Forum Replies Created
“u can only borrow money from people u know personally and less than 20 in total.”
The above is somewhat correct.
The Australian Securities and Investments Commission [ASIC] stipulates that you do not need a prospectus if you are raising less than $2 million from 20 investors in any one year.
There is also an exemption to the prospectus rule if the money is raised from so-called sophisticated investors who are willing to invest in amounts of $500,000.
A “sophisticated investor” needs to be certified by an accountant or financial planner as someone who is an experienced investor with sufficient assets and knowledge to be described as sophisticated.
While the exemptions mean a prospectus is not required to be filed or registered with the ASIC, a borrower must still provide detailed information to all potential investors.
The expectation is there will be enough information for an investor to make an informed decision.
“What other security do u have to offer the investor”
“Security” is not a necessity when raising capital by way of a joint venture. The investors decision is often based solely on the information provided [business model], including financial projections, and rate of return/equity.
I have structured many joint ventures, some of which raised significant capital, and have not once offered any form of security.
“can u afford to pay 20% return”
If you decide to proceed with an interest rate then the feasibility study will determine the rate.
Avoid mentioning any rate of return to investors until you have an idea of what they will accept and you know what you can offer.
“what if the interest rates go up etc .”
The interest rate defined in the joint venture agreement is final. This rate is not influenced by market factors unless it is based on the Official Cash Rate [OCR], i.e. interest defined as “OCR + x points”. This variable option is not recommended for the type of transaction you have outlined.
“at the end of the day u are taking money from unsophisticated investors”
Because the investors are friends and family does not necessarily mean they are unsophisticated.
— Michael
“what should I expect if I am putting in money (up to $100k) for private investment arragnements.”
There must be some form of agreement/contract.
Your return on investment will reflect the “risk”, i.e. secured or non-secured, market conditions, etc, and the term of investment.
The higher the risk, the higher the return.
Make sure a qualified lawyer reviews the agreement/contract before commiting any funds.
— Michael
Generally your best and easiest option is to only raise the “shortfall” capital privately – being the difference between what a primary lender i.e. bank, will loan and the cost of the property.
As noted, private funds typically incur a higher rate of interest than a bank.
The two most common scenarios when forming a joint venture are 1. offering private investors a rate of interest, or 2. offering equity – a percentage of the ownership in the property.
The “interest” option can be the most complicated if you intend offering the private investors recurring payments. If for any reason an interest payment [which may have to include principle] cannot be met, this can create disharmony which may potentially compromise the investment.
The “equity” option is often the easiest method of raising private capital, but it can also cost more when comparing to an interest payment over the lifetime of the investment. When investors take an equity position they must be prepared to retain their money in the property until such time as the property is sold or they are otherwise cashed out.
The key in the scenario you have outlined is not to be overly concerned with “maximizing your return” at this stage – assuming this is your first investment property. Secure the property using the easiest method which offers the least risk, then as future opportunities arise structure any loan on terms more favorable to you.
A joint venture agreement, or similar, needs to be drafted by a qualified lawyer. Do not attempt to save a few dollars when it comes to partnership contracts.
It is recommended that the agreement is tailored for this one investment. The next investment has its own agreement drafted and so on.
There should also be a clear “exit strategy” included in the agreement, so that everyone is aware of the “term of investment”. An option to extend is common subject to the investor’s approval at the time.
Joint ventures of which you are proposing can start out on a positive path, but often one of the investors can become disgruntled or require their money out for whatever reason, which can again compromise the investment. This “risk” is often compounded when the investors are friends and family. The agreement must account for such events – a qualified lawyer will include necessary provisions.
In terms of security, the bank or another “primary lender” will take a note over the property – meaning their debt must be paid first and foremost. Any other debt is subordinate to the primary lender.
A second note/mortgage is not required if the shortfall is being invested by the joint venture partners. The agreement between the parties will outline terms and conditions associated with money loaned, return on investment, any security, etc.
If a third party becomes involved, they may require a second note, which is subordinate to the primary lender, but must be paid before you and the joint venture partners receive any payment. Being a $40,000 investment I very much doubt a third party will be required.
— Michael
“wondering how most developers buy land they want to put units on”
The objective is to “control” the land, which does not necessarily mean you “buy” the land.
A conditional contract [or “option”] is typically subject to planning approval, finance, etc. In many cases the option may require no money down – the length of the contract is also negotiated with the land owner.
There are no specific rules as such, the contract generally reflects a mutually satisfactory agreement between the buyer and the vendor [“seller”].
This approach has been used in some of the world’s most sought after real estate markets and does not have to be confined to markets where land is difficult to sell.
At times the land may be purchased or “flipped” without proceeding with the development because of the “demand” factor.
Always have a profitable exit strategy – whether you own the land or have a deferred option to purchase.
“how long does it take most developers to get the council to approve the buildings including getting plans draw up”
Planning approval and the time required to prepare working drawings depends on the projects scope and the Council you are working with.
“If all okay, then approach the neighbours to find any concerns. Town planning must take into account any objections lodged against proposals.”
The above is only necessary if the Council requires a notified application.
Often projects are only notified for public input if the project is outside the realm of the Council’s zoning provisions and/or bylaws.
If the design parameters, i.e. height through cosmetic finishes [color, etc], fall within the Council’s planning and/or design guidelines, the project will generally receive non-notified approval – without the need for public input.
— Michael
“no matter how good your lawyer is, there is no guarentee you will win the case so it is a punt”
My point being.. it is very rare that legal action transpires from a sunset clause if the provision and agreement are properly drafted in the first instance.
I am not referring to your subdivision, rather the importance of using qualified legal counsel in general before executing any purchase agreement.
— Michael
As you said.. “We found out too late that our lawyer was not good enough”.
If you did have an experienced and/or competent lawyer you would likely of had legal grounds to ensure the transaction went as intended – if the developer clearly intervened with the intention of terminating the Agreement.
It is also likely that the developer would have been forced to cover your legal costs as a result of his/her conduct.
— Michael
Sunset clause – A legal clause giving a final date after which no remedy may be sought, regardless of the grounds of complaint.
“Be aware of sunset clauses, particularly if you are buying an apartment.“
Sunset clauses are common and more than often a provision intended to protect both/all parties interests.
“many court cases result from sunset clauses.“
Not necessarily correct given the fact that there is a sunset clause or other exit provision in most contracts.
Litigation is a result of not having the contract reviewed by a “qualified” lawyer. Or people ignoring legal advice.
If a sunset clause – or other exit provision, is not acceptable, do not sign the contract. The same applies to any condition of contract.
“so the company deliberately slowed down things so that they went over the sunset clause, enabling them to cancel the original contracts“
What development company?
A common provision any qualified lawyer will require before allowing a client to sign is the date of completion. If missed the development company is liable.
— Michael
To become a professional real estate developer [not referring to someone who simply builds the occasional low-cost spec home] you require a diverse set of skills, including; finance, negotiation, planning, legal, communication, analytical, team building – and attention to detail.
Most importantly you require the ability to identify opportunities and ensure every project you conduct is profitable.
Talking to agents/property managers, etc, will not help you become a successful developer. Reading books on the subject is a good first step.
If you don’t have any experience in construction, planning or valuation – fundamentals of RE development, you should look for a job with a reputable company and specialize in one of these tasks.
Find a smaller company where you are not overlooked – locate a mentor.
At the same time undertake a University program to gain qualifications you can use – not a several day course offered by a supposed “guru”.
If all you want to do is purchase land and build a house, then stick with the books and hire contractors.
— Michael
“Don’t you think that if oil runs out and we move to other things, that will affect the US and the US dollar??“
Not negatively.
“But that’s up to the media/TV to let them know“
A logical statement.
— Michael
“How many have a Plan B?“
If you don’t have a “Plan B” you shouldn’t be undertaking any form of investment.
— Michael
Here in Washington DC I am close to the heart of what makes the US economy tick, and to a lesser extent, global economies.
The trade deficit compounded by rising energy costs is somewhat of a concern, but these issues can be adequately managed over the medium term given the right economic policies.
In terms of a global economic recession, or even a US recession, the chances of this happening are minimal at this time.
An economic “collapse” in the United States simply will not happen in the foreseeable future.
“the US economy is funded on the back of spending rather than manufacturing productivity”
The above statement is not necessarily accurate. The US economy is influenced by consumer spending to a reasonable degree. But manufacturing is a fundamental component of any economy, specifically the United States. It dictates employment numbers, productivity trends, etc, which determines where the equity markets and interest rates are heading.
“The second factor to watch is world oil prices.“
Correct. But in the not too distant future, the world’s economies will be less reliant upon oil as a primary energy source.
“In the 80’s I think it changed to a US$ standard, countries have to buy oil in US$. The yanks said so…“
Such statements require some validation. You will find the reason oil is traded in USD is quite the opposite.
“Then you have to consider the impact of the falling share market – will this creeate another stampede for property?“
Since the “dot.com crash”, real estate commodities/assets have demonstrated record rates of return in the United States and elsewhere. This reflects a trend toward “bricks and mortar” investment rather than a reliance on forecast assumptions.
Although the Dow remaining around 10K has a correlation with oil prices and the war in Iraq, this trend is more closely aligned with caution from an equities standpoint and avoiding overinflated valuations.
There is also a greater tendancy to profit from shorting the market in today’s environment than in the late 90’s when stocks continued to climb with no limit in sight.
At this time I don’t see a need to raise interest rates at a significant pace to offset inflation in the United States.
As for the Australian real estate market, and New Zealand for that matter, if myself and other US investors felt there was global economic doom and gloom in sight, we would certainly not be focusing so much on Australasia.
“I dunno, but it all seems logical.“
If it was logical I very much doubt George W. Bush would be in power.
— Michael
What the media overlooks when they compare median prices is the effect “supply” has on those prices.
Month to month sales are down in Auckland, Wellington, Queenstown, etc [using New Zealand as an example] but supply is playing an influential role in this equation.
For example, there are not many worthwhile $million plus properties available at this time which in the past year or more have driven the increase in median prices.
One reason being the better properties have already changed hands and buyers are currently in a “wait and see” pattern.
— Michael
Never make investment decisions or assumptions based on what you read in the media.
An adjustment in any market, no matter how severe, can result in a profitable outcome for those who are prepared.
— Michael
Why do “you” think the investment is not such a good idea?
If you can afford to pay for the land at settlement, and you conducted sufficient due diligence to determine if the land was a viable investment, then it could be “a good idea” .
Otherwise, you may have to forfeit $1000 – a small penalty for a mistake in this business. If this is the end result, put it down to a valuable learning experience.
— Michael
1. What does it mean if a purchase is subject to a title being issues? (what is a title?)
A certificate of title, issued by the local land titles office, defines the property you have purchased and any encumbrances or mortgages over the property.
Apartments are at times sold off-the-plans “subject to title” when the developer has not had titles issued prior to sale. Settlement cannot take place until the title is issued.
Often this provision allows the purchaser to receive a full refund of any deposit, plus interest, if the title is not issued on or before a specific date.
2. What does it mean if an appartment is strata titled?
Strata Title is the system of title/ownership that applies to apartments/units, and at times, townhouses.
The title is based on the horizontal and vertical subdivision of “air space” rather than land.
The title represents your right to part ownership of the building, i.e. an apartment, and a proportionate share of the land.
In Australia strata title apartments are typically managed by a “Body Corporate”. Strata title law is regulated by the Strata Schemes Act, 1973.
“All strata titled apartments in Victoria include the thickness of the external walls and half the thickness of shared walls. I agree that this is a bit deceptive“
It is not necessarily deceptive because the apartments future valuation must conform with this same stipulation. Therefore you are not losing money unless the market takes a dive.
Either way, the thickness of external walls and half thickness of shared walls should not have a significant impact on the net floor area – and would typically not come close to 20%, or 15% as you have now noted.
— Michael
A couple of comments in response to points highlighted;
“When I emailed CE to ask how they calculated the measurements they responsed by saying “The apartments/title have been professionally surveyed by a qualified surveyor. The areas are calculated in accordance with the Property Council of Australia method of measurement.“
Contrary to what the Property Council informed you, the above statement would be correct if the CE development is multi-use or outside the realm of a typical residential-class development.
A “quantity surveyor” is required to comply with regulatory methods of measurement for valuation purposes – not structural. This data is used by CE to secure finance by way of an institutional lender [bank].
“She [lawyer] could not see that there was a problem [20% variance]“
If in doubt find another lawyer.
If there is a 20% variance [or 10-15%] in the gross floor area this will have an adverse affect on the apartments valuation and therefore directly compromises your investment.
“I received a valuation back from one of the banks and they put the flat size exactly as the measurements that CE had told them (so I guess they got the figures direct from CE and did not measure it).“
The bank will have used the quantity surveyors report which as noted is the basis of the property’s total valuation.
“I’ve had 4 sets of friends check the plan and they all said its about 20% less.“
Your investigation should be impartial and conducted by professionals from day one if the information is used for litigation purposes.
“3. Ask you solicitor to send a letter to CE and get them to detail how they measured the property.“
Based on the information provided, CE have met this request.
“There was no written figure for the appartment size in the contract. There was a plan of the appartment with some measurements“
If the plan accompanied the sales material, then on legal grounds, it can be considered part of the contract of sale.
Although, a plan detailing gross and net floor areas should always accompany a purchase agreement.
“They will only quote the total size and say it is irrelevant at this late stage as completion is immenent.“
If the above statement is accurate, and there was no underlying information provided by CE, then the fact that completion is imminent is quite irrelevant if there is a large discrepancy in the floor area.
“The legal area of the apartment is as shown on the apartment title which includes the plan of subdivision. You should have a copy of the full title as part of the contract of sale.“
The above is correct IF the purchase is not subject to title being issued, which can be the case when buying OTP.
If the purchase is subject to issuance of title an associated provision should be clearly outlined in the contract.
“The Subdivision Act 1988 outlines the official system of measurement of any strata titled apartment:“
There is a considerable difference between variations associated with the System of Measurement and a 20% discrepancy.
“6. As the transaction occured in Westminster (a UK London borough) – I have reported this to Westminster trading standards who might prosecute Central Equity) – I am awaiting a response.“
It is unlikely a foreign entity will pursue legal action due to the property and development company being outside their legal jurisdication.
“as a consumer, I feel very misled about the flat size“
Although it is quite possible CE have breached their legal obligation, you may find this situation is a direct result of your following comment;
“As I was sold the flat at a seminar, I did not have time to do these (not simple) calculations and therefore relied on the sales laminate“
Never commit to a property under contract until the agreement and all relevant information has been reviewed by a qualified lawyer.
Because several authoritive parties in Australia have informed you there is no discrepancy, then it is quite possible you have simply made a mistake. The apparent feedback from the regulatory entities in the UK is quite irrelevant.
In saying this, if you feel there clearly is a discrepancy which is not being addressed by CE in a fair or professional manner, then you should pursue the issue. Or as noted, forfeit your deposit.
Note, the above comments should not be construed as legal advice. They are based on my experience as a real estate developer/investor, primarily in the US, but also Australia, and my direct involvement in all contractural issues.
— Michael
“it is land that appreciates and buildings that depreciate.”
Apartments typically have a land component in the valuation.
Houses can depreciate as much if not more than an apartment.
Apartments in the right location can appreciate at a faster rate than houses in the same vicinity.
— Michael
Always use a lawyer.
— Michael
The fundamentals of real estate development [and investment] are the same worldwide – more or less.
If zoning and/or tax issues need clarified, then this information can be sourced through local authorities.
One of the better publications focusing on property development is:
Real Estate Development: Principles and Process. [Mike Miles]
Although published in the United States it is used by leading universities and education facilities in Australia and New Zealand.
This book is readily available from http://www.amazon.com and http://www.barnesandnoble.com
For those more interested in Investment and Finance, I recommend the following:
Real Estate Finance & Investment Manual [Jack Cummings]
— Michael
The best scenario is dependent on the location/market and where it is heading in the next couple of years – and how much risk you want to incur.
If there is clear projected growth in the next 3-5 years, then I recommend building the units and retaining one or two.
If the project is feasible I wouldn’t decide not to move forward with a development because of CGT alone.
You should also speak with a qualified accountant about tax implications, if you have not done so already.
— Michael
