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.
[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
