Don’t let the fancy name above throw you… Here I discuss exactly how to work out how much to offer when buying a development property, so you know with greater certainty that you will make a profit.
A skill every successful property developer requires
Working out what a development property is worth is one of the skills successful property developers MUST acquire. To work out a property’s value TO YOU, the property developer, you need to start at the end, or as I like to call the process “Reverse Pricing”.
Doing the numbers, start at the end
Whether you intend to build, renovate, subdivide, or just create vacant land, you must first get a fair idea of the properties improved or finished market value in today’s market place. What are the pieces of land worth today, what is the renovated home likely to be worth today, etc.
To work out today’s values, you’ll either need a relationship with a good looking real estate agent (such as yours truly), or access to reliable and recent sales information – rp data membership is ok, but I prefer REIWA statistics you can get via a real estate agent. If you have neither of these then I suggest you search the reiwa and or realestate websites in the suburb your are considering investing in and call the dominant agents in that area, and pick their brains on the property types, possible values etc for what you are considering creating.
By working backwards, you start your calculation from the properties improved market value subtracting back your required profit (the most important part because we are not investing without a profit) and all of the costs to develop create the property to that point, including purchase and holding costs… this leaves you with your maximum purchase price. This is what you can actually pay for the property and still make your profit.
Let me give you an example
LIVE EXAMPLE: Kelmscott potential 5 unit site – for sale $310,000
This large 1,188sqm block of land in Kelmscott with a 2×1 timber home returning $280 a week in rent, has the development potential to create a maximum 5 villa site, each villa being a 3 bedroom 2 bathroom design with double carport. Each proposed block would be roughly 200sqm each, each villa being approx 130sqm under roof, double carport 1 living area, with a probable sale price in the vicinity of $309,000 each. So your final sale price is:
$309,000 per villa x 5 Villas
=$1,545,000 (A) GROSS INCOME
Once we have a value of what the final products are (in this case five 3×2 villas) and we know what they will likely sell for in today’s market, we can work backwards, taking out all the costs to create the 5 villa’s, starting with – our profit.
$309,000 20% gross profit on total deal
$50,000 Selling Fees for each villa, including advertising and Legal fees
$750,000 Building costs of $150,000 each villa x 5, includes finishing costs
$30,000 Demolition and site clearing costs
$75,000 Site works, subdivision costs, connection fees etc $15k x 5
$25,000 misc & or holding costs (more or less depending on how much money you are borrowing
= $1,239,000 (B)
A – B = $1,545,000 – $1,239,000 = $306,000
The figure of $306,000 is what you can afford to pay for this property (less stamp duty), if you are looking for a 20% gross profit (before interest and tax).
Another example with a lower total outlay
Most investors I know are a little uncomfortable with $1.2 million dollar deals, so I’ll use the same process to decide what to pay for a smaller, sub divide and retain property. However, I am going to use a lower profit figure of 10% versus the 20% profit previously. The reason being is that as more people can afford a cheaper development deal there is usually more buying competition, so the returns tend to be less as the risk of holding that much development cost is also less.
LIVE EXAMPLE: Forrestfield, retain and sub divide 3×1 home – for sale $389,000+
This is a 3 bedroom home in need of renovation with the potential to retain the existing home and create a 440 sqm block at the rear on a 1,000 sq.m block zoned R20.
FINAL SALE PRICES
$325,000 Front 3X1 on 440sqm – fully renovated
$165,000 Rear 440 sqm block of land
$490,000 (A) GROSS INCOME
$49,000 Profit 10% of gross value
$18,000 Selling Fees for a house & block + advertising and Legal fees
$25,000 Renovation costs
$15,000 Demolition and site clearing costs
$20,000 Site works, subdivision costs, connection fees etc
$15,000 misc & or holding (interest costs)
A – B = $490,000 – $142,000 = $348,000
So in this case you would have $348,000 (less stamp duty) to spend on this property.
Further info & assistance
If you would like to know more about the process of subdivision make sure you join our community update now and stay informed of dates for one of our next Subdivision Seminars.
Plus if you would like my assistance with purchasing or maximizing the profits from any sub dividable site in Perth, I am available on my contact details below.