In some markets for some types of properties, especially in
the luxury bracket, you will only get the highest price for a new property that
the buyer can touch and feel. Your best strategy may be to hold back as much
product as possible until construction is complete and you have fully staged
each home (staging means you hire furniture and fit-out the home to how it is
intended to be lived in). Speculative homes are called as such because by
selling only when complete you are betting on a rising sales market during the
construction period to maximise profitability.
Waiting until construction is
complete to sell is a luxury most house and land developers do not end up with
or want in the first place. For the majority you want to be sold and done by
the end of construction so you can take your profit and move your resources on to
the next project. Beyond the speculators, reasons why developers still have
unsold product at the completion of construction include:
The construction loan and other costs are repaid and the developer is under
no stress to sell the last few remaining units. On a 20 unit subdivision the
first 16–18 units are likely required to cover all your costs, so this only
leaves a few to sell anyway. If the market is rising why not wait for maximum
price?
You have the capital to hold the remaining properties
yourself as rental investments.
You have not achieved high enough sales prices
to generate sufficient profit and therefore are under stress to wait for higher
prices. You have arranged an extension of finance to enable you to do this. The
race is on to sell before your finance costs further decrease your profit.
Purchasers are defaulting on settlement, in
which case you are forced to resell units — and probably at lower prices than
you originally did.
Therefore ‘when are you going to sell?’ involves deciding and managing how much of your product you sell before you start construction, how much during construction and how much you want to leave, if any, until construction is complete. It’s a juggling act and achieving maximum profit is contingent on the market at each stage and the constraints imposed by your funders.
Andrew Crosby +64 21 982 444 andrew@xpectproperty.com
Uncategorized — Comments Off on Selling #9: Selling During Construction 26 Aug 25
When you sell a section or home before construction you are trying
to convince purchasers to buy into two visions. The first vision you have to
sell is that the development will actually proceed. Some buyers may be
previously fatigued by pretty pictures and promises of developments that never got
built. The second vision is that the completed home and section will deliver on
all the promises, expectations, features and benefits you are presenting on
paper.
If your subdivision has started earthworks and civil infrastructure then you no longer have to convince a purchaser if the development will become a reality. This will increase your potential buyer pool as many will be spurred on by a project under construction. If your subdivision works are complete, buyers can physically see how each home section relates to its surroundings and the value of the amenity you have created (parks, paths, access). With house construction underway, a new group of buyers who want immediacy come into play and much less is left to the imagination. Eventually the homes are complete and there is no need to sell any vision as they can touch and feel the finished product. Of course if the delivered product does not meet the expectations set (by the vision presented when pre-selling) then you may find it now harder to sell.
Andrew Crosby +64 21 982 444 andrew@xpectproperty.com
Uncategorized — Comments Off on Selling #8: Sales Strategy — When Are You Selling? 25 Aug 25
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:
Pre-construction (Pre-sales)
During construction
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
Uncategorized — Comments Off on Selling #7: Selling Upgrades or Optional Extras 22 Aug 25
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.
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
Uncategorized — Comments Off on Selling #6: Sales Strategy — What Are You Selling? 21 Aug 25
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
