How Property Developers Can Find Success in a Softening Market

Despite the current marketing softening, there is still space for developers and investors to find solid returns if they’re strategic with their timing, planning and partnerships.

Australia’s property markets are in the middle of a softening period, but Dominique Grubisa, DG Institute founder and CEO, believes this is the time for smart property investors to find success.

“As the esteemed American investor Warren Buffet so eloquently puts it, smart investors are ‘fearful when others are greedy and greedy when others are fearful’,” Ms Grubisa said.
“With the right strategies, property speculators can survive and thrive the current market.”

According to Ms Grubisa, here are six examples of the right strategy for those considering a development venture:

1. Joint ventures

Ms Grubisa said a big challenge that developers and investors face is the tightening of the lending environment, with APRA measures making it harder to invest.

For developers in particular, Ms Grubisa said one option available to them is a joint venture with the vendor of a property that they would like to develop. “Essentially, you enter into a partnership where they supply the property and you supply expertise and potentially meet the construction costs,” she explained. “In return, they share the profits you reap. This significantly lowers your need for cash upfront. “With vendors now achieving significantly lower sale prices and looking for ways to add value, a falling market is the perfect time for such agreements.”

She added that lawyers should be involved in order to make sure each party’s obligations and benefits are clear.

2. Rent to own

An international approach yet to fully take off in Australia, rent to own is a viable strategy according to Ms Grubisa, for both developers and investors and buyers.

Rent to own works when a vendor who is having difficulty selling a property enters an agreement with a buyer who might be having difficulty securing a loan; the vendor agrees to lease the property to the buyer over a set period of time, with the buyer able to purchase the property at the end of the period, and with lease payments going towards the total price.

“Property investors can make a profit by acting as intermediaries, connecting potential vendors with potential buyers,” Ms Grubisa said. “Again, with property prices on the wane, more vendors will be keen to explore this kind of agreement.”

3. Second mortgage carry back

For developers who are having issues securing finance, a second mortgage carry back is another option. Ms Grubisa said this strategy works by the vendor stepping in and lending a developer the short fall.

“For example, if you want a property worth $1 million and the banks will only agree to lend you $700,000,” she said. “You reach an agreement where the vendor signs a second mortgage on the property for the remaining $300,000.

“You now have the money needed for the project to proceed and the vendor has $700,000 plus regular income provided by the interest payments on the $300,000.”

4. Overage agreement

An overage agreement allows you to purchase a property below market value, but with the condition of a bonus to the vendor if the development is as profitable as predicted.

“They might agree to sell you a property at below its market value (e.g. $900,000 instead of $1 million) with a legal proviso in the contract that if you achieve a certain profit, they receive an extra payment (perhaps $200,000),” she explained. “This reduces your upfront investment and means the vendor takes on additional risk (and potential profit).”

5. Option agreements

Holding on to a property before development approval is given is a risky move, so Ms Grubisa recommended taking up an option agreement, where a developer can take a property off the market for a relatively small portion of the price, usually one per cent.

This then puts the vendor into a position where if you are still interested after one or two years, they can sell the property exclusively to the developer.

Article by Sasha Karen