aenspire delivering developmentprofit.com

Now you know what you are selling the question becomes ‘when are you going to sell?’ There are three different stages of development when you can sell your subdivision down:

1. Pre-construction (Pre-sales)
2. During construction
3. Post-construction (Spec Building)

Pre-Construction (Pre-sales)

Obtaining sales before you start construction helps to de-risk your project. It validates your estimated sales prices and provides collateral to secure funding from a lender for construction. However, the longer the time between pre-selling and when you start construction the greater the risk of costs blowing out and you have sale prices you cannot deliver on (as profitably). In a rising construction market, due to increased demand and a shrinking amount of available resource (previously decimated by the last recession cycle), construction costs can accelerate rapidly. It is common for developers to get excited and sell out product early in the development cycle. Unfortunately, when they find out construction costs have escalated, the project may no longer be profitable enough to secure financing. They either must go back to purchasers for more money, or if that fails or is not a contractual option, cancel the development.

Where sales prices are continuously rising, the developer may find in retrospect they have undersold their product and not made as much profit as they could have. In a red hot market you might sell 20 homes out in one week, then have to wait six months for consents and to arrange contractors and funding and then another two years to complete construction. If the market continues to rise, you could have made more money by staggering sales throughout the development period.

The flipside is you may not want to miss the market and have product left unsold once construction is complete. If prices stay flat or go down then you are in a better position by having your product pre-sold. However, if the market continues to deteriorate and the value of the home becomes less than what purchasers paid you will start to see settlement risk. This is when purchasers are no longer willing or in a position to obtain their own funding when the time comes to settle. If the value difference is greater than the deposit held then this puts the developer’s profit at risk.

So there are positives and negatives to presales. Nevertheless, the ‘pre-sell or not?’ question is often one the developer has no control over anyway. An external lender may require pre-sales before advancing construction funds. Therefore, without pre-sales there is no project. For example, in the middle of a rising market the lender may require 50% of the sections or houses pre-sold. So the developer works as quickly as possible to secure those pre-sales so they can tie up financing and contract with a builder to commence construction. Only once pre-sale numbers are satisfied does the developer have the option to consider whether to pre-sell the remaining product or sell it down during construction or hold it until construction is complete.

Experience shows that after a prolonged rising market where lenders become increasingly nervous, or at the start of a rising market where the pain of the last downturn still hurts, then lenders may require an even higher pre-sale percentage. The requirement can be as high as 120% of the amount borrowed. That means the developer must achieve enough pre-sales to cover the entire loan amount — this could be 80% or more of your sections or homes.

Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com

You can create additional income by selling upgrades or optional extras with your sections or homes. It may be all your competitors are doing this and you must provide optional extras in order to compete, or no one else is doing it and this is your point of difference. You can offer just a few upgrades to add interest to your sales and marketing or a whole household menu of items. The extreme example is where every home is customised to the individual purchaser such as when you provide full interior design services.

What you offer as an upgrade means you are not providing it as part of your standard base product pricing, so this needs consideration in light of your competition and target market. Your buyers may consider some upgrades as necessary items and view an upgrade as cheapening the base product. For example, while offering a tile upgrade to vinyl flooring in the bathroom may be reasonable for affordable housing, it would be ridiculous to have vinyl as standard for luxury homes.

 Upgrades and optional extras to your sections and various house features are only limited by your imagination and the vast amount of products available. Here are some ideas:

Sections

• Fencing packages.
• Taking grassed building footprints to foundation ready with hard-fill and retaining.
• Driveway crossings.
• Adding additional services like gas (assuming the main trunk gas line is installed).
• Irrigation.
• Section contouring and landscaping.
• Retaining wall upgrades (from timber pole to crib wall or stone).

House Structural, Services & Design

• Room conversions like adding a bathroom, extending a toilet to include a shower or turning a second living into a bedroom.
• Adding a kitchen island, extending benchtop.
• Skylights.
• Upgrading sliding doors to French doors or bi-folds.
• Adding electrical and data points.
• Electrical upgrade to gas water/cooking.
• Underfloor heating.
• Heat pumps/air-conditioning/fireplace.
• Air pressurisation ventilation systems.
• Burglar alarms and intercoms.
• Sound system wiring.

House Finishes & Fittings

• Hardwired appliance upgrades (dishwasher, oven, range-hood).
• Appliance packages (fridge, washing machine, dryer).
• European (or more luxurious) kitchen and bathroom fittings.
• Feature lighting.
• Feature kitchen tapware.
• Rainwater shower head.
• Tiling material upgrades.
• Tiling from floor only to floor and wall.
• Kitchen and bathroom benchtop upgrades (laminate to engineered stone to granite to marble).
• Carpet weight or quality upgrade (from 20oz to 32oz, from synthetic to wool).
• Wardrobe organisers.
• Garage storage systems.
• Garage marine grade carpet.

Home Furnishings

• Curtains and blinds.
• Custom furniture packages (beds, sofas, tables, chairs).
• Custom built-in cabinetry.

External House Works

• Decking and paving.
• Pergolas and sun shades.
• Clotheslines.
• Security lighting.
• Video surveillance.
• Utility sheds.
• Swimming pool or spa.
• Green waste systems.
• Letterboxes.
• Landscaping packages.

While it is all very well to offer a vast menu of extras to buyers, they do present delivery complications. Product selection needs to be confirmed before the house reaches the relevant stage of construction. Confirming upgrades during the pre-sale stage allows you to add them into construction contract negotiations. However, once construction has started you will need cut-off dates for when upgrades can still be accommodated that don’t delay the construction programme. Items such as tiles can have long lead times so the cut-off date may have to be many months before installation.

Managing the delivery of numerous extras requires additional resource and systems from agent, developer and contractor. You may already be offering different colour options, and integrating additional upgrades can get complex. If your project has multiple house designs, an option may require different pricing based on each design. For example, upgrading the carpet requires each house type to be measured. Adding a room may be simple in one house type, but require structural changes in another. Some extras may require design changes by the architect or other consultants or even a revised building consent, increasing the cost and taxing management resource further. Without a dependable communication process (from buyer to agent to developer to project manager to designer to contractor to subcontractor to supplier to manufacturer), mistakes will be made. Resolving the mistake later (like adding a wall) can easily affect the critical path and cause rework with additional cost.

For those reasons you have to charge a high margin to the purchaser, on top of the contractor’s margin, to justify providing upgrades and extras in the first place. When the real cost is promoted it may look very expensive to purchasers and deter them from upgrading.

Offering supplementary upgrade services beyond physically altering your product is a further option. Consider financial products by establishing relationships with funders and mortgage brokers. You could also provide post completion management services. If you convince suppliers that you are presenting them with a captive market and purchasers in bulk you should be able to secure some favourable deals. These can include:

• Lower interest rates (bank promotion for the development as opposed to the developer buying a lower rate for buyers, effectively hiding the cost in the purchase price).
• Low deposit bonding.
• Discounted property insurance.
• Advanced financial engineering products such as rent-to-own schemes and equity share.
• Property management and letting.
• Property and landscape maintenance.
• Long term home warranties or new build insurance (if not already provided by builder).
• Utility service agreements (i.e. you become the retailer to the home buyer by securing a distribution agreement with a wholesaler that allows you to take a margin).

Upgrades can equip you with negotiation ammunition in a softening market. You can throw in some extras when negotiating one on one with buyers or even convert some of your upgrades into your standard offering without decreasing your purchase price. Of course this will hit your bottom line profit but it will provide greater psychological value preservation (to potential buyers) than dropping prices or offering gimmicks like a ‘free holiday to a tropical island’.

Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com

This section looks past the obvious and describes potential strategies for what you are selling. The discussion looks at whether you are selling land (and in what form), or land and houses. We also look at what optional extras you can upsell with your house or section to set yourself apart and increase profit.

Selling Land, or Selling Land and Houses?

Selling individual homes on their own section is the standard house and land sales package. You are the developer from start to finish, creating the subdivision from a piece of undeveloped land and handing over the keys to finished homes to individual purchasers. However, you can sell down your project at any time throughout the development process. When markets change, your original strategy to sell complete house and land packages may have to evolve. What you are selling depends on your risk appetite, what is more profitable in the current market, your current cash flow and financial position and what resources you have to manage the project.

Options, in ascending order of how far your development has progressed, include:

• On-sell your site, as is. When land is appreciating quickly it can be tempting to just sell your site for a profit and move onto the next project.[1]
• Sell the subdivision as bare land with planning and infrastructure approved to another developer to undertake remaining design and construction works. You have added value by gaining the approvals but do not wish to take on construction or product sales risk.
• Sell large blocks of contiguous land that can be further subdivided — commonly called super-lots — to other developer/builders. You complete the civil construction and subdivision works to a certain level with main trunk services and infrastructure in place. Super-lots are created with their own title. The purchasing developer/builder further subdivides the super-lot into individual sections, extends infrastructure and sells down the houses.
• Sell the entire completed subdivision of fully serviced individual sections to a house builder. The builder will in turn build homes on the sections and sell to individual purchasers. The builder does not carry the risk of subdivision and civil works, but carries sales and construction risk on the homes.
• Sell completed groups of fully serviced sections to different developer/builders. The builders will in turn build homes on the sections and sell to individual purchasers. Effectively this is selling super-lots, the difference being all the section works are complete and individual titles are issued.
• Sell completed individual sections, typically with all services ready for connection and the section fenced, to individuals who wish to build their own home.
• Sell completed ‘turnkey’ house and land packages.

Just to make it a little more perplexing, where you are selling land only, you can further breakdown the extent of planning approval, design and home building consent you provide to purchasers:

• No planning approval, no section design, no house design (the as-is hold and fold option).
• Conceptual subdivision design with no planning approval.
• Planning approval for the overall subdivision broken into stages or super-lots with no individual section or house design.
• Planning approval and infrastructure consent for the overall subdivision broken into stages or super-lots with no individual section or house design.
• Planning approval (with or without infrastructure consent) to individual section design, with no house design.
• Planning approval (with or without infrastructure consent) to individual section design, with a conceptual suite of house design options.
• Planning approval (with or without infrastructure consent) to individual section design, with a planning approved suite of house design options.
• Planning approval and infrastructure consent to individual section design with designed and planning approved houses.
• Planning approval and infrastructure consent to individual section design with fully designed, planning approved and building consent approved houses. This option means the buyer can start to build houses immediately.

If you already have secured purchasers but part way through need to change strategy on what you are selling, then you can on-sell those sales contracts (if your sale and purchase agreement is drafted correctly — more on that later). For example, say you sell 20 out of 30 house and land packages before you start civil infrastructure construction. During civil construction you run into funding issues and decide to sell the entire site once the subdivision is complete but prior to building any houses. Those first 20 sales will then be an attractive part of your sales offering to buyers as the purchasing developer/builder will only need to sell the remaining 10 houses.[2]

Let’s discuss selling land versus house and land in relation to profitability. It takes more resource and expertise to manage builders throughout the house construction phase. There are higher costs to fund, it takes longer and more can go wrong. So selling earlier in the process can be appealing but you are leaving profit on the table. Selling before civil works commences removes you from all construction risk, but of course whoever buys it will be paying you a price cognisant of the remaining risk they still must take on themselves. For some developers, contracting land, gaining consent and flipping the project is their business model. For others, the need to sell prior to building houses arises because of a change in circumstances, better opportunities elsewhere, inability to gain funding or lack of faith in making a larger profit by continuing with the project through to house completion. The bona fide house and land developer, buys raw land, builds all the civil infrastructure and houses and then hands over the keys to buyers, taking a healthy profit margin on everything along the way.

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[1] This is called flipping, not developing and the book for flipping raw land simply by holding for a period of time and then selling, would be very small!

[2] Consider the scenario though where the first 20 sales are under-priced in the current market — in that case they may have no value.

Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com

The listing agreement is the legal contract between real estate agent and developer. In many jurisdictions it is required by law before your project can be advertised by the real estate agent. There are three key points to negotiate on the listing agreement, commission, exclusivity and listing term.

Commission

Commission is the percentage of the sale value or the dollar amount you agree to pay the agent on a successful sale. The agent may offer to have a flat percentage fee, say 3%, or a graduated fee depending on the sale price, like 4% of the first $300,000 and 2.5% thereafter. If your market has co-broking arrangements then the fee may be higher (6%), split between agent and co-broking agents. A co-broking arrangement is where the agent markets to other agents to bring their ‘buyer’ clients to your project in return for a share of the commission. Commissions can be negotiated although the agent may have to confirm it with their agency’s corporate management and they may have internal restrictions on how far they are allowed to discount. Bear in mind though the idea is to sell your product at the best price in the best time and give the agent every incentive to do so. Until you are doing multiple projects and can leverage a volume relationship with agents it is recommended not to skimp on commission. You want the agent to focus on your product and not get diverted because they have other clients with better commission rates.

To help with your cash flow it is ideal to delay payment of all commission until settlement. However, to incentivise the agent, or even to get them involved in a market where they have other options, you may want to offer a portion of commission to be paid earlier. This can also be negotiated. A common arrangement is half is payable once the sales contract becomes unconditional and the other half on settlement. It is important the agent still has skin in the game right through until the purchase settles, as you will need the agents help if issues arise that affect settlement. Commission should not be held or automatically deducted from purchaser’s deposits or settlement proceeds by the agent’s firm. You should have your lawyer, escrow agent or independent entity administer deposits and settlements so there is no chance of a real estate agency controlling the money flow.[1]

Exclusivity

Every agent prefers a sole listing, where they are the only agent permitted to sell the project with the option to invite other agents on their own terms. The alternatives include: a general listing where you reserve the right to appoint other agents to sell and market; a master agency where you appoint an agent overall in charge but they ask other agencies to sell, sharing the commission; or any other combination where you define the sales channels you are allowed to use, without splitting commission. For development project marketing you should start off providing an exclusive listing to one agency. That gives them confidence to devote their time and resource. Although it is exclusive, the developer should always negotiate to retain the option to sell at least some properties themselves to ‘friends and family’ without agent involvement or commission payable. This should be carefully worded so the agent does not believe they are entitled to commission if the developer does sell some sections or homes.

Listing Term

The agent will request a term as long as possible to be listed on your project. They want the time to do their job, which is fair enough. However, don’t tie yourself into a long-term agreement that backfires if the agency doesn’t perform. Negotiate a sales performance clause into the listing term to help elicit the performance the agent promised when you selected them. The clause might read something like:

‘The exclusive listing period is 6 months from the date of this agreement provided a minimum of 2 sales per week from the attached price list is achieved. If the minimum number of sales is not achieved the vendor can terminate this agreement.’

Ironically you want your agent to be an expert negotiator so the confidence, humility and persuasion they display in their dealings with you to negotiate their listing agreement will often foreshadow their ability to close buyers on your product.

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[1] Your jurisdiction may have regulatory controls over exactly how this works.

Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com

If you don’t provide a brief — and unfortunately even if you do — you may be disappointed in what many agents provide in the way of a marketing proposal. What you want to receive is a strategic sales and marketing plan specific to selling your development so you can compare and choose the agent who has the best ideas and most likely success in selling your development down. Large agencies with project marketing divisions are well versed in putting slick and targeted marketing proposals together. From others you may receive nothing more than a basic résumé, a listing agreement and an advertising budget. Some agents, especially in a busy market, either through arrogance (sometimes warranted) or incompetence, may not give you anything but words from their mouths.

Whomever you encounter encourage the agent to submit a proposal that describes:

• Their team’s experience relevant to your project including previous and current project campaigns and sales results for off the plan projects.
• Back office support resource.
• References from other developers.
• Recommendations of the appropriate mix of product and target market (remember you are talking to agents long before you have finished design).
• Indicative pricing ranges.
• Indicative sales velocity.
• How they intend to market the subdivision and what collateral is required.
• Their sales strategy and preferred method of sale.
• Strength of their internal ‘databases’ and investor/buyer networks.
• Publicity channels they understand how to mine (editorials, advertorials, interviews, social media, product placement).
• Advertising channels they will utilise, reinforced by results-based reasoning and evidence.
• Their listing agreement key points such as commission and listing period.

Ask the agent to present their proposal in person together with the team they are promoting to work on the project. Naturally some agents will be better at selling their proposal to you than it comes across on paper. You also want to make sure that you are not being ‘sold’ a lead agent who will delegate all the day to day sales to below par team members, so ask for them to be present so you can see if they stack up to expectations. Even if you find no one suitable in these first interviews the more interactions you have with various agents the more information you will capture that will help you understand your market and the better prepared for selling you will be.

When you have interviewed enough to make a decision on your preferred agent you will contractually engage them via their listing agreement.

Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com