Hi
We’re currently evaluating two potential deals one to subdivide a residential block and put on a second dwelling and the other to strata a block of four units and on sell. Both have issues and I’d really like some opinions on which way to go. Please bear withh me though as it’s going to be a kinda long post.
Deal One:
Residential block – land size 1300m2. Current dwelling in front left hand corner. Idea to subdivide and move a second dwelling behind (this avoids having to deal with BASIX – a useful loophole!).
We have been negotiating on this for a while. Originally the vendor accepted our offer of $240K subject to Council approval of the subdivision. Then they went out and found their new dream home and wanted an unconditional contract. We offered them less to go unconditional but they are fixed on their price. In the meantime we have had surveying of the block undertaken. The back of the block comes in the 1 in 100 flood zone although the surveyors and Council both say that it should still be subdivisible (neither of them are willing to put it in writing though). If we walk away from this deal now we will be losing about $3K. If we go ahead with it and it is not subdivisible we stand to lose about $17K. Assuming that we simply resell the current house at our purchase price.
Buy $240K
Loan $348K (to buy, subdivide and place second dwelling – 100% finance including closing costs)
Back $400 – $440K depending on what we can sell for. $200 K each is worst case scenario, others in this area are selling for around $230K.
Profit $19 – 52K depending on selling price. This allows for interest for 12 months.
Risk: that we can’t subdivide – although both a surveyor and Council have given the verbal OK. If we then resold the house at $240K we would lose $17K.
timeframe 8 months.
DEAL Two
Second deal is a block of four units on one title to strata. They are solid brick and will need a fire rated wall in the ceiling, plus separate water meters to allow for strata title. We have offered $445K subject to Council approval for strata.
The vendor has come back with $460K and quick settlement or nothing. A similar block the next street over sold for this price in January. We run the risk of not being able to strata them although, this is minimal given the area is full of strata titled units, and it fits the Council’s requirements for strata. I will have to wait approximately 6 months to get Council’s verdict though. I have rung all the agents in the area and they have indicated a selling price of $150 – $180K ea. There was a very similar unit sold last week for $160K.
Buy $460K
Strata + reno $46K
Loan $526K (100% finance including closing costs)
Profit: $17 – 75K depending on selling price (sell at $145 – 160K).
Risk: that we can’t strata, although this is minimal. If this is the case and we can only resell for $460K we could lose $80K. Wow this sounds a little scary now that I put it in writing.
What factors should I consider?
Would you pursue either deal??
Is the risk worth the return???
Has anyone successfully strata titled a block of units in NSW? Any hints?
I really look forward to your thoughts and comments.
Thanks
Alison
G’day Ali,
Great post and lots of data to work with for a change. I’m sure you’ll get some cracking replies.
What factors should I consider?1. What is the land component as a %age of the asking price for both deals. I’d go for the largest if I had to choose.
2. What are your strengths ??
3. What are your partner’s strengths ??
4. Do you have buku cash reserves to hold the project if necessary….ie the separate deals don’t sell for as much or as quickly as you anticipate ??
5. What’s the timeframe on the block of flats ??
6. What is the buyer competition like for both props….or are you the only game in town for both Vendors ??
7. Can you tighten the revenue side of things up a bit….currently your margin of error goes from ‘a good profit and hence worthwhile’ right the way through to ‘out the backdoor big time’…..surely you can have a chat with someone more cluey than a REA. 150 -180 per unit x 4 units is a margin of 120K…..pretty sloppy in a 526K project (23% error margin).
Would you pursue either deal??No way, but then you probably wouldn’t be interested in what I like….so it doesn’t really matter IMO.
Is the risk worth the return???Depends what your appetite for risk is. The first alternative looks pretty plain vanilla to me – surely not too much risk there ?? Do you think the returns are stellar – or pretty plain vanilla to match the risks ??
Has anyone successfully strata titled a block of units in NSW? Any hints?I’m a complete novice in this area, so I’m talking completely out of my hat…..not a jot of experience in developing residential places.
Hi, some thoughts on your numbers.
Deal 1
1) You may need more than $120K to build a new house. I’m going to build 4 on flat ground and each costs $140K including interest costs & infrastructure.2) Your profit margin may need to be a tad higher. I’d look for a minimum of $50K gain for each house.
3) Look into the rental potential. I’m now preparing to hold all my properties for 5 years for the depreciation benefits. I calculate that they’d be neutral gearing at least.
Deal 2
I’d look at the rental yield first. If it’s close to neutral or +ve, then strat titling is icing on the cake. You can then choose to have your cake & eat it at the same time. If the rental yield is very negative, then beware!Good luck
Kum Yin
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