Property Development Contract Stage: What To Consider
What’s it like in the property development contract stage? Australia’s Billion Dollar Property Developer, Bob Andersen, shares what he knows.
Hi! Bob Andersen back again.
In the last video, we talked about locating a deal. We talked about one of the students that came up with a deal—a potential four townhouse project—and how quickly we jumped on it when we could see that the numbers were going to work.
Today, I’d like to take you through a little bit forward to the contract stage – the actual acquisition stage because that’s important as well.
WHAT IS REAL ESTATE CONTRACT LIKE IN DIFFERENT STATES OF AUSTRALIA?
Real estate contracts vary from state to state, and in each state, they have their own little quirks. In New South Wales, they got exchanges and in Queensland, you get straight to a contract with conditions. It’s a little bit different in every state and if you’re not familiar with how contracts work, then you need to be familiar. How can you buy property? It could be by auction, by tender, by private treaty, where it’s actually listed at a particular price, or could be by negotiation where there’s no price at all.
If you live in Melbourne, the “Auction Capital of Australia” where a lot of deals are done by auction, you have to get used to buying at auctions. If you’re going to do that, then you better do your due diligence early. You have to know exactly what those properties are worth — if it’s going to be any good for you — and set yourself a figure and not go past it. In the next video, I’ll take you more to the due diligence side of a deal, the sort of things we look for to make sure the deal is a deal. But today, I just want to talk more about the contractual side.
FOUR TOWNHOUSE PROJECT CASE STUDY
In this particular case — I’m referring to this four townhouse project — it was a situation where the owner of the property is about to list it at a particular price.
The owner took an advice, had a look at other sales in the area, and came out with a figure. That particular figure happens to be $750,000.
As I said, I did my numbers, my five-minute fees, I did it based on that number and a bit more detailed due diligence to decide if the deal is a deal. The next day, I proceeded straight to a contract. The market was a bit hot and I didn’t want to let it sit around. I wanted to jump on this deal. So my student got the contract in front of the owner and the seller very quickly before the property actually and officially hit the market.
This particular project happens to be in Queensland, where I live, so we can go straight to a contract with conditions.
WHAT ARE THE CONDITIONS SHOULD BE PUT ON THE PROPERTY CONTRACT?
There are a few conditions I wanted to put on this contract.
First of all, I want to do a due diligence clause in there. I chose a due diligence clause of 14 days.
What does that mean?
That means that the contract is subject to satisfactory due diligence. Satisfactory on my behalf, that I’ve done the due diligence that I want, that things are coming up trumps, and I want to proceed on that basis.
I wanted fourteen days to do that. Do I need 14 days?
No. I can do due diligence in a matter of hours unless there’s something particularly quirky about a particular site where I might need to take advice from someone like an engineer. For a normal situation, I can do due diligence quite fast. I want to give myself that time just to really dig deep.
Also, I made it subject to finance.
In other words, I added a further 21-day finance at the end of the due diligence period. The situation is to sign the contract, which is subject to 14-day due diligence. If everything comes up trumps on that 14 days—due diligence, we’re going to a 21- day finance clause for me to arrange the finance.
WHAT IS THE LENGTH OF THE CONTRACT DID I ACTUALLY GET IN THE CASE STUDY?
I actually got a longer contract on this. I actually got a 19-day contract. Part of the reason was that we didn’t argue about the price and we didn’t try to negotiate. I thought it’s going to just work at 75, and I want this deal. I don’t want to be bogged down in a hot market talking about dollars and cents, and then somebody else will come and end up buying so I took it at full price.
The owner of the property knew that I was selling a potential development site. In fact, the house that we’re sitting on was a bit of a shocker. The $750,000 I was paying for the site wasn’t house value. It was what it was worth as a potential development site. I knew that, and I was prepared to pay that sort of money. I needed a finance clause to know that I could go to the bank and get the finance done and settle in 19 days.
Part of the reason for the 90 days as well is that I could proceed and get started on the development application before I even settle on the land — that helps with holding costs.
I also had another clause for access because I needed access for this particular property. As it turned out, this was a rental, so the owner of the land was renting it out. But I need access, I need to go in the site with the town planner and the architect. I need to get a surveyor in there to survey so I can proceed with the development application before I even settle on the land.
Simply, an access clause is one that gives you permission to enter the site.
WHAT IS A RETAIL LOAN IN PROPERTY DEVELOPMENT?
In this particular case, the sort of finance I’m going to get is what we call a retail loan. Technically, I wasn’t buying a development site, because as far as banks are concerned, it’s not technically a development site until you have a development approval or development permit.
At this point, I was just buying an investment property. It’s basically a pretty shabby old house with a development potential on a block of land. But because it had no development approval, the banks just consider it an investment, if you heard guys paying over the odds for an old investment. That’s just a normal investment loan, a simple eighty-twenty line or whatever happens to come out of it, depending on the valuation. I’ll cover finance in more detail in a future video.
So the property is under a 90-day contract, 14-day due diligence followed by a 21-day finance, access to let me onsite, and so I was able to wrap up the finance in that period and proceed to lodge the development application. I’ll go through that in more detail in coming videos.
Hope you’re enjoying this, it’s all about property development, but it’s also a great case study.