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The Conditional Purchase Contract

Now that you have found your house and land development site you need to make an offer to buy it. The objective is to tie up the property before you spend too much time or money investigating it in great detail. To do this you want to include a due diligence condition in your offer that allows you a period of time to undertake detailed investigations and gives you the option to proceed with the purchase without the seller being able to sell to someone else. 

The due diligence clause in the sales and purchase contract will be easier to achieve in a soft market where the seller may be more willing to give a free look period. It is also more common in a commercial transaction (like vacant land or a large property with an alternative use) than in a residential home transaction. In a hot market you may have to compete at auction where you won’t be able to secure any free look period at all. In a tender some developer buyers will write in a conditional due diligence period. Others will purposely bid high to secure the opportunity and still retain the option to pull out if they can’t make the numbers stack.

            You have to put a price on your offer so you will be relying on rules of thumb and any detailed analysis you have managed to cobble together without spending too much time or money. For the novice it will be difficult to establish what price you should pay, so most of your due diligence will have to occur before you put a contract on the property. Sure you can put any price down, as you have not committed to the purchase simply by signing a conditional contract; however, it is a dubious strategy to put a high price down in order to secure the contract and then try and go back to the seller and try to reduce the price down. If your due diligence uncovers nothing significantly negative you have no argument to stand on. The seller may also be doing their own due diligence on you at the same time. They may want confirmation that you have access to the funds to settle before committing to providing you with a due diligence period that effectively ties up the property.

As you gain negotiating experience you may want to make purchase agreements more to your advantage by inserting other developer-friendly conditions. One is a conditional period in the contract where you attempt to secure milestones (such as a zoning change) before you are obliged to settle the property. You can put any condition in your offer, but, of course, the seller does not have to accept it. Unless you offer a substantial price premium or the market is depressed you will likely not get away with some of the more aggressive conditions. Unfortunately there is often no shortage of buyers who make decisions on less information, make more aggressive assumptions of where the market is heading or simply have the luxury of lower costs because they build themselves or have a cheap line of credit. When the market is hot, many will happily overpay for a site without significant due diligence and when it is cold, no one else will be interested. Similarly, when the market is hot, finance will be easier and when it is cold, you may never find anyone who will lend.

Nonetheless, there are many ways to structure a deal. Here are some aspirational conditions to consider when negotiating to purchase:

• Long due diligence ‘free look’ period
• Settlement of purchase price based on buyer achieving milestone conditions (like planning consent, presales or individual section titles)
• Minimal deposit or staged deposits
• Low purchase price plus profit share
• Long period to settle/close, or staged payments over time
• Access to the site prior to settlement to undertake invasive due diligence (for example, drilling holes for geotechnical analysis)
• Access to the site prior to settlement to undertake works. This is commonly called builders terms, where you don’t have to pay for the site until you have completed the homes you intend to sell
• Purchase price based on seller achieving milestone conditions (like achieving zoning or individual section titles on behalf of the buyer)
• Purchase price to be discounted if buyer discovers issues between unconditional period and settlement (like ground conditions which cannot yet be quantified).

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Benefits Marketing in Property Development

This is not a sales and marketing real estate 101 book, as there are scores (times a thousand) of considerations for each different product type in each different market. However, let’s spend a little time looking at benefits marketing.  It’s easy to list all the features of your property. It takes more brain power to conceive and describe the benefits. The difference between benefits and features is not always that obvious. It often gets confused and to be fair they can start to merge into one another. One definition is that a feature is a thing and a benefit is what that thing allows you to do. The more emotional, valuable and topical the benefit, the greater the marketing impact. The degree to which you spell out the benefit should be based on not treating the recipient of the marketing like an idiot and stating the obvious, but creatively explaining how it will ‘benefit’ them.

            For example, you could point out “this house has a second living room.”  That’s a great feature for many families. Going further you could say “this house has a second living room with enough space for kids to play with all their toys.” That is a feature within a feature and alludes to a benefit. But what about “escape your children on those wet Sundays. A separate living area for family growth and peaceful solitude.” That is unquestionably describing a benefit.

Dispelling people’s fears can help you formulate benefits. Instead of “close to the local primary school” try “no roads to cross on the short distance to the local primary school.” Rather than just “secure second level apartment” what about adding “lock and leave, secure at home, safe while traveling lifestyle.”

Benefits can be ascribed to people’s desires, aspirations and enhancing their self-image. From “large flat backyard” to “the yard your neighbors’ kids will want to play in.” Alternatively, “so much space your friends will be impressed during summer barbeques whilst your neighbors hide their envy.” “Fabulous city view” becomes “contemplate achieving your next goal, peering into the city lights.” This works at a corporate image level as well. Don’t merely sell “the five-star restaurant in the office foyer”, sell “the luxurious enclave to impress during your most important client meetings.”

Topical considerations might be the latest fad or the result of fear mongering (real or perceived) in the media. “R2.7 insulation” becomes your peer pressured civic duty: “Do your part for climate change, in a green certified thermally efficient home.”

When you discuss value, investments and costs you can pitch it two ways. Take “best value in town” for instance. One, embrace the future potential positively like “your new neighbors have experienced 300% capital gain over the last thirty years, but your new house boasts even higher quality construction.” Or two, frame in terms of the psychologically more powerful loss aversion (fear of loss): “this suburb has never gone down in value over a five-year period.”

Benefits also come in the form of the real estate business problems your project solves. “50,000 square feet for lease” — an admirable feature (but who would know), transforms to “we provide the largest contiguous office space floor plate in the CBD, vitally important for large companies wanting to promote internal collaboration.”

I think by now you get the picture. And that’s a good way of thinking about it. Paint a picture of the benefit in the mind’s eye of your buyer or lessee.

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I recently took the mickey out of developers selling cars….. I mean houses. I have earned the right to as I have been in those discussions and if anyone cares to remember I publicly launched and advertised the most elaborate incentive package the New Zealand market ever had. It went something like this.

10k for furniture
Mortgage paid for six months
5k holiday.

But of course our purchase price covered it. I did this to explain to a ‘select’ group of people, what a complete waste of time these incentives are. You want it sold, just reduce the price. Buyers are not that thick, to think they are getting a free car -I hope. Banks don’t really want you to load up your mortgage with a vehicle. Valuers won’t take the bait. Timeshare tactics are so 1985.

Simply deduct the developers cost of the car from the purchase price to deduce the actual market value and offer them that for the house (assuming that is not still above market value). Then buy a used car. Here is some analysis. You are welcome!

Or am I misrepresenting the marketing trick of the century and doing these agents and developers a gross disservice?

When I started at the ‘company’ we were finishing off about 30 terrace homes on contract build, when I left we had almost completed another 120 terraces and apartments with another 40 ready to build vertical when the market was to pick up. That’s the Northcote story.

Well actually I had another Northcote story. Once upon a time, at HNZ, I was the person responsible for trying to find a PPP development partner for the entire precinct. The issue was a big pipe was required and no one had the cash. And we literally couldn’t give the opportunity away.

Fast forward over a decade and Northcote sure has pumped the homes in, courtesy of HLC and then KO and the rest of us who brought sites and dabbled with kiwibuild.

Learnings:

Design review panels (5 of them) and RC took 13 months for us on the apartments. That was red tape gone crazy. And council and KO not seeing eye to eye. What a cluster. And what a massive risk when the market changes abruptly. At least KO were favorable to renegotiate with, albeit the boat missed on the market and the govt first home equity share programmme.

Can sell a townhouse there all day long every day.

Better to price realistic on day one, especially if profit still results, rather than follow a market down -should one be allowed to do so.

Build to hold and rent out is a great downmarket strategy -should one be allowed to do so.

Put the joint owned access way in before going vertical. Yep it might need some repairs but makes everyones life on site easier.

Top floor apartments are the bomb for so many reasons. Sacrifice for a few stairs.

A million other things, you will just have to engage Xpect to find out!

From the book:

Artist’s Impression

It used to be an actual artist would paint or draw an image in perspective of the development based on the plans that the architect would provide. Nowadays every architect has software that will generate a three dimensional render. Except for large firms with dedicated staff, the quality of these renders typically does not compare to firms who specialise in producing photo realistic renders. The very best ‘artists’ create images that look like professionally staged photographs — especially interior shots. The artist’s impression renderings are crucial to help sell your product so put your best foot forward. The old ‘a picture tells a thousand words’ is never truer. To get an artist’s rendering right takes some management as there is a number of issues to consider:

Exterior

• Prepare wireframe or quick block renders first so you can choose the best view angle for the render. Don’t leave it to the architect or artist to choose this and don’t proceed with the render until you have agreed the best angle. For a subdivision you will probably want to show a render of a streetscape profiling a couple of different house types close up. You may also consider doing a perspective of the entire development from above. If you are selling sections, without any house design, you still will want to evoke the emotion of what the development could look like when houses are actually built. By focusing on amenities, like a park, you can leave the houses in the background so you don’t have to worry about detail you haven’t actually designed.
• Include your agent as the perspective proceeds. Have them to comment on sales emotions invoked by the render.
• Cars, are they modern, current and match the target market?
• Do the people shown represent the aspirations of your potential buyer profile? Are there enough or too many? What are they wearing? What ethnicity are they? Are there any double ups (where the artist has cut and pasted a clone in different parts of the picture). Consider if you need people in the perspective as it is difficult to make people look realistic.
• Lighting. Is this to be a day shot or a night shot? Consider what time of day to get the best effect from sun shading for your development.
• What materials and colours has the artist used? Are they compatible with what you have planning permission for and what the architect has specified? Artist’s perspectives are typically done before the architect has completed their specification detail. However, the rendering is what buyers believe they are getting, so in essence the artist’s impression can trump the architect’s plans if there is a discrepancy. You may find yourself selecting construction materials as part of the artist’s perspective process rather than during the architectural developed design process.
• Use glazing to add interest by adding reflections or depth with furniture and people behind the windows.

Interior

• Choose the wireframe views before it is fully rendered. If you are on a tight budget consider just a kitchen and dining render. Other interior renders can include bathroom, living, bedroom, a combination view or even an angle from standing on a deck if the outlook from your development is a key selling feature.
• Are you going to have a view superimposed on shots where there is a window (requiring drone photography onsite)?
• Does the furniture and interior decoration match your likely buyer profiles? Be careful not to clutter small spaces so the effect of spaciousness is lost.
• Once again be careful about materials and finishes — are you really providing full height glazing? A continuous splashback across the entire kitchen wall? Intricately detailed lattice work on the stairs? A custom made integrated joinery unit?
• People are difficult to include without detracting from the shot, especially as they will be close up. Frame the render like a real life interior design photography shoot and be very selective on using people, if at all.