I have heard of people buying land and building Townhouses. Selling say half off the plan that actually pays for all the townhouses and just left with paying off the land. Has any one done this? Does this really work?
Regards Bear
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DONT MISS OUT!!!!!to sell off the plan you would need to offer some discount to their true value (and selling OTP for a townhouse product isn’t easy). To make enough to pay for the other two you would have to be making some extraordinary profits (and don’t forget that half of this profit would go in personal tax and another 10% in GST). Developers margins have slimmed from 20% and out of desperation are dropping to as low as 10% when all rats and mice are thrown in. So I can’t see how people are doing this. If you find a deal that you can do this with I would grab it fast, because there will be 100’s lining up behind you. Also you will often find that the profit is represented nearly as much by the capital appreciation in the land.
Extensive list of new Perth property available for sale.Alternatively, become a joint venture partner in one of our property development partnerships – contact me to find out why our developments are unique. John – 0419 198 856
With all due respect I disagree with most – if not all, of the above response.
“to sell off the plan you would need to offer some discount to their true value”
— Not necessarily. Supply and demand are two of the most important factors when evaluating an OTP development. Generally speaking, the project should not move forward if supply exceeds demand.
If sufficient demand is identified, the valuation does not have to be discounted on the basis of pre-construction sales.
“and selling OTP for a townhouse product isn’t easy”
— Again, not necessarily correct. As with any proposed development, you do not proceed if the market and/or feasibility study indicates there is insufficient demand for the product.
The product should also be “packaged” professionally – and there should be an experienced and reputable team behind the development to instill buyer confidence and limit the duration of the sales phase.
“To make enough to pay for the other two you would have to be making some extraordinary profits”
— The above statement is a general assumption. [Bear] has not specified the location, estimated price points, market analysis, cost of development, loan margins, etc. Therefore, how can one determine how many townhouses need to be sold to retain the remaining.
“and don’t forget that half of this profit would go in personal tax and another 10% in GST”
— A qualified tax accountant and financial advisor will ensure this is not the case.
“Developers margins have slimmed from 20% and out of desperation are dropping to as low as 10%”
— Media assumptions – or inexperienced developers? In reality, a development would not be a worthwhile exercise if the profit margin was as low as 20 percent. And certainly not feasible if the margin was below 20 percent.
“If you find a deal that you can do this with I would grab it fast, because there will be 100’s lining up behind you.”
— I would have to disagree. Real estate development is not for those who are inexperienced or do not understand “due diligence”.
Furthermore, we identify opportunities on a weekly [if not daily] basis which reflect the scenario you have outlined.
“Also you will often find that the profit is represented nearly as much by the capital appreciation in the land.”
— If the above statement was factual, we would all be farmers.
[Bear] in response to your question, you are correct to an extent. But there are a number of factors to account for in determining if this strategy is viable, including location, supply/demand, and feasibility.
— Michael
hmmm – some responses…
“to sell off the plan you would need to offer some discount to their true value”
— Not necessarily. Supply and demand are two of the most important factors when evaluating an OTP development. Generally speaking, the project should not move forward if supply exceeds demand.
If sufficient demand is identified, the valuation does not have to be discounted on the basis of pre-construction sales.
AUSPROP – Yes I have heard (and tried) other marketeers that clainm they can achieve full value OTP and they have teh magic database and packaging etc. Having sold OTP and finished no one will ever persuade me that OTP achieves the same prices as a finished product.
“and selling OTP for a townhouse product isn’t easy”
— Again, not necessarily correct. As with any proposed development, you do not proceed if the market and/or feasibility study indicates there is insufficient demand for the product.
The product should also be “packaged” professionally – and there should be an experienced and reputable team behind the development to instill buyer confidence and limit the duration of the sales phase.
AUSPROP – my comments here were eluding to price point, townhouses being by their nature a much dearer product than single level. In Perth the market cannot accept or bear this fact and it reduces, in my opinion once again, the profitability of townhouses vs other styles in all but the premium locations
“To make enough to pay for the other two you would have to be making some extraordinary profits”
— The above statement is a general assumption. [Bear] has not specified the location, estimated price points, market analysis, cost of development, loan margins, etc. Therefore, how can one determine how many townhouses need to be sold to retain the remaining.
AUSPROP – well Bear said half, meaning a $200k townhouse at cost would have to sell for roughly (without doing the exact calcs) over $660k. I would go to the end of the earth to find a deal like that.(i.e. 660 less 200 divided by 1.1 divided by 2
“and don’t forget that half of this profit would go in personal tax and another 10% in GST”
— A qualified tax accountant and financial advisor will ensure this is not the case.
AUSPROP – eventually it all comes home to roost and tax is a reality.
“Developers margins have slimmed from 20% and out of desperation are dropping to as low as 10%”
— Media assumptions – or inexperienced developers? In reality, a development would not be a worthwhile exercise if the profit margin was as low as 20 percent. And certainly not feasible if the margin was below 20 percent.
AUSPROP – 20% is considered benchmark by most. In last years land squeeze guys were going in at less with the hope capital gains would pull them through. If it is your livelihood then 10% beats 0%, but its risky. I have heard margins on the east coast can be a lot better
“If you find a deal that you can do this with I would grab it fast, because there will be 100’s lining up behind you.”
— I would have to disagree. Real estate development is not for those who are inexperienced or do not understand “due diligence”.
AUSPROP – well i’d be #2 in line, followed by many of my buyers and anyone I cared about
Furthermore, we identify opportunities on a weekly [if not daily] basis which reflect the scenario you have outlined.
AUSPROP – can you please PM me with some of these deals as we may be able to do something
“Also you will often find that the profit is represented nearly as much by the capital appreciation in the land.”
— If the above statement was factual, we would all be farmers.
AUSPROP – ? farmers, developers – all just making a buck
[Bear] in response to your question, you are correct to an extent. But there are a number of factors to account for in determining if this strategy is viable, including location, supply/demand, and feasibility.
Extensive list of new Perth property available for sale.
Alternatively, become a joint venture partner in one of our property development partnerships – contact me to find out why our developments are unique. John – 0419 198 856
i think *selling* off the plan, as a developer, is okay, I mean I’m sure you’d make money. I guess i just don’t really think it’s a good idea to buy OTP so I would find it hard to be ‘selling’ it to someone.
The reason I reckon buying OTP is bad is that resale values seem to be a real problem, according to this article –
…..”A comprehensive study of resales of new apartments in Melbourne over the past 10 years provides the most damning hard evidence of the capital growth myth. The new study by property analyst Charter Keck Cramer of the 3000-plus new central Melbourne apartments sold since 1992 shows the average price gain was 1.3% a year after inflation. “
…http://bulletin.ninemsn.com.au/bulletin/EdDesk.nsf/0/716ca9a406a48fdaca256c170010bf31?OpenDocument
basically, because more and more otp properties are built, and nobody wants last year’s model. Also, the land content in an apartment isn’t there like it is with a house + land, so you get the ‘buildings depreciate’ thing, but you don’t get the ‘land appreciates’ thing so much.
Also i generally think that OPT deals show lame returns, made to look better than they are by tax write-offs. i mean, if you were high income club it might work to do it once. But I wouldn’t imagine it would be replicable.
Always good to see a bit of discussion going!
My theory is that the majority of OTP buyers are investors who wish to buy on figures (cheaply), wheras the majority of home buyers (ppor) will make an emotional “value” judgement.
Thus, the completion price would usually be higher than OTP
AUSPROP – Yes I have heard (and tried) other marketeers that clainm they can achieve full value OTP and they have teh magic database and packaging etc. Having sold OTP and finished no one will ever persuade me that OTP achieves the same prices as a finished product.
MICHAEL – the valuation is dictated by location, competition in the marketplace, the standard of product and how it is packaged, supply and demand, and the team behind the project. Not the sales strategy.
AUSPROP – my comments here were eluding to price point, townhouses being by their nature a much dearer product than single level. In Perth the market cannot accept or bear this fact and it reduces, in my opinion once again, the profitability of townhouses vs other styles in all but the premium locations
MICHAEL – see above.
AUSPROP – eventually it all comes home to roost and tax is a reality.
MICHAEL – tax is a reality, but not in excess of 50 percent.
AUSPROP – 20% is considered benchmark by most. In last years land squeeze guys were going in at less with the hope capital gains would pull them through. If it is your livelihood then 10% beats 0%, but its risky. I have heard margins on the east coast can be a lot better
MICHAEL – most experienced developers/RE investors will not move forward on a projected 20% ROR.
Less experienced developers should be even more cautious if the projected ROR is ~20 percent.
Subject to economies of scale, I am referring to the type of development referred too in this post.
AUSPROP – can you please PM me with some of these deals as we may be able to do something
MICHAEL – we are not seeking investors/JV partners, etc.
AusProp, I responded to your comments because I felt your initial response was misleading and inaccurate, in this case – possibly based on a personal experience. It would appear you did not consider the original question from an objective point of view.
OTP is not always the best approach, however if conducted in the correct manner, this strategy will often reduce the developers risk, provide financial leverage, and ensure [as much as possible] a profit is made on completion.
— Michael
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