$640,000 Profit in 4 months | Analyzing The Otara Development Deal That Sold for $2.1mil

Leverage Addicts Case Study

Entrance Cost: $1,460,000
Completion Value: $2,100,000
Entrance Cost: 40%
Margin for Developer:17.5%

A story blew up recently, where 2 Otara properties that were bought for $1.46 million, 5 months ago were sold to a developer for $2.1 million. 

Otara is now a recent member of the million dollar club and the group at Leverage Addicts are looking to dissect the development plan and the initial deal to determine who got the best outcome.

Purchase and Plan

When it comes to purchasing a development site, there are 3 major factors to consider. Whether it is a flat site, whether it is on a floodplain, as this can change the soil and foundations and whether or not you have stormwater and wastewater. 

 

This property has a few issues. There is a manhole, but it is on another property’s site, which could be a problem. 

The developer’s plan is to put 12 units on the site. Half of them are elevated on piles due to the floodplain soil situation. 10 of these units will be 2 storeys high, whereas 2 will be a single storey, owing to rules regarding allowable height in relation to boundary. 

The 2 storey units will be 3 bedroom and 95sqm large, whilst the single storey buildings will be 2 bedrooms and 60sqm. 

The developer bought this property for $2.1 million and we will go into the figures a little now. We expect that they may landbank this opportunity for 18 months or so. During this time, they will likely receive $600pw from the 2 existing buildings from rent as income. 

Financing

Bear in mind that these following figures are on the lowest building costs for the 12 property development. 

Cost per m2 for construction should be around $2,300 GST inclusive, meaning that for construction alone, each 2 storey unit will cost $218k and the single storey units $138k.

The site work is tipped to be one of the more expensive factors. Piles alone are $5k and at least 50 need to be budgeted. Infrastructure, such as a drain bridge over the wastewater will likely be necessary. Perhaps a budget of about $130k per unit is a realistic figure to work with. This is in addition to construction costs.

There are some considerations that could save on these expenses. Perhaps the developer has ongoing mutually beneficial relationships with architects and builders that they have used in the past. They may save costs this way, or by having such skills themselves. 

Typical second-tier lending fees and a 70% mortgage has been applied. 

A crude valuation based on recent sales in the area saw that a 3 bedroom Otara property was selling for $650k each and 2 bedrooms about $580k. 

This would suggest that the total sale price of the development would reach around $7.5million.

Results

Compare these numbers with the initial purchase and flip. The property was bought for $1.46 million and held for about 5 months to be sold for $2.1 million. 

Add holding fees, architectural fees and GST, this investor made a net profit of $315k. There was a margin of about 40%. Even if it was purchased on 100% finance, you are still looking at a 30% margin. 

In contrast, the margin for the developer before agent fee is a relatively low 17.5%. For any successful development, you should be looking at around 25%. Not only does a development come with inherent risks in general, with such low profit margins, this is not a deal that anyone from mortgagehq would consider. 

Do keep in mind that the developer may have their finger in several industries that will reduce their costs and increase profit margins, so watch this space!

But to conclude, we believe the real winner of the day was the individual who bought this property a few months ago and flipped it for a fantastic, stress-free profit. 

Links and Resources

  • Check out the conversation here, where Blandon goes through and explains the numbers, guiding his students to ask questions and draw conclusions.  
  • If you have any questions about this deal, or any investment or development idea that you have, do get in touch with the team at mhq.co.nz

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