An agent told me about a 2000 sq m block that has been on the market for 2 years. Figuring that the owner is laid back about the time frame for settlement, I sent the following letter to the agent.
Summary of Offer
1. New Age Property (NAP) intends to subdivide the land to create 10 house and land packages within the next 18 months.
2. NAP invites Owner to share in profit from developing the land, as follows.
3. NAP pays Owner $500 immediately.
4. NAP applies to council for approval for subdivision, buildings, obtains quotes for utilities connections and other associated activities.
5. If NAP considers the project to be worthwhile, he initiates subdivision and building.
6. Upon completion, NAP offers house and land packages for sale.
7. From sale of each package, Owner gets $29,500 per lot + 5 % of profit on development (approximately $800 per lot).
Features
Owner retains land until houses are sold – maximum time for NAP to complete this is 18 months.
Owner agrees not to sell land to any one else during this time.
NAP has right but not the obligation to proceed with the development.
The proposal is basically an option, but because there is so much ignorance and bad press about property options I avoided using the term at this initial stage and spelled out the terms in English.
By having the owner retain the land until the new home owner buys a house and land package, I avoid paying stamp duty on the purchase of the land. The land never goes into my name.
But is there a risk that some creditor of the owner could seize the land that I will have poured money onto before I've had a chance to sell it? If so, iis there any way to protect my investment without actually owning it and paying stamp duty?
There certainly is a risk.
Speak to a lawyer about priority of interests in land. Generally first registered legal interest takes priority over later interests. But this is a complex area. You would register a caveat on exchange due to you obtianing an equitiable interest.
Depending on the state and the structure of the option there could be stamp duty on the option at the same rate as the land so get legal advice before doing anything.
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
What's the land worth? The owner only gets $303,000 so it would want to be worth a lot less than that to make it worthwhile for the owner. And in the build time he has to pay rent somewhere.
Or am I misreading this?
Catalyst:
Actually I misled you about the size of the land. It's 7000 sq m, not 2000. Sorry.
And it's vacant, so there's no issue with the owner renting somewhere else.
The value of the land is difficult to gauge. I first thought it was a good deal, but recently I discovered that Hickinbotham is offering a house and land package on 500 sq m for $221K. It's 4 bed, 2 bath and 2 lockup, 204sq m.
So to compete with that and still make a profit I'd want to be able to offer a better design for the same price.
I haven't checked out the cost of building a 204 sq m house, but it's got to be at least $150K.
So that makes their land worth $50K max.
On the block I'm looking at, my rough estimate of subdivision costs is $185K.
I want to build 10 New Age homes for a market where the competition is selling at $221K
So, land cost would be $295K + $185K = $480K = $48K per lot.
House construction cost, at $1100 per sq. m, would be 204 X $1100 = $224,400, say $225K
Total cost of house and land package is therefore $225K + $48K = $261K.
So my cost is $40K above Hickinbotham's selling price!
Either they got their land really cheap, or the Owner of the block I'm looking at wants too much, or building is cheaper than I thought.
Anyway, the reason it's been on the market for 2 years is probably because Owner is asking too much.
There's a lot to do in the subdivision. Council wants a road with kerbs and guttering, etc, etc.
O well, even if it doesn't go through, at least I made an offer. If Agent says Owner can live with the terms ther'es still time to explore further before I'm committed to anything. And even then, the commitment would only be $500 + my time.
But I'll certainly contact Hickinbotham and ask if they can build New Age houses for me when I find some appropriately priced land.
Terryw wrote:There certainly is a risk.Speak to a lawyer about priority of interests in land. .
Terry, you've put me straight.
I'll forget about my devious plan and just plan on paying the obnoxious stamp duty. I think in the long run it will be less stressful than trying to scheme around it.
Thanks for your sound advice.
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