03 Jun Bob’s Time-Saving Feaso Hack!
I’m often asked the question, “Hey Bob, do you have a thumb rule for doing this or that?” It seems everyone loves a thumb rule. With that in mind, I want to show you a ‘feaso hack’ technique I use to see if a deal is likely to stack up before I go to the trouble of doing a detailed feasibility.
As you would expect, we spend a lot of time with our mentoring students doing due diligence on sites, part of which is crunching the numbers (performing a financial feasibility analysis if you’re talking to a valuer or financier).
On plenty of occasions, particularly early in their education, we get the students to put up the base numbers to start to put together the feasibility. There are three base numbers – land (site) value, construction cost, and GRV (gross realisation value or sale price). These are the big numbers that have the largest effect on the feasibility. Just land and construction can easily make up 80%+ of all the costs. So, for all you lovers of mathematics and ‘time saving techniques’, read on. For others go slow, read it a few times and the penny will drop.
What we need to know is:
Site value (asking price, agent’s indication, buyer’s expectation)
GRV (sales price based on recent sales, agent feedback etc)
Build cost (square metre rate, builder’s estimate)
Profit (based on a 20% margin on cost deal, equals 16.67% of GRV)
By way of explanation, I will use a real-life example of a deal that was put up last week. The student was looking at a duplex site to demolish the existing house and build two new duplex units. I asked the student to supply the GRV from their research. The answer was (2 x $1,300,000) $2,600,000. We knew the asking price of the land was $1,100,000 and we both knew the build price was (2 x $500,000) $1,000,000 +GST based on recent conversations with builders.
You would know this formula – GRV = TDC + Profit (sale price = total development cost + profit).
Therefore TDC = GRV – Profit.
TDC = $2,700,000 – $433,000 = $2,267,000
The two big cost items (land and construction) are
Land + stamp duty $1,150,000
Build cost +5% contingency $1,050,000
Now deduct that from the TDC $2,267,000
That $67,000 must cover consultant fees, council fees, finance costs, marketing, GST, and a bunch of smaller costs. Clearly, it is a long way short. Even the finance alone would eat up way more than that.
So here it is again in simple terms. Multiply the GRV by 83.33%. From that deduct the land + stamp duty and the build cost + 5% contingency. That would take about a minute. Then see what is left to cover all the other costs. If it is way short you either walk away, or contemplate a combination of these – check if your GRV is low and how negotiable is the land price, and if you and the financier are ok with a lower return on cost.
This one-minute ‘feaso hack’ can save you a heap of time.
Any questions, please email firstname.lastname@example.org