Hi, I am thinking of getting a prop development company to buy a property, subdivide and develop. From what I have read on other forums is that you should have 20% profit margin. I have recieved a feasibilty sudy from this company. There is a approx 20% profit margin however this is for the 2 unit sales 30 months down the track. Total development costs 1.7m, Total sales 2.0m. Profit margin 300k.
What I found interesting was that the longer the construction period went on the sale value went up. Going back the other way, theoretically if you could build the units straight away resale value is 1.6m, development costs 1.6m (1.7m minus 100k interest).
This means that the 300k profit margin is solely made up of cap growth, with an input figure of 8.5% per annum.
What my question is; Is this normal. Where should the 20% profit be calculated. On the end sale price taking into cosideration cap growth over the 30 months or at the start without cap growth.
If it is the former I cant understand why anyone would develop when the value of the 2 units at todays dollars is 1.6m and development costs are 1.6m. Profit margin 300k due to cap growth.
You could do the same thing without the risk and hassle of developing by buying the same 2 units in todays dollars for 1.6m, waiting 30 months and using the same 8.5% growth of the feasibilty study and still make your 300k "profit margin".
Interested in hearing other peoples thoughts
Cheers
P
It should be 20% on todays sale price. Who knows what the market could do in 30months. Im sure there are many a developer who went under during the PAST 30 months.
Was it 30 months from settlement date, 30 months from the start of construction or 30 months after completion of construction.
Not that it matters regardless but just curious.
I can't really answer your question, but when I do a quick feasibility for any of my development opportunities. I base all my figures on today's values, … there is no way I can accurately predict what is going to happen down the track. If the numbers based on today's values work with good profit/equity margin, then I seriously look at taking the next step.
I basically take the property price (or if I already own the property, the loan amount) add up all costs associated with completing the project including surveyors, council costs, contribution levies, sub-division and of course the construction plus allow some dollars for extras that always pop up.
Basing the profit/growth on future predicted capital growth seems a bit dodgy. Others may do if very differently, but I'm comfortable with my way of working out if a deal has potential.
Anyway … good luck with your plans.
Mystery
I managed to get my hands on some of Carly Crutchfields DVDs and even she states that the 20% profit margin is calculated on today’s market price. The 20% allows you to take a small hit from a drop in the market and still profit from the deal.
I would be very dubious about relying on equity growth alone, especially given the recent economic climate.
Remember, when developing, Capital growth is the cherry on top, not the cake itself…
Cheers
Darren
Thanks all for your replys, 20% in todays market sounds better.
fredo, the 30 months started from the purchase of the development site. Total development cost 1.7m
Month 1 – Purchase
Month 3 – Settlement
Month 20 – Start Construction
Month 30 – Construction finished, able to be rented or sold – 2.0million (as long as 8.5% per annum cap gain over 30 months). If happenned to be 0% cap growth over 30 months (purchase to construction completion), sale price 1.6m (actually lose 100k).Cheers
P
Was it only 2 units?? If so geez thats a long time.
I thought they may have sat on the market for 30 Months…..
What was the Feaso pre purchase…….. Maybe it was 20% before the crash?
2 double storey townhouses. The feasibility is on a proposed development, so nothing has even been purchased, therefore whole feasibilty is based on getting 8.5% cap gain from today (if bought today) until 30 months later, to give you the 20% profit margin.
WoW!
Uhh 3 years to get two units done and dusted is a really long time. The margin definitely should be 20-25% after all the costs are accounted for. This profit should not be in tomorrows dollars because if the CG never eventuates neither does your profit. The length of time is really long. Council approval on something that is like what you are describing should be under 12mths unless you have a really bad design or no precedent in the area or council is really bad/busy. Construction time on 2 units should be 6-9 mths with a half decent builder.
If you get a decent architectural firm who is familiar with small developments they will be happy to help you muddle you way through (you pay them for doing this of course) You buy the property, you get the funding, you do the rest. They help you get it through council and do the design etc, and can even organize builders.
I think you could find a better deal on your own. Where are you shopping?
Have fun
D
DWolfe | www.homestagers.com.au
http://www.homestagers.com.au
Email MeNow that is an absolute shocker Pascoe. The numbers are so rubbery that Durex would be proud of them!!!!
1) Interest on the land = say $800k x 27 mths/12mths x 7% = $126,000 assuming that the land component will not be more than 50% of the development cost.
2) Interest on the construction = say $800k x 10 mths/12mths x 7% = $23k
3) How solid are the construction cost estimates? Ie $400k will buy one hell of a townhouse or freestanding house from most home builders.
So instantly the numbers provided are incorrect or grossly inflated by the "developer". It sounds like they will make the 20-25% and you will be financing their deal.
If the deal was so good, why would you make your offer conditional upon settlement being delayed until the DA is achieved, thus limiting your interest costs to the development period?
Why will the DA take 14 months?
Hehe, go Scott!
Yeah 400k for a townhouse is a bit rich. It'd want to have a gold kitchen for that! The whole thing is a bit on the nose. Probably great for people who can't think on their own but the whole profit based on CG reeks. I think you are bang on Scott with the company making the profit on the deal.
Run Pascoe!
Also tell us where your "deal" is so we can chew on it!
D
DWolfe | www.homestagers.com.au
http://www.homestagers.com.au
Email MeHavnt got feasibility in front of me, but it was around 320k for each townhouse. 800k land, 2 x 320k townhouses = 1440k, rest of 160k is other fees, ie their management, stamps, town planning, contingency etc etc.
Now the company…………..I have emailed them in regards to the "profit based on CG" and are awaiting their reply to see if they can explain themselves or maybe show me how I have misinterpreted the feasibility report. Either way I will post who the company is and their reply / explanation after I have given them a chance to respond.
Stilll, doesn't give me any more comfort
Hmm.
320k per townhouse is about $50-100k over what you should be paying depending on finish. Where is the land? $800k is good value for that area? Have you done your own due diligence on this area and what these deals are like there?
I think you should cut and run now. Don't tie up any more of your valuable time not making money.
D
DWolfe | www.homestagers.com.au
http://www.homestagers.com.au
Email MeI can hear Jenny's voice now from Greenbow Alabama…………….Run, Pascoe, Run!
FAST
Pascoe,
The sums should (IMHO) always be current, and furthermore there should be some contingency allowed.
And yes, the timeline is rubbery!There arre plenty of good deals around, and my suggestion is that you determine your goals and establish a plan to make these happen. If you can establish the fundamentals, then you can test and re-test these as a research tool.
As for margins, 20% is sound, 30% is a "professional" margin, and more than that may well be too good to be true!
Interestingly, these margins are also useful in banking (there are others on this forum that can tell us more) where it has been my experience that retail bankers look for 20%+ on small developments, and commercial bankers are looking at 30% for larger projects (and pre-sales or excellent security).Pascoe,
Did you purchase the land outright without DA or do you have an option over it?
320k each for a townhouse seems a little rich. It better be a massive townhouse like around 280-300m2. Most developers look at spending around $1000 per m2 for building costs. The other thing is once you have received your op works certificate (BA/CC) a decent builder would have that done within 26 weeks.
Always work off today's figures as you don't have a crystal ball.
Good luck
It was on a proposed development, so I'm not sure about the "without DA" or option over it. The townhouse size was 210m2 so around $1500 per m2.
From my previous post………….Now the company…………..I have emailed them in regards to the "profit based on CG" and are awaiting their reply to see if they can explain themselves or maybe show me how I have misinterpreted the feasibility report. Either way I will post who the company is and their reply / explanation after I have given them a chance to respond.
The company has responded and couldn't really explain themselves, just started mentioning ROE is 75 %. But this still was based on future capital gains.
So I've decided to give this company a miss as too many things dont add up and continue my research/learning.
The company is well known, with offices in Melb, Sydney and Bris, their melb office being in Bay St Brighton.
Ahh Michael Yardney's developing co. Good for him! Probably not so good fo you. I got told that recent build rates are at around $1400 on something like an apartment block (more concrete, fire proofing etc) so if you are paying $1500 for something like townhouses, it may be just a little too much.
Look, they are probably good for hands off developers and that's what you pay for but why would you develop if you wanted to be hands off? Buy shares. Buy positive cashflow or something. I dunno. Good for you Pascoe on doing your homework.
D
DWolfe | www.homestagers.com.au
http://www.homestagers.com.au
Email Me
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