I'm not a very good investor as it turns out. I have a house on the market on the Gold Coast, bad time and all. It's a duplex zoned block, currently has an old house on the front to the right hand side – initially I purchased it with the thought to perhaps develop later but recently I had to put it on the market because, I owe, I owe, I owe so the property has to go (though if anyone wanting an office extraordinaire on Gold Coast is about please email me!). Anyway…today whilst I was at the house that is currently vacant and on the market for mid 400's – two guys came over and asked if I was interested in sharing the risk with them and optioning the property with them to knock down house at front and develop 2 x house aka duplex the block.
I'm not exactly sure what they are offering me? They said they would be able to do it all in about a year and they presume they would be able to sell both houses for $450,000 each and that it would cost approximately $250,000 each to build, plus demolishing the house plus development approval, plus flood report?, plus a couple of large trees to be removed.
I'm not sure how much they would make out of this, they haven't actually suggested a figure asides from mentioning that the houses would sell for around $900k. Doesn't make sense to me, it seems there wouldn't be much margin left to do anything anyway. There were a couple of duplexes that sold at the end of our street for about $550k a couple of years ago but the market seems to have changed somewhat.
I don't know what I should expect or want out of it, or if I should just keep it on the market?A property option is a legal document that allows a person to control a property, and not only profit first from natural growth, but gives them the ability to add massive value to the property. It gives the option owner the right to buy the property at a certain price and by a certain date, but they are not obligated to settle. In return for 'time' e.g. 1-2 years for a development approval to add value to the property, an investor may offer the seller more than the asking price e.g. $500,000 instead of $400,000. This might sound great, but remember this is a right to purchase the property at $500,000 in the future, and not an obligation to.
The way I see it is that there are 2 main scenarios. They either settle on the deal or don't settle. If they settle, then that's an extra $100,000 for you for not doing any work. If they don't settle, you could either be on the losing end or winning end. Losing end, if they demolish the house, and then walk away from the deal. Winning end if they manage to get a development approval (thus adding more value to your property) before walking away. If I were you I'd ask them to elaborate on what they mean by 'Sharing the risk'.
Hope that helps clarify a few issues, and encourages you to do some more due diligence of your own
the option does not give rise to any rights until the purchaser has exercised the option.
You are still the owner, you have to sign any DA (in return for the option fee) , you can still rent out or use the property until settlement if they exercise. If not you have picked up a fee for the right to buy. The beneficiary of the option cannot remove anything until they have possession.
As you said "recently I had to put it on the market because, I owe, I owe, I owe so the property has to go"
You need the proceeds straight away where as an option agreement will not give you money until either the buyer takes up the option (12months to 18 months if development is involved) or if the buyer can flip your property to a another buyer who decides to exercise the option (means they buy the property from you) but the time frame could be anywhere from 6 months to 18 months to onsell the property. Hopefully they do not plan to vendor finance out the properties to their future buyer.An option holder has the right to lodge a caveat on a property.
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
Thanks for your responses… I really appreciate that other people are happy to help me clarify things!
I had a bit of a ponder on it last night and I can't really see what they could get out of it anyway unless I drop my price, they know something about the property market going up that I don't, or they are getting kickbacks from the builder etc. They guesstimated that the build price would be around $500k but I have no idea? Assuming If was to sign an option saying that I would accept $450k and they were going to sell at $450,000 which I think is about where the market is at then aren't we at square one?
Hi Kelly,
Please correct me if I am worng.
I just had a quick look at your numbers you quoted and they do not seem to make much sense.
A summary of the deal that has been proposed:
Costs
Land and original house: $450k (this is the price you have said you can sell it for so has to be taken into account)
Cost to build two duplexes at $250k each: $500k
Subdivision costs/Other costs: $30k (this is probably a bit light but you might be able to get away with this)
Holding Costs: $40k approx (again probably a bit light)Revenue:
Sell two houses at $450k each: $900kTotal Costs: $1.02m
Total Revenue: $900k
Result: $120k lossThese figures are very rough and based on the info you have mentioned. Am I missing something?
Cheers,
LukeExactly!!
Two duplexes at the end of our street sold for about $550 a couple of years ago, but the market has changed since, I don't know much about building costs and such but I can't really see how they could make much money unless they were doing some pretty crappy building..
Therefore, I will keep it on the market and see how I go!
Thanks all!Hi Kelly,
Have they just offered you what you are currently asking for the property – $450k? In any normal option deal, the offer should be well above the current asking price to compensate the seller for the time until settlement, which is usually at least 12 months. I would think if these guys were serious, they would have to offer you at least $500k if not more. I'm not commenting on the potential profitability of the development, because others have covered that. It all seems a bit strange.
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