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=
$288K
$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.

How to Make Money with No Money in Property by Spotting

Today I drove to a potential development site- it's an approved subdivision which the bank has reclaimed through foreclosure. It requires almost $1,000,000 in contributions to the government and the asking price is $2 million. That's alot of money!

Wait, don't you have to have $3 million to make money from this deal? Don't you have to qualify for $3m of financing? The interest payments on that would be unbelievable!

The answer is NO!

If you wanted to do this development yourself those obstacles would be overcomable, but for the beginning entrepreneur with alot of heart and not the financial wealth to take on a big project like this, there is a much better way to make money which goes by the name of bird dogging, scouting or spotting.

It works like this: you find a potential deal, verify that it is a good deal and let a much more experienced and wealthy developer do the work for the bulk of the profit. Why would you be willing to let so much potential money go? Well what do you think of a quick $30,000? What about $50,000? More? This sort of cash is normal in spotting fees for this size development.

Spotting is a great strategy if you have enough knowledge to know what is a good deal, but not the knowledge or money to pull it off yourself. You may even find a developer willing to show you the ropes in exchange for a smaller spotter's fee, which is worth it in the long run. And they may be willing to fund your future developments.

These sort of deals aren't available everywhere, they suit markets where the population is growing, or for some other reason the demand for new housing is increasing. But they are out there.

While you might not be the biggest fish in the pond, you connect a developer with a deal, they reward you, and then provide housing to people who reward them. It's a win win win! You and the developer make money and people get quality housing! Best of all you get your spotter's fee up front which means you can make some quick money.