There are various methods to sell a section or a house and land package. Which one will maximise your profit depends on the preferences of your target buyer profile and the current strength of the sales market. Different methods of sale include:
- Set price
- By negotiation
- Auction
- Tender
- Expressions of interest
Set Price
This is where you advertise a price for each section or house and land package. Buyers know what the asking price is and can make offers or negotiate on that basis, although some buyers may be put off contacting you in the first place if they feel the price is too high. If you set a price range, rather than a price point, then you may find legally you must have some product at the lower end figure quoted so not to contravene consumer protection laws. In a rising market this strategy can work quite well as you can progressively increase prices to compel those who have not bought to get in now before further price rises. In a softening market though, it is best not to reduce advertised prices (unless you are desperate for the sale) as buyers may start to think what is wrong with the product. Instead, consider swapping the method of sale. Advertising a set price is the most common way to list house and land developments.
By Negotiation
This is where you promote the property without a price. This is a strategy where you want to solicit offers from buyers without capping price expectations. Usually the first thing a buyer will ask is ‘what is the price?’ so you need to have a pricelist anyway. When you first launch the development this method is not the best to generate significant interest. However, by negotiation may be an appropriate strategy to sell down the remaining last few properties at the end of your project. For luxury properties, an invitation only, price by negotiation approach may be an effective strategy.
Auction
If you expect significant interest and want to generate additional publicity an auction may be the best option. With multiple properties to sell, you do not want any left unsold on auction day as that implies a failed auction. So either you expect a lot of interest to sell out the project or you only auction a limited release. On auction day you set a reserve, which is the price you will sell at, with the hope that all the interest generated and on the day competition between bidders pushes the price up higher. Auctions often work best for properties already complete, as the risk of the buyer knowing what they are going to receive has been eliminated. Usually a complete property will have an increased pool of potential buyers. (More on auctions below where we compare them to tenders.)
Tender
Selling by tender involves marketing the property with a set sale date that all offers must be submitted by. Similar to an auction, a tender is intended to create an urgency and a call to action to buyers. In a tender the buyer reviews the tender documentation, undertakes their own due diligence and submits an offer to the buyer. Tenders are sometimes referred to as ‘set date of sale’ or a ‘sealed bid’. Tenders are mostly used for commercial properties or unique properties where it is difficult to establish a value, although agents may provide potential tenderers with a price expectation range. Selling super-lots is often done by tender. There are other differences between tenders and auctions:
- In an auction it is the second bidder that effectively sets the sale price, and the winning bid is typically only marginally higher to win the auction. In a tender the winning tender price may be significantly higher than the second highest. This is because in an auction bidders know what their competition is willing to pay, whereas a tender is confidential between each buyer and seller.
- An auction creates an unconditional sale: that is, the property and the terms of sale are disclosed up front and the buyer is legally obliged to settle when they win the auction. In a tender the seller may stipulate conditions that all tenderers must abide by or allow tenders to insert their own conditions. Tenderers with a commercial background will often insert their own conditions anyway. These conditions typically cover: terms of settlement (such as deferring payment for a section for six months after access is granted to help the buyer’s cash flow); further due diligence or financial approval (although you ideally want to ensure tenderers have all the documentation and financial backing before they submit a tender); or anything else the buyer may dream up — and this could be anything for a unique property or a unique buyer. Conditions make the assessment of the winning tender a little more difficult as price is not the only variable to consider.
Expression of Interest
When I worked for a government housing developer, we sold land and development opportunities by ‘Expression of Interest’ (EOI) and ‘Request for Proposal’ (RFP). An EOI or RFP is effectively a tender where there are a number of criteria to submit on, in addition to price. The EOI or RFP document will list the criteria and its relative weighting to be assessed on that buyers must include in their response. For large and complex sales there may be an EOI required first, a shortlist created and then a further RFP for shortlisted buyers to submit on. Financial criteria in EOI and RFP can include:
- Purchase price.
- Purchase price range (where substantial due diligence is still expected).
- Profit margin required (where land is paid for as a residual of set home prices).
- Settlement terms.
- Deposits, bonds and insurances.
- Financial minimum or maximum appetite (where there are multiple opportunities and the EOI is to solicit financial capability).
- Confirmation of funding.
Non-financial criteria, the main reason to undertake an EOI process in the first place, may include:
- Strength of the buyers company.
- Past performance and experience.
- Management staff and systems.
- Health and safety practices.
- Quality control and examples of past work (an onsite inspection may be requested).
- Strength of relationships with subcontractors and consultants demonstrating supply chain resourcing capabilities.
- Innovation demonstrated.
The criteria is either assessed as compliant or scored against a relative weighting. Responses that are not compliant may be rejected or compliance requested of the bidder. For criteria scored they are multiplied by their weighting and added up. For example, the EOI may set three criteria for compliance and four that are weighted as follows:
| EOI Criteria | Weighting |
| Compliance | |
| Funding secured | Yes or No |
| Insurance obtained | Yes or No |
| Bonds in place | Yes or No |
| Scored | |
| Purchase price | 50% |
| Settlement terms | 20% |
| Management experience | 10% |
| Quality Control | 20% |
The discussions we had in
assessing EOI and RFP in the government sometimes bordered on insanity (from my
point of view) as we as a group attempted to score non-financial criteria. It
is extremely important to define how to score subjective criteria before you
attempt to do so. If you are selling a small subdivision to the public or
groups of sections to builders you would probably not consider this method of
sale. However, if you are working with large corporates or especially
government housing providers in a formal procurement process, this may be the
requested option.[1]
[1] If you want to know more on how to best present Government EOI and RFP for housing projects then you know who to ask.
Andrew Crosby
+64 21 982 444
andrew@xpectproperty.com
