscious decision] then the risk factor increases ten-fold.
Those who make a conscious decision to let the numbers determine whether an investment is good, mediocre or bad, control the risk component and generally fast track their way to independent wealth.
— Michael
Investment should be based on the “numbers” – feasibility.
Too much emotion can lead to mistakes, whether during the decision phase, i.e. selecting a property, the negotiation phase, i.e. getting the best out of the deal, or the resale phase.
But there is another aspect of the emotion factor which is aligned with perceived risk – remaining focused on “feasibility” is a means of overcoming this aspect.
In simple terms, it is how you as the investor perceive the numbers. If you look at the capital being directed into an investment as “cash” or “money” that could be better used elsewhere, would enable you to purchase XYZ, or it is simply “perceived” as “too much money”, then it is likely you will never become independently wealthy.
Every dollar invested should clearly demonstrate a return on that investment when you conduct a feasibility study. Each dollar should be treated as a “number” – not looked at in a monetary sense.
If every “1” returns “1.25” [only an example] then often the amount of money you have to invest can be somewhat irrelevant – the deal is “feasible” – meaning there are ways to finance the deal with creative thinking and persistence.
— Michael
Your questions need to be clearer.
Are you buying a property or selling?
My response assumes you are buying a property, in which case it is often beneficial to extend the settlement date.
— Michael
There are so many variables associated with this question – and the options outlined, that I do not recommend making a decision based on advise you may receive from a public forum.
You need to speak with an accountant and discuss the options with qualified advisors, i.e. a building contractor.
— Michael
Negotiate the extended settlement with an option to rent for 60-90 days.
The owners do you a favor, you do them a favor – a win-win scenario.
— Michael
Contact a qualified “lawyer and accountant”.
If you try saving a few bucks getting advise via a general web site forum, it will cost you ten-fold.
— Michael
“is there any books that give an indepth detail of doing this or articles”
The OTP strategy is covered as a topic in many books, but because every project is different, it is difficult to provide specific guidelines.
However, the approach is quite simple. Typically the OTP strategy is used when the developer wants to limit his/her risk and capital requirements, and/or acquire assets/equity at a minimal or zero cost [property retention].
General steps you need to follow:
1. locate land – secure extended option [if possible]
2. locate “qualified” resources, i.e. architect, engineer, quantity surveyor, etc
3. conduct feasibility – supply/demand, cost analysis, etc
4. prepare concept/preliminary design
5. planning approval
6. select sales channels, i.e. real estate agents
7. prepare marketing materials
8. implement sales strategyOnce sales have been achieved:
9. prepare working drawings, etc
10. commence constructionNote: you do require cash reserves or assets, etc to offset preliminary [pre-construction] costs. Typically an institutional lender will not become involved until your sales target has been reached, i.e. sales = or + 70/80% cost.
The above is a very general summary of the steps involved.
The land component often requires the most negotiation. For example, avoid committing financially until your sales target is reached and secured.
And there should be an out-clause [conditions] in the land agreement which enable you to walk “subject to” finance, planning, etc – and retain any deposit [incl. interest] required to secure the contract.
The deposit can also be a point of negotiation, dependent upon you/the vendors specific requirements and the project.
“hire entire teams to flog their investments, beleive the commissions were pretty high, way beyond what a RE agent charges.”
First, it appears you are going to retain the 3 bedroom for yourself, and sell the 2 units to cover the debt.
Either way, you do not need to hire a “team” to sell 2-3 units. Because you are selling OTP it is recommended that you employ a real estate agent
and/or RE marketing company with experience promoting this type of property.I think you will find any marketing team employed by an experienced developer will not cost “way beyond what a RE agent charges”. The cost is generally on par, or slightly more than a RE agency, based on reputation and track record.
RE agencies do not only charge sales commission when marketing a OTP development.
— Michael
“But how do you flip a property?”
The option to purchase [a contract] was simply assigned [sold] to another party.
“still can’t figure how someone would pay more than you did originaly.”
Supply and demand. Demand well exceeds supply in this market which was the basis of the decision to acquire the option – when there are more buyers [including a high ratio of overseas investors] than available property, real estate values will increase across the board.
The primary reason the value doubled is the re-zoning. The land can now generate a substantially higher return on investment than under the prior zoning.
Why did we not retain this land? Because it did not offer the attributes we seek for development purposes – it was used as a mechanism to leverage other investments in the same location, therefore reducing our capital outlay to almost zero.
— Michael
“you “can” make pots of money even in a crappy market.”
Absolutely agree – in fact I have touched on this several times in earlier posts.
However, in a bear market the strategy is different because it can be difficult to flip the property – as in the example used – if this is the intention when taking the land option.
This example is very much reliant on foreseeable capital growth [appreciating value].
In a bear market the best strategy is to “accumulate” longer term options [preferably] or the land/property with conditions in place – to draw out the closing date.
Vendors are more likely to negotiate favourable terms when the market is down.
You are then in a position to off-load the options/property when the market turns – or retain the property and benefit from the capital growth.
Whether the market is up or down there should always be contingencies [i.e. conditions] in place so you as the buyer can walk away if the “risk” exceeds your comfort zone.
Furthermore, the deal should be positioned where there is no cash investment [minimal at most] – which can be achieved by simply conducting a fair negotiation, i.e. offer a slight increase over the asking price – if confident it will not have a negative impact on the transaction.
— Michael
“units don;t really have land value as such”
Land value is incorporated into the value of a townhouse/unit at time of purchase and sale.
“A townhouse is over two floors, a unit is “lowset” or on one level.”
A unit is not necessarily a single level dwelling. Townhouses are often designed as a duplex – where units generally define a multi-dwelling comprehensive [attached] design.
“Unit” is often used to define any dwelling associated with a multi-family development.
“It is only a single storey place with no adjoining walls.”
Developers can position this type of dwelling as a townhouse or villa if built alongside similar dwellings on a common site.
— Michael
Secured an option within the past 3-4 months [no money down] on land in Queenstown, New Zealand subject to the vendor receiving re-zoning approval.
The offer was slightly higher than the asking price.
Approval was granted.
The land was flipped for more than twice the agreed price on the date the deposit was due – closing + 30 days.
Total time committed ~8-10 hours.
There are a number of locations in New Zealand where the same strategy can be applied with a guaranteed [as close as you will find] return on investment.
Moral of the story, you do not require an abundance of cash or equity to make money in real estate.
The key is due diligence [doing your homework] and presenting an offer which is risk adverse and a “win-win” for both parties – this type of transaction does not require disclosing your intent in terms of resale or otherwise.
— Michael
“I don’t think the government wants property prices to fall”
Correct. You will find rising interest rates are more associated with managing inflation and other fiscal issues not necessarily related to property values or “affordable” housing.
If any government introduced fiscal policy to “reduce” property values, the impact on institutional lenders – in most cases the government – and foreign investment could send the economy [and currency] into a downward spiral.
The Australian and even more so New Zealand economies are reliant on foreign investment [and competitive interest rates]. A considerable portion of this foreign investment is directed into property to offset higher risk short-term investments, such as technology, infrastructure and the stock markets.
This foreign investment plays a critical role [from a wider economic perspective] in home owners being able to generate capital growth.
Higher interest rates, etc, “may” reduce sales activity in the short term – affordable housing or otherwise, and may impact demand to some extent. But do not expect prices to drop [to any great extent].
New Zealand for example is still significantly undervalued in most regions – looking at a 3-5 year outlook, and although Australia has reached a plateau, it too offers an abundance of investment opportunities – which will ensure property values continue to increase over time.
Property values are controled by the marketplace – supply and demand. For as long as there is supply, there will always be demand to sustain value. Investment strategies will simply evolve with changing economic conditions.
— Michael
As a rule of thumb – and in my experience, the 2 bedroom option should generate higher capital growth and higher yields.
Although supply/demand and location are key factors when comparing, we have a policy not to invest in 1 bedroom apartments for the above reason.
— Michael
“due to personal reasons needs to pull out.”
“Apparently her friend can walk from the deal and be refunded due to the project taking so long or she can onsell it.”
— Which is the reason for on-selling the townhouse?
We conduct a number of developments with a pre-sales [OTP] component. A purchaser on-selling for personal reasons is not uncommon – although severe penalties generally apply if settlement obligations are not met.
The second scenario is not as common and will often adversely impact anyone associated with the development.
1. It would appear the purchaser is able to on-sell the contract. However, this needs to be verified [see purchase agreement] and check whether there are any staged payments due prior to settlement.
2. If the project is at the stage where buyers have the option of a deposit refund, this more than often means the developer is in financial trouble.
As a result the project could come to a halt and/or the developer may be forced to file bankruptcy – meaning the project could be on-sold several times [if at all] before further work is undertaken.
Subject to the stage of development, a new owner/developer may not have to comply with the design and standard controls set by the original developer in the terms of sale.
Before getting involved in a transaction such as this, look beyond the potential opportunity and “great price”, research the project and developer, and ask a lot of questions.
Request a copy of the purchase agreement and body corporate agreement and take these to a qualified lawyer and accountant.
I have seen too many people acquire property off-the-plan then realize what a mistake it was – because they didn’t spend a couple of hundred on qualified advisors – or conduct a background check into the developer.
As noted, find out what other projects the developer has conducted “from start to finish”. Then conduct research to verify the extent of the developers involvement and how successful the project has been since completion, i.e. sales figures.
OTP deals are easy to get into, but they can be very difficult to get out of.
— Michael
More than often once the property owner has filed bankruptcy, the lender has already on-sold the property – commonly referred to as a “note” [the property loan/mortgage].
A term used to describe an investment associated with a forced sale – due to pending bankruptcy – is “pre-foreclosure”.
The transaction takes place before “foreclosure” and often prevents the property owner from filing bankruptcy – resulting in a positive outcome for all parties, i.e. the owner, the lender, the buyer.
There are two basic methods for locating distressed property 1. contact lenders or 2. approach owners directly. Avoid third party channels if possible, i.e. brokers.
1. Lenders: Contact a bank, or mortgage lenders, in the area of interest and find out who manages foreclosures/distressed properties.
Take the representative out for lunch and provide an overview of your investment objectives – in turn they may advise of, and keep you updated on, pending foreclosures that suit your objectives.
In terms of working directly with lenders, in many cases they are willing to negotiate x cents on the dollar with the intent of covering as much of the outstanding loan as possible.
2. Owners: The same principle applies when the property owner is forced to sell. Although in this case, the owner is generally obligated to cover all of the outstanding loan – unless an arrangement has been worked out with their lender.
—
Many people who become familiar this form of investment often secure property under contract below market value, then assign [“flip”] the property at a higher price to another buyer before closing [or simply retain the property and put the equity to work].
Although, in this instance, the investor must make sure the cost is covered in case the resale does not proceed.
With enough due diligence and the right contacts pre-foreclosures can be a lucrative investment strategy.
— Michael
$5 acre for prime land overlooking Crested Butte [ski resort] in Colorado.
The land is owned by the US Government who are in the process of selling a number of acres to a mining company.
The mining company found a legal statute which allows them to acquire the land for what it was valued at in the mid 1800’s.
— Michael
Unless there is a clear [and short-term] financial benefit to acquiring these units – which outweighs the apparent risk, this would not appear to be a good investment.
Aside from the liability issues, the absence of a body corporate committee/agreement can, and probably will, negatively impact the value of your investment.
A Body Corporate is comprised of the owners of the strata titles, and is administered under the “Unit Titles Act”.
— Michael
Jeff – I provide feedback which I hope assists so-called “novice investors” with expanding their outlook from an investment perspective.
If the more experienced investors on this forum communicate or provide feedback at a “novice level”, those who are prepared to learn, research and “think outside the box” are missing out on valuable information.
In terms of my feedback on this occasion, I have provided a simple definition of infinite COCR – as per the question, and explained that “draw down” is an incorrect terminology in regard to utilizing equity [not an “equity loan”] to leverage further investment – nothing more.
— Michael
Jeff – my recommendation is based on a “simple” investment strategy which is the foundation for aquiring real estate and other assets, and building wealth.
The most confusing term used in this discussion is “draw down” – when you leverage equity you do not need to “draw down” anything – unless you are referring to a “home equity loan”.
The bank/lender takes a “note” against the equity in property A. The value of the note is applied to the cost of property B.
[J] “First you must value the property correctly, if not and you utilise existing equity to make the purchase you may find yourself running out of equity real fast.”
I don’t think anyone with a basic understanding of real estate investment would proceed with the equity/leverage [or any] investment strategy if it did not “stack up”.
My recommendation is based on a fundamental principle – there are a number of variables, i.e. interest rates, to consider and it cannot be applied to every investment.
Most of the investments I am personally involved with – whether acquiring/investing in real estate or other assets, result in infinite COCR/ROR due to leveraging equity, institutional lenders and OPM.
— Michael
Jeff – read again what I wrote. In a round about way it appears you agree with what I have said.
Do not use [or “draw down”] cash if there is equity available to offset a deposit, for example.
— Michael
