You've done it.
You've found a development site.
The feasibility stacks up.
It sounds like the vendor will accept your offer.
All of a sudden "stuff" gets real (Property Pulse is G rated!).
Up until now you've been so focused on finding a deal that works, you probably haven't spent much time thinking about what things you need in place in order to make an offer.
So let's take a look at the whole picture.
Basically, it all comes down to 4 things:
Now, right upfront l want to be clear - seek your own professional advice about everything I'm about to say, as I am simply sharing some general pointers about the things you need to think about. I am not giving advice.
Your Exit Strategy
If you've been following me for a while, then you've probably heard me talk about a 5 year Action Plan. As part of that, you work out what type of deal you need to do and when.
As our scenario is that you've found a deal, I'm going to assume that it fits your Action Plan. So it will boil down to 2 outcomes - you're going to subdivide the property into land lots, or you're going to build at least one structure, probably more.
The other part of your exit strategy that you need to know is whether you're planning to keep or sell the end product. This is important, because keeping something longer term may require a different holding structure to a project you're planning to sell.
It's also important to know at which point in the development process you're planning to sell, if that's your exit strategy. As soon as you get the DA? After the civil works are done? After you've built the project?
Knowing your Exit Strategy then flows into...
Your Funding Strategy
If you're ready to make an offer, then I'm going to assume you've already spoken to a mortgage broker about your serviceability status. Please say "yes, Rob, I have done this", as you really don't want to make an offer only to find out you can't get the loan you expected.
When it comes to funding a deal, there are 3 main parts:
You need to already have mapped out in your head how you're going to cover each of those parts. It may be that you have a thumping big line of credit and can cover everything yourself with cash. Great!
But if you don't, then breaking the funding down into components, followed by working out how to fund each one and what that's going to cost you, is vital. You might even want to revisit your development feasibility at this point.
Knowing your exit strategy helps you decide whether you need residential or commercial funding. This in turn affects how much deposit you're going to need - which may change how you fund the deposit.
As another example, if your strategy is to buy, build and hold, then getting private money is going to be expensive as it potentially needs to stay in the deal for a couple of years. Also, you need to plan how you will refinance that money out of the deal down the track, as you won't have funds coming back through sales.
Both your exit strategy and your funding strategy then feed into...
Your Choice of Structure
The next part of the puzzle is determining the structure you need to use for your offer. There's lots of them available, but they fall into 3 major categories:
This is definitely an area where professional advice is important, although I'm warning you now - your lawyer will give you advice directed towards asset protection, whereas your accountant will give you advice to minimise tax. And often those two points of view give different answers!
So you need to know which is a priority for you, with the answer likely to depend on where you are up to in your 5 year Action Plan.
It will also depend on your exit strategy, as holding stock long term is likely to require a different approach to develop and sell.
Funding also plays into your choice, as depending on what type and level of funds you need, one type of structure may make the process easier to get the result you want.
Once you have the first three elements in place, you need to think about...
Your Acquisition Model
At this point you also need to think about the vendor's needs, as well as your own. There are lots of different ways to acquire property development sites, many of which I've covered in other articles, particularly ones about No Money Down Deals.
But once you've sorted out all the "stuff" that is best suited to you as the buyer, start to factor in the vendor's requirements.
For example, if they need a quick settlement because they're already committed to another property, then it makes no sense to try and negotiate an option contract or a delayed settlement. It's just not going to work for them.
I could go on, but hopefully you get the idea.
There, that wasn't so hard, was it? The good news is that a lot of the above preparation doesn't need to be squeezed into a few minutes of time before making the written offer. You can do all the necessary research and preparation in advance (including consulting professionals for advice!), and just tweak the final bits and pieces in order to make the offer.
Then you can sit back and relax, because all that's left is to complete the property development process. Oh...
You've found a development site.
The feasibility stacks up.
It sounds like the vendor will accept your offer.
All of a sudden "stuff" gets real (Property Pulse is G rated!).
Up until now you've been so focused on finding a deal that works, you probably haven't spent much time thinking about what things you need in place in order to make an offer.
So let's take a look at the whole picture.
Basically, it all comes down to 4 things:
- what is your exit strategy?
- how are you going to fund the deal?
- what structure should you use for purchasing?
- what legal documents are needed to purchase the deal?
Now, right upfront l want to be clear - seek your own professional advice about everything I'm about to say, as I am simply sharing some general pointers about the things you need to think about. I am not giving advice.
Your Exit Strategy
If you've been following me for a while, then you've probably heard me talk about a 5 year Action Plan. As part of that, you work out what type of deal you need to do and when.
As our scenario is that you've found a deal, I'm going to assume that it fits your Action Plan. So it will boil down to 2 outcomes - you're going to subdivide the property into land lots, or you're going to build at least one structure, probably more.
The other part of your exit strategy that you need to know is whether you're planning to keep or sell the end product. This is important, because keeping something longer term may require a different holding structure to a project you're planning to sell.
It's also important to know at which point in the development process you're planning to sell, if that's your exit strategy. As soon as you get the DA? After the civil works are done? After you've built the project?
Knowing your Exit Strategy then flows into...
Your Funding Strategy
If you're ready to make an offer, then I'm going to assume you've already spoken to a mortgage broker about your serviceability status. Please say "yes, Rob, I have done this", as you really don't want to make an offer only to find out you can't get the loan you expected.
When it comes to funding a deal, there are 3 main parts:
- deposit
- serviceability
- equity to run the deal
You need to already have mapped out in your head how you're going to cover each of those parts. It may be that you have a thumping big line of credit and can cover everything yourself with cash. Great!
But if you don't, then breaking the funding down into components, followed by working out how to fund each one and what that's going to cost you, is vital. You might even want to revisit your development feasibility at this point.Knowing your exit strategy helps you decide whether you need residential or commercial funding. This in turn affects how much deposit you're going to need - which may change how you fund the deposit.
As another example, if your strategy is to buy, build and hold, then getting private money is going to be expensive as it potentially needs to stay in the deal for a couple of years. Also, you need to plan how you will refinance that money out of the deal down the track, as you won't have funds coming back through sales.
Both your exit strategy and your funding strategy then feed into...
Your Choice of Structure
The next part of the puzzle is determining the structure you need to use for your offer. There's lots of them available, but they fall into 3 major categories:
- individual/joint names
- a company
- a trust structure
This is definitely an area where professional advice is important, although I'm warning you now - your lawyer will give you advice directed towards asset protection, whereas your accountant will give you advice to minimise tax. And often those two points of view give different answers!
So you need to know which is a priority for you, with the answer likely to depend on where you are up to in your 5 year Action Plan.
It will also depend on your exit strategy, as holding stock long term is likely to require a different approach to develop and sell.
Funding also plays into your choice, as depending on what type and level of funds you need, one type of structure may make the process easier to get the result you want.
Once you have the first three elements in place, you need to think about...
Your Acquisition Model
At this point you also need to think about the vendor's needs, as well as your own. There are lots of different ways to acquire property development sites, many of which I've covered in other articles, particularly ones about No Money Down Deals.
But once you've sorted out all the "stuff" that is best suited to you as the buyer, start to factor in the vendor's requirements.
For example, if they need a quick settlement because they're already committed to another property, then it makes no sense to try and negotiate an option contract or a delayed settlement. It's just not going to work for them.
I could go on, but hopefully you get the idea.
There, that wasn't so hard, was it? The good news is that a lot of the above preparation doesn't need to be squeezed into a few minutes of time before making the written offer. You can do all the necessary research and preparation in advance (including consulting professionals for advice!), and just tweak the final bits and pieces in order to make the offer.
Then you can sit back and relax, because all that's left is to complete the property development process. Oh...
