I cant make them add up to be profitable, and it doesn't make sense. I'm looking at buying a block with a rundown house on it, doing some renovation on the house and subdividing off the back and selling the front block with house. I think I should get away with just my buying and selling costs remaining, so about $20k to own the new back block. This is the one I posted a little while ago about needing some roadwork. Anyway, I put the numbers into some spreadsheet I found online for feasibility, and it basically comes back as break even. I've had to guess a fair number of costs though, so maybe I'm well out in some numbers.
Expected sale of new house is around $240k (thats off the selling agents and also checking comparable sales in area). I havnt allowed at all for interest yet, I'll work that out if it even seems profitable at all:
Development Sales $240,000.00
Total Income $240,000.00
Purchase Costs (soft costs)
Land Purchase Price $20,000.00Total Purchase Costs $20,000.00
Consultant Costs (soft costs)
Architects Costs $4,000.00
Council Costs $1,000.00
Engineering Costs $2,000.00
DA $2,000.00
Council Rates and Contributions $1,000.00
Other consultants $4,000.00Total Consultant Costs $14,000.00
Construction Costs (hard costs)
Building $155,000.00
Landscaping $6,000.00
Road $6,000.00
Driveways + Fences $6,000.00
Service Connections $2,000.00Total Construction Costs $175,000.00
Selling Costs
Conveyancing (sale) $1,000.00
Selling Fees $10,000.00Total Selling Costs $11,000.00
Contingency Costs
Item $15,000.00
Total Contingency Costs $15,000.00Total Borrowing Amount $235,818.18
Margin Before Interest $4,181.82
Less Borrowing Interest $0.00
Profit Margin $4,181.82
Total Development Cost $235,818.18
Internal Rate of Return 10.833%
Margin on Development Cost 1.742%Building costs is from two different sources, for a 3 BR 2 Garage house of around 130sqm. Most of the consultant costs are guesses, and the landscaping/driveways/fences/Service connections are also. Selling costs are also just estimated.
It just doesnt make sense to me that picking up a block thats worth around $65k (comparable sale just around the corner recently) for $20k yet building the house and selling barely breaks even. I must bet getting something wrong. Obviously theres a number of costs I'm still just estimating, for instance I'm not sure just what consultants are required on something like this (I've read a few books, but they try to be generic from renovation to quadplex type developments and just say "not all are required" but I'm not sure which ones are.
Anyway, while I keep going trying to work stuff out, I was hoping people who have been through it before could look at the numbers and see if anything jumps out as particularly wrong?
I guess the obvious next question also, is whats required to just sub-divide and sell? Atm that seems likely to be more profitable.
Hi bjsaust,
Just a few comments on your expenses:
– you have not included any borrowing expenses (assuming you will be borrowing to finance your construction, and even if you don’t, you should build in the opportunity cost – eg, the interest rate of that money in the bank) Construction can be around 6 -12 months depending on the builder, and selling can be 3-6 months depending on the market. 236K @ 6% is around $1200 a month.– What is the “other consultants” cost of $4K? or is it a contingency? Or independent inspectors to validate the building work at each stage? They should be around $1000-1500.
– $175K total construction cost is very excess for something that sells for 240K (That’s a huge 73%!! any construction project that does not give you 15-20% return, you should really think long and hard about doing it or not). Focus on reducing that or increasing the selling price if you want to make it work. (unless some of the cost will increase your selling price of the front block?!) Don’t artificially inflate the sell price though.
Does this include dressing/interior decorating the property for sale?– Contingency of $15K is very risky. I know you don’t necessarily need to build it into your feasibility analysis, especially if you are experienced. But construction projects are notorious for blowing out budget and timeline – but you probably know that already.
As it stands, however, doesn’t look like it’s stacking up in terms of numbers.
Have you investigated the targeted market?! There’s no point spending extra money to build a mansion if the price ceiling is going to be $240K.
The risk of building the wrong product, is that you risk the property missed mass market and sit stale for a long time!
There are cases where numbers just don’t stack up, but you have many different options. (eg, do council plan/permit and sell the block at a premium >65K)Good luck
K.Havnt factored in borrowing expenses yet, I do intend to once I have a better idea. One option I'm looking at is JV with the builder (he's just out on his own and looking to get into development himself) with him covering all construction costs, which means I'd just need to buy the land and cover consultants/etc without needing a construction loan. Or if I do it by myself I would need a construction loan. Once I have a better idea of costs I can try to work out which works out better taking into account the borrowing expenses.
"Other Consultants" is me not knowing what else I might need, so I guess its an extra contingency allocated just to the consultants area.
$175k does seem a lot. One builder I spoke to (different one) estimated around 150k for a 12-13 sq house. The builder I'm thinking about JV with spoke to a designer and got told
Quote:A town house averages 13 to 15sqs including 3 bedrooms, 2 living, double garage and would cost $10,000-$15,000 per sq, depending on the fit offSo I guess a 13sq by 12k is 160k, so if we can keep down close to the 10k mark its more like 130k. 155k was somewhere near the middle. If I could be confident of 130k that obviously makes a big difference. Cost for the road may change. A planning permit approved 3 years ago required the owner to seal the road, put in concrete gutters, etc. I spoke to their planning department now and he seemed to think it was unlikely we'd need to fund the whole cost of the road. $6k was an estimate of $3.5k to seal the road from a road constuction company and a guess on my behalf as to additional cost for guttering. Landscaping, driveways, fences, etc are all guesses. I dunno, they may come in cheaper I guess…
$15k was 10% of construction costs, which I thought was a recommended amount. Should it be more like $20k? More?
I'm not experienced, this would be my first one. Thats why I'm unsure of so many numbers and hoping to get some pointers.
I am considering just getting the permits done and on-selling. If I decide not to JV with the builder thats a definate possibility. Will probably come down to what the construction costs end up at if he's a partner instead of a contractor.
Thanks for feedback
.Hi Bjsaust,
I won’t comment too much on the structure. There are obviously pros and cons in terms of a JV with a builder. However, do make sure this builder is qualified and registered with the appropriate authority. (and have insurance).
That’s the typical quote: 10-15k a sq. I would’ve thought the builder can give you a more realistic quote?
I’m not sure how long a planning permit lasts in other states, but Victorian’s are normally 2 years, and you can extend it for 12 months at a time (with a fee). Have you check with the planning department if the permit still stands?I would have 10-15% of the project cost. But again, this just needs to be available when called upon.
It is not just the construction that can go haywire.Good luck!
KennyThanks Kenny.
Planning Permit was granted in March 2006, so its almost 3.5 years old now. Planning department said its dead and we'd need to redo a new approval. Thats why theres no more accurate quote, there isnt an actual plan to quote from now. Plan would be to ask the designer to create a design thats on the cheaper side of that quote.
I've basically just used the old planning permit as a guide for the kinds of issues council will have/conditions they'd impose.
Getting a valuation done on the PPoR today, but even a conservative estimate should leave me with much more than the $15k contingency available, its just that obviously the more of that I spend the more interest I pay on top of the cut into profits.
Appreciate the advice
Seems to be a lot of effort for a very little profit.
Have you progressed further with this deal?
Hi Bjsaust,
What would you see as the benefit of a joint venture with the builder?
From what i've picked up so far, the builder makes a healthy profit at $12k per builder square (please correct me if i've been misinformed),
So do you need to run it as a JV or can you just buy the land and hire any builder to do the work for you at the most competitive price you can find?
.
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