Buyers Cooperative

Here is a new concept that I am interested in gaining some feedback on.

Firstly some background… I have recently been attempting to finance a Sunshine Coast property development based on the one pre-sale held. Quite frankly the banks are in lock down due to lack of wholesale finance and the market sentiment has been driven down by the media). My opinion is that the market has leveled off, no price reductions but a 4% drop in listings, migration continuing to boost population, low supply, high demand but suppressed, high rents…. something has to give! My view…the first half of 2009 will see improvement in sales and price, second half will see price escalation. Supply and demand is a powerful factor. Now that's my opinion and of course it may be worth nothing, and of course it applies only to the Sunshine Coast. I don't think you can generalize when it comes to the property market as each region has varying issues (consider the new mining area boom as an example).

Anyway needless to say I have confidence in pursuing a property development that will hit the market around about when the sector should be thinking of getting motivated.

So what to do…banks are difficult to gain finance …I could get high interest mezzanine finance or do a JV with others. Well here is the concept that I am considering …

Firstly the issue of ROI, no doubt its quite significant to build this 8 apartment complex and take all profit (or hold units for tax purpose etc). But it has been suggested that I establish a property development cooperative.

The decision is that firstly I accept an overall reduction in ROI (that's a big step, but then again I'm not in this to make millions but simply wish to supplement income). Secondly I could go out to a network (clients of our financial advisor or anyone interested for that matter) and offer participation in a cooperative established to build the 8 apartments. Considering that I now have secured the land, obtained a Development Approval and are ready to start construction this time focuses any involvement.

Involvement in the cooperative involves a commitment to buy one or more of the apartments at verified (by QS) cost. This means that an apartment would be around the cost price in the vicinity of $500K depending on which unit. We would most likely retain 3 apartments leaving the balance of 5 available.

The expected market price would be around $90K more, thus providing a capital gain of this amount on completion. Of course participants may choose to on sell during construction, at completion or in fact hold the apartment for future growth and tax purpose. Some are talking significant % increases in property when it starts to move again particularly for well located properties such as this, so potential gains may be significant.

The profit factor calculated includes savings made by eliminating:

• marketing costs
• agents commission (unless a member decides to let an agent sell it)
• GST

  So in simple terms we are offering to build a property for participants, at cost and with no holding costs due to the quick commencement of the project. Just like being a property developer without the baggage.

  Finance arrangements would be coordinated through a local financial institution by using a trust structure managed by a lawyer to simplify financial control over the project. Individual finance would be drawn down as the project progresses (just like building a spec home). As the trust would borrow on an LVR of say 60%, each contributor would need to put in an initial amount to procure their portion of the land/DA costs etc (probably around $50,000).

  Feedback so far has been positive but I would appreciate any candid impressions of such a system.