Land Subdivision ? Do these Numbers Add Up?

We are looking at doing a sub division in Perth and running the numbers on this block (this is a sample, as part of our research):

http://www.realestate.com.au/property-residential+land-wa-maddington-200829387

Our Cost Estimates are as follows:
Purchase price of block of land $899,000

Costs to bring the land to a saleable condition

Stamp Duty (Based on Purchase Price) $40,000
Subdivision Costs $200,000
Selling Fees $60,000
Interest (2 year holding costs) $142,000

Total Costs $442,000
Total Cash Outlay $ 1,341,000
(This assumes a 20% cash deposit)
Sales proceeds 10@170k $1,700,000
Cash Profit $359,000
(Excluding Taxes)

Any ideas on anything we are missing? Thanks.

What have you included in the subdivision costs? A couple come to mind: sewer connection, power, contributions, drafting, DA, common land driveway, etc

mrdobalina said:

What have you included in the subdivision costs? A couple come to mind: sewer connection, power, contributions, drafting, DA, common land driveway, etc

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These costs: site costs, town planning permit, building permit, council fees, water corporation, subdivision costs, landscape (fencing), external plumbing and drainage, concreting, drainway, water tank, stormwater detention costs etc

These are the most difficult to estimate, conservatively we have $20,000 per block.

Also need to look into GST margin scheme, and it's impact.

Anything else we are missing?

One that comes to mind is bank fees for commercial loan, they can be very helfty?? Also, contingency plan... not sure but is this area Maddington.... clay soil prone? If so, I have been told add $30K for villa/unit.

How did you come up with the end of value of units/villas??? Also, curious are brand new units/villas selling quickly at the moment??

Mr. Wolf said:

These costs: site costs, town planning permit, building permit, council fees, water corporation, subdivision costs, landscape (fencing), external plumbing and drainage, concreting, drainway, water tank, stormwater detention costs etc

These are the most difficult to estimate, conservatively we have $20,000 per block.

Also need to look into GST margin scheme, and it's impact.

Anything else we are missing?

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It's showing as Under Offer?

So you just want to subdivide and sell off as land?

The blocks would be survey strata?

With a gross profit margin of around 20% I'd want to be definite on those prices before continuing. A 10% blow out could make it a very poor deal.

That is the type of deal where I'd want a Due Diligence Clause of 2-4 weeks to get those prices known before committing.

MTR said:

One that comes to mind is bank fees for commercial loan, they can be very helfty?? Also, contingency plan... not sure but is this area Maddington.... clay soil prone? If so, I have been told add $30K for villa/unit.

How did you come up with the end of value of units/villas??? Also, curious are brand new units/villas selling quickly at the moment??

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This is a land subdivision. Yes, we are aware that this area has clay - but I would assume the buyer would pay site costs when they purchase a block of land?

On bank fees, are this not in built in the rate, and how much are we talking about?

Mr. Wolf said:

On bank fees, are this not in built in the rate, and how much are we talking about?

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The bank costs are built into the rate. But commercial lending is a completely different beast to residential, and the rate depends on the risk profile of you to the bank. You'll probably need more than 20% deposit too.

I was looking at madddington a few months ago. I remember city of gosnells contributions were huge (around $105 per square metre. But that was for a R60 site, not sure if it is different for R30).

Heed MTR's advice about the end villa value. Potential buyers will work back from this to determine how much they are willing to pay for the block, factoring in building costs, site works, profit margin, etc.

Id also consider time to sell the blocks of land. Im not too sure if there would be a huge demand for sections that size in that area? i would have thought people could either find better locations to buy land to build or if they were interested in that area they might want to buy house and land complete rather than just the land alone. This might cause some delays in selling and interest costs could chew up profits pretty quickly.

have you had experience in subdividing first?id recommend starting with something easier first or getting help from someone with experience for a larger project.

It may look simple on the outside but there can be so many unforeseen costs in a project like this and like westminster says due diligence is very important to get end values right.

cheers

Oops... I misunderstood.

Your strategy is very high risk in Maddington IMO, you are trying to flog off land when there is already an oversupply, this area is price sensitive. It will take you one phone call to work this out and sales, plenty of land and house packages, hate that, have competition.

Strategy of subdividing and on selling land is a great strategy when you are buying in tightly held areas, where there is a high end value, and I am not necessarily talking about high end blue chip. Its about finding areas that are built up, relatively close proximity to city, great infrastructure, great schools and still affordable family friendly areas where people want to live. Buyers love new product, they want to build their dream home.

What makes this an ideal strategy in these areas is the fact when they hit the market there is no stock/no blocks available so every man and his dog is jumping to buy and prices continue to rise for vacant blocks.

The key is finding the areas and then knock yourself out trying to secure one of these gems, it takes time and effort and sometimes you have to pay a little more but if you can make 20-25% and it is low risk, then why not. Of course if there is more money to be made by building and you are in a position to finance the deal then you also have this option, I like both to help improve turnover.

Cheers
MTR

Also its most likely possible to get 12 or 13 lots from that block.
But you would want to check that there is demand for this smaller land component.

Another idea is to stage it and build yourself and sell like that. Might be easier to sell with more profit that way.

Cheers

I have to say the margins look too slim for a land subdivision.

A few comments:

• Subdivision costs look too low you have 10 lots you'll be to provide full contribution for power upgrades, common area storm water, retaining, fencing, drives etc.
• There is no contingency in your feasibility, which suggests you know confident on all the price variables
• A quick looks on realestate.com.au shows a vast amount of land supply.

To consider this I would want to see firm cost numbers, low end sale values, a large selling budget to put all the blocks away faster than the competition and a fat profit margin to justify the higher risk (30%+).

Agree with MTR &HD_ACE.

Maddington-Kenwick areas has lots of land. It would be tough to sell land. If you build a few at a time, you may make profit. But interest costs could kill the profits.

What about subdividing a few lots of land and selling them first? The overall costs may be higher. I am just thinking aloud, don't know much.

Have you participated in similar subdivisions? Have any idea about council costs etc?

Thank you everyone for your comments.

Initially we were looking at a development and subdivision seemed favourable but looking at our numbers and demand/supply in Maddington we would struggle to make money. Also, we don't have experience in land sub division.

Can any one recommend a buyers agent in Perth?

Margins too small - aim for 25%+ on paper.

Mr. Wolf said:

Thank you everyone for your comments.

Initially we were looking at a development and subdivision seemed favourable but looking at our numbers and demand/supply in Maddington we would struggle to make money. Also, we don't have experience in land sub division.

Can any one recommend a buyers agent in Perth?

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Yes. Pm for details.

Cheers