What’s a joint property development venture with a land owner? Australia’s Billion Dollar Property Developer, Bob Andersen discusses.
Hi, Bob Andersen. Welcome back.
Now when it comes to making great amounts of money, there’s no property strategy that comes anywhere near property development. The good news is – when it comes to financing property development projects, the bank puts in most of the money.
But you need to put in some money up front and we call that equity. Now typically on a commercial-type transaction or commercial finance, you’ll have to put in about 25% of the costs, up front, and the bank puts in the balance. Now the good news is, even if you don’t have that 25% equity upfront, there are a range of strategies that go towards supplying part of that 25% or even all of it, and I’m going to take you through some of those strategies.
JOINT VENTURE WITH A LAND OWNER
The first one I’m going to talk to you about is what I call a ‘joint venture with a land owner’. Imagine that there is lots of land out there that has development potential. Now the problem is, it’s usually owner by people who aren’t developers. So when they come to want cash, what do they do? They sell it. And who do they sell it to? A property developer! Now from their point of view, they often get a bit cranky because they’re giving away a lot of future profit but they don’t have a choice because they don’t know what to do. And remember the 2 key ingredients of a property developer are: Knowledge and money.
And I can tell you that the one that is in short supply is knowledge! It’s not money, not once you get involved in property development. So an opportunity exists for you to do a type of joint venture with land owners who own development land. Now there are a couple of prerequisites to make this work. First of all, there needs to be either little or no debt on the land. This is important because what you’re going to do here is you’re actually going to use the equity that is in the land (if you like the land owners equity in fact) to supply the equity in the development.
So let’s look at it like this. Let’s just say there’s an opportunity there to talk to a land owner. There is little or no debt on the land. Now what the land owner will get out of this is he will get his land value, although they would have to wait for a little while, and he will get a chunk of the profits. How much? Well it depends on how much you negotiate. Typically it might be 50% of the profits.
Now this is how it works. The land owner comes into the deal with you. They put up the land as equity, as security if you like, to the bank and that supplies the 25% equity. The bank takes security over that through what we call a “Third Party Mortgage’ . So you can actually put that property up for security even though you don’t own it, but you have to do it with permission from the owner. Now with that security in place, the bank then lends the rest of the money to fully develop the property.
Now at the end when it’s finished and you start selling down the property – that could be vacant blocks of land, it could be townhouses or it could be apartments – as the settlements come in, first of all the bank (the financier) will take their money up front. Then the next money to come in from the settlements will go to the land owner and pay for the land… so they’re getting paid for their land at the end. And the next chunk of money that comes out is the profit. And that profit is then distributed between yourself and the land owner.
So let’s just say you’re going 50/50 in the profits, so it’s a good deal for the landowner, they get their full land value on valuation, but at the end of the project they get 50% of the profits. That’s a big upside for the land owner and a good incentive for them to want to get involved. For you, the entrepreneurial developer, you get 50% of the profits but you haven’t had to put any money it. It’s fully funded without having to use one cent of your own money. So it’s a good deal for you.
So that’s what I call a little or no money down deal. It could be a NO money down deal if the land is owned without debt. It’s a great strategy and I like it and it’s not even my favourite one. I’m going to cover that with you in my next edition. So get out there, start tracking down land owners and start negotiating.