01 Jul How to turn $600,000 into $50,000 in under 6 months
Ha! I bet you think that is a misprint. You thought I had this wizz bang new strategy (other than robbing a bank) to turn $50,000 into $600,000 fast. Well, it’s not a misprint.
Now, I know you could probably manage to achieve that with a week-long binge in Vegas but I’m talking about using a proven property strategy that I’ve used and maybe you have too. So, how could it all go so wrong?
It’s not a secret that getting a development approval on land can, and should, add value. But does it always add value? Some people think so, like the non-developer mums and dads who stumble through getting a DA on their property before putting it to market because “it’s going to be worth bucket loads more, maybe as long as a telephone number”.
What’s even worse is some of the equally clueless agents who get behind it and market it. In fairness, that’s not their strong suit. They’re just there to sell – and buyer beware.
By way of example, I was offered an ‘opportunity’ by a local real estate agent last year on a site that had a development approval for 6 townhouses. It looked well priced at $800,000. Typically I would have expected it to be around $850,000 – $900,000 so it got my interest.
It had quite a respectable renovated home that should pull $600,000 as a house.
When investigating a site with a DA I immediately go to the plans. This is where the truth comes out. In this case, there was plenty to see.
Firstly it was on a four-lane road. That could require anywhere between 5% and 10% to come off the sale price. I’m losing interest. I don’t like busy roads. Unless there are 60,000 cars a day passing and I can erect and lease a big advertising sign in the front yard. Done that before.
Then there was the slope. It ran down from the road 4 meters in a diagonal direction. Building on slopes costs money but the real issue here is getting a connection for the stormwater and sewerage seeing it won’t flow uphill to the street.
The solution was for the design to build a huge suspended concrete slab at street level to erect some of the townhouses on.
At the risk of boring you, there were plenty of other issues including earthworks, retaining walls, and a weird split level design with the garage on the first level (above the living area). The result? A very high build cost.
If a build is really complex and costs a lot more you won’t get any of it back at the sale price. It has to come off the land price upfront. If it costs $100,000 more per townhouse to build, you have to take it off the land price.
Such was the case here. I ran a feasibility set at a 20% margin (profit as a % of total costs) and guess what the land value came in at? You guessed it, $50,000.
So, here we have a mum and dad owner who goes to an architect and says “Squeeze as much as you can on here, I’m going to make a fortune when I sell it”.
What they did is start out with a $600,000 house, spend $35,000 getting a DA, made it worth $50,000 then tried to sell it for $800,000.
Crazy I know. But I’ve seen uneducated ‘wood ducks’ buy this stuff. I’ve seen sites with a DA produce negative values. At the end of the day, it’s always back to “highest and best use”. In this case a $600,000 house.
There are really only 3 choices:
- Do nothing (still better than number 3).
- Learn how to do property development and feasibilities properly (preferred).
- Risk becoming a wood duck (please don’t, they don’t even taste any good).
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