Hi guys,
for the most part im new to the site, im a young property developer in my mid 20s and have been in the market for approximatley 2 years now. ive been studying my local market fairly thoroughly and have noticed there is a severe housing shortage, and many overpriced homes. i thought id drop in a quick question on a theoretical system ive been playing around with to see if anyone has any thoughts on it.
Without getting into too much detail:
the basic jist of it is if you were presented the opportunity to purchase a block of land for 50% of the current market value
($280,000), so the block cost you $140,000. The condition of purchasing was as a house and land package. The builder would build your property either from a pre selected plan, or to your design for a comparable price, competitive with other builders. For ease of calculations lets assume the total build cost was $400,000. which would bring your outlay to $540,000.So, the current market value of such a property is approx $680,000.
You have effectivley saved 20%, or made $140,000 over the time it took to construct.
Now this all sounds well and good, but there are a few conditions to purchasing the land.
1. to keep your saving of 20% after the build, you must remain in ownership of the property for no less than 20 years.
2. if you wish to sell the property earlier, 20% of its current market value MUST be repaid to the developer
3. if the 20 year period is completed, no monies will be owed to the developers
4. as mentioned, its purchased with building rights to one predetermined builder.
5. if you wish to use a different builder, or be an owner builder, you will only qualify for a 25% saving instead of 50% on the purchase of the land-
In this scenario, the developer will only retain 10% of equitable value in the property, still in
effect over the same 20 year period, diminishing thereafter.Thats the basics of it, i hope it was easily enough to understand.
would like to hear anyones thoughts on it.
cheers.
A couple of points – most houses/loans are rolled over every 7-10 years, so there is a great likelihood that you will sell before the 20 years are out (and the developer is banking on it).
Secondly, are you overcapitalising on the block? a $400k house on a $140k (or $240k) block?
Thirdly, there is very little risk for the developer – ie assuming the numbers are as stated $680k. If you sell before 20 yrs @ $680K, the builder gets $136k back (20% of selling price).
What do your numbers look like at $280k purchase price?
How will the developer know that you have sold? Will there be a caveat? How will the bank lend against this property considering that you have received effectively $140k vendor finance?Hi Guys,
Old story. If it sounds too good to be true it likely is. No one gives away 140k. Two things, at 280k the block is likely very over valued if you look closely and why would they do it if they thought that they would loose. They would not. So who looses?
The very first thing you should be looking at if even considering something like this is the TRUE value of the land, then the TRUE value of the building that the developer now has the EXCLUSIVE rights to build.
Be careful.
Hi, $400000 to build a house? The builder is probably making 200000 from building it.
KY
very strange… don't really understand. why would the builder care if you sell before/after 20 years?
am I stupid?
If they can lock you up for 20 years (by this stage your house would have depreciated by 50% but the land value may have increased), they have already recieved mega profit on the original build & site works (even at $140k), they are going for a third bite at the cherry.
Your only hope is that the company is wound up before the 20 years are out.
I think i3ravo is planning on being the developer, so from that perspective, it all looks great! The comments all sound very favourable to you i3ravo!
The problem may be getting purchasers to agree to your terms, which sound far more favourable to the developer than to the purchaser.
Cheers
K
On that basis, then you may have more luck with locking them in to a 5 – 7 year timeframe. Monitoring resale will be difficult without having an enforceable caveat on the land.
Thanks for the feedback everyone. There’s been some interesting points raised, ill try and answer some qs as best as possible.
As far as the land price goes, this is where the market currently is in Darwin. The cheapest house block in a new suburb would be around $200k-$300k in the same suburb. Most blocks are 450-900m2. I’ve based this example on a block I purchased about a week ago for $270k, and have intentions of building a $400k house (my cost as the builder). This property is expected to reach a sale price of $900k, as the neighbouring property of the same quality recently fetched this price.
I doubt there will be much difficulty in sparking the public’s interest in such a system, the way the market is here at the moment, people have literally been camping out over night to secure a block of land at new releases. At a new suburb called Lyons, a release of 6 blocks saw more than 15 people camping on the sidewalk from up to 5 days prior to the release. And these blocks all sold in excess of $320k.
With the build cost, $400k is fairly standard contract price for a 4bed 2 bath double garage home. Apart from our building code being one of the strictest in the country, we overpay for nearly all material as it’s all got to be sent up from down south, and most tradies are on higher incomes comparing to wages in other states. Obviously this makes our labour more expensive.The reason I suggested 20years is to avoid the operation having any effect on the current market. If a surge of 200 blocks were released at lower prices, it could possibly flood the market and lower values for other homes. As mentioned such a period is a burden but I consider it necessary.
The management of resale of these blocks from the developers’ perspective would have to be as a caveat, the developer would maintain some of the equity in the property, which could cause some difficulties as far as future lending goes. To solve this, the developer could offer a written consent to the bank to approve reasonable and viable lending within the boundaries.
The Territory Insurance Office implemented a similar system earlier this year in conjunction with the NT Gov to address the affordable housing dilemma. They basically buy up to 30% of your property and maintain ownership until you have paid them off. If you sell prior to doing this, your debt is 30% of the current market value, minus any improvements you have made to your home. It allows first home buyers/lower income families to enter the market at a reduced loan, so it suits their needs for long term housing. As far as future lending against the property is concerned, it is granted by Gov consent for approved purposes/amounts. http://www.tiofi.com.au/wps/wcm/connect/58a59c804eec8371bd70fd80398ce46e/FACT_isHomeStartNTforyou02.pdf?MOD=AJPERES&CACHEID=58a59c804eec8371bd70fd80398ce46eIn saying the above, this system proves much more appealing to the home buyer as if they manage to complete the 20 year period, the initial saving they made on purchase is theirs to keep. As far as the potential investors are concerned, this system allows them to buy a property for 20% less than usual, but still receive appreciation on the properties full price. With the lower loan, rents would be more than sufficient to cover repayments, and effectively the property services itself like a good investment should. Furthermore, the interest repayments would be lower on the smaller loan. For example, @ 7% a $500k loan incurs $35k interest p.a. whereas a $400k (20% less) loan @ 7% only brings $28k interest p.a. saving the investor an extra $7k per year. On these figures, if the property was to appreciate from $500k up to $600k, the 20% owed to the developer would go from $100k to $120k. Even if the investor was to sell prior to the 20 year period, they have still acquired $80k in appreciation.
It’s an interesting question, to ask who would give away the $140k, but if it’s a process that could be repeated, serve well for the community and market whilst making a substantial profit, then its better to make a little less, a lot more often. Even with such a reduction in profits, the exercise is still more than worthwhile to execute the subdivision. The Company aims to make profits from the construction of the homes after the land is purchased. As previously mentioned, if the buyer opts to use their own builder, they will NOT qualify for the same price reduction on the block. (Only 25% of land value)
Hope this answered your qs and look forward to reading your responses. Cheers
ttt
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