Thursday, May 28, 2009

What to Beware of when Making Money spotting in Property

One thing to be aware of when spotting or doing any property transaction is that the profit is not all ready calculated into the price.

Often, when owners or agents become aware that their property has "development potential" the price instantly skyrockets so that any money from a future development goes to them in the purchase price.

For example, the deal I am currently working on- the expected sales turnover of the 29 lots is about $4 million. Take out of that

$3 million purchase price and contributions
$200,000 agents commissions (if selling via agents and not through own marketing)
PLUS marketing fees
Plus interest capitilising at $16K a month * 18 months=
$70000 transfer tax/stamp duty
Possible $400K tax- still working out tax implications
Plus legal fees

Anyway from these numbers you can see that from these calculations there's almost no money in this deal. Ideally you want a $500,000 profit at least which gives plenty of cushion money for turns in the market and other unexpected happenings. And, it gives the developer a reason to pay you a spotting fee! For this one to be worth it the purchase price would have to be brought down at least to $1.5 million- making aquisition cost $2.5 million. There are many people who only do transactions like this when there is a good one million dollars in it for them, which is a good way to go.

Land speculation and subdivision isn't the only instance where this happens, it also happens in inner city or high demand urban locations where the land can be developed, and in conversions from aparments to condos or strata titling.

All it means is that there are deals out there that are advertised as "Development Opportunities" which aren't good deals and won't make you any money. You still have to walk away from some, even when spotting. But there are also others out there that are worth it, and with a little negotiating you can come out a good $50,000 to $500,000 richer.

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