A week or so ago, two real estate agents put deals in front of me that they thought would be great purchases. These aren't just any agents - these are agents in my network whom I know and trust, and on face value, these deals looked good.
Both of them were "all the hard work's been done" deals - properties that are being sold with Resource Consent and Building Consent already granted. Sounds awesome! So easy! So many costs already paid and out of the way! A newbie-developer's dream, really!
More like a nightmare.
The first property was an off-market deal, a piece of land in the lovely Green Bay area that came with RC and BC to build 2 large houses. The price the vendor wanted was about $1million - $500,000 per section. Sounds reasonable, right?
Usually with a property like this we would complete Options Analysis to determine what you could do on the site (what's feasible) and what you SHOULD do on the site (what the profit projections for each might be - which is the best financial option). However many thousands of dollars had already been invested into planning and consenting, so I just modelled up the one option.
To develop this property as consented would cost you $119,000-300,000* more than the end values of the properties once completed. That's an average LOSS of 10%.
* if you're wondering about the range - it's because we always project property resale values using a 'likely' figure and an 'optimistic' figure - we like to hope for the best, but we always bank on the worst.
The second property was a mortgagee sale in Te Atatu South, so I worked on a very low purchase price of $750,000. This property had RC and BC to build 4 spacious homes, all 3-storey duplexes with a floor area of between 192-236m² for each. Beautiful homes, but overkill for this area in the current market. The same agent gave me resale appraisals of the consented plans, which I used in my cost-to-completion.
To develop this property as consented would cost you $400,000-620,000 more than the end values of the properties once completed. That's an average LOSS of 15%.
To put that another way, instead of spending the money building these 4 properties, you could go out and spend the same money to buy 5 properties, and be better off.
There really is safety in numbers, as long as you have the right numbers from the start.
If you have a site and you'd like an Options Analysis report, you can order this through the wonderful team at Gilligan Rowe and Associates. If you'd like Pathfinder Property to help you find a site that's actually going to make you money, then feel free to get in touch.