I have received town planning approval for the construction of 7 x 2 bedroom strata titled units. I have established a company which has purchased the property for $100,000.The estimated total costs for the development is $950,000 or about $135,000 per unit.The anticipated retail sale costs is $170,000-$180,000 per unit.I have established an agreement from an investor to invest $200,000 into the company with the proviso that he receives 2 of the units at cost price. That is, approx $147,500 x 2 or an extra $95000.
I have another investor interested in putting another $100,000 into the company with similar terms and conditions.Will these arrangements be sufficient for me to secure a bank loan of $750,000 to complete the project? Should I arrange to have another 2 units sold off the plan on 10% deposit? With this option, the reail price will be $190,000. I seek your advice.Looking at the numbers:
End value = $170k * 7 = $1,190k
Cost to complete = $100k + $950K = $1,050
Potential profit = $140k (but this excludes financing costs, etc. so its probably a lot lower)
Given the risks (construction, selling, etc.) is it really worth doing this development (especially since you’ve forgone some of your profit already by sell 2 at cost)?
1. I wouldn’t do it. There’s not much upside and there’s a lot of downside.
2. You will find it very difficult to finance (because it’s a very weak deal).Sorry for the bad news.
Cheers
Stu
Hi Russellwebber,
Another too is, many banks and lenders will not look at you, till you can show some evidential proof that 90% of the properties are sold or under contract on a OTP purchase. In your case.
You seem to be able to get the finance up, but again like Stuart has said the deal looks to weak. For 90% of the development to be under contract, you have to have all 7 of them as you cannot have 6.3 propertis purchased. Unless you were going to decide to develope a complex of 10.
Sorry for not much help, but do agree the deal looks very week.
Cheers,
sisWith the deals your investors are getting it doesn’t leave a whole lot of cream for you. Could you not offer them a 10 or 15% return on their money – much better for you – even 20% is better than giving away around half your potential profit for less than a third of your required funds.
Have you had a look into demand for units in Perth, particularly at the prices you are planning to sell at. Most houses in Perth are still at those prices or below.
From my experience, selling off the plan does not work that well in Tasmania, even in urban areas. A finished product sells stronger than a concept/drawing.
A developer would endeavour to obtain a profit of about 25%
Pisces133
Russell
You could possibly get 65% of end valuation with private financiers, rates are around 12%pa.
65% of $1,190,000 = $773,500.
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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