Posted by: davidgarnerconsulting | September 2, 2009

Structured Land Acquisition or “Buy & Build” Investment Projects

Download your FREE GUIDE TO REAL ESTATE INVESTMENT IN 2009 – Authored by David Garner – Managing Partner of David Garner Consulting – The What, Where, When, How, and Why of investing in property in 2009

I have previously been involved in six structured “buy and build” projects over the last 4 years covering Turkey, Northern Cyprus and Bulgaria.

Over the last two months I have been reviewing a structured land investment in the north east of Brazil, around Fortaleza. My due diligence is now complete and I am in a position to provide an educated opinion and reccomendation for this particular project and in my next post, I will provide an in-depth run-down on the project itself.

In the meantime I will use this posting to go through the basic concept of structured land acquisition and buy & build projects, how the strategy works and what to look out for (inherent risks) etc.

Structured Land Acquisition or Buy & Build projects are, in my opinion a far more profitable option than off-plan property purchasing and, if structured and contracted efficiently can provide investors with more flexibility and a larger share in the profits of pre-construction property.

The basic concept is relatively simple, Party A buys a large parcel of land in a desireable location using their purchasing power to negotiate a very attractive price. The land is then seperated into sub-parcels and sold on to individual investors (Party B) with an inherent mark-up for Party A whilst still keeping the cost per square metre below the value that the Party B would have had to pay if buying alone.

Party A may or may not have acquired planning permission or building licenses before selling the smaller parcels on to multiple Party B purchasers.

Party B can then develop the land, usually using a building contract that has been pre-negotiated by Party A as part of the original package.

This can work incredibly well for both parties, but without proper control and due diligence, can also go horribly wrong.

Download your FREE GUIDE TO REAL ESTATE INVESTMENT IN 2009 – Authored by David Garner – Managing Partner of David Garner Consulting – The What, Where, When, How, and Why of investing in property in 2009

BAD EXAMPLE:

  • BAD Property Development (BADPD) by a 10,000 square metre plot of land in Turkey for €400 per square metre (€4,000,000).
  • They achieve a change of use from agricultural to residential and subsection the land into 10 parcels of 1,000 square metres and sell them to individual investors for €1,000 per square metre (€1,000,000 per plot) on the premise that the individual investors can build Villas on the plots. Grossing €10,000,000 in revenue.
  • In reality BADPD have made around €6,000,000 in profit and each individual investor has no infrastructure, no internal roads, no services connected to the site, each will contract a different builder who will build at different times, some may never build and genrally the individual investors will end up re-selling their random plot of land for a loss some time later.

I have seen this happen numerous times!

Download your FREE GUIDE TO REAL ESTATE INVESTMENT IN 2009 – Authored by David Garner – Managing Partner of David Garner Consulting – The What, Where, When, How, and Why of investing in property in 2009

GOOD EXAMPLE:

  • GOOD Property Developer (GPD) buys 1 million square metres of prime land for €50 per square metre and spends a considerable amount of time, effort and finances planning a large mixed use (residential/commercial) development complete with infrastructure, for 1,000 residential individual properties plus a commercial centre, services, internal and external roads etc.
  • GPD then apply for, and achieve planning perm¡ssion for the entire development.
  • The land is then sub-sectioned into individual parcels for each of the residential properties plus the commercial development etc.
  • GPD then contract an architect and builder to build the infrastructure such as the roads and services, with building to commence within two years.
  • GPD also keep ownership and resoponsibility for the commercial portion of the site such as commercial centres etc. which again are contracted to commence construction within two years.
  • Once all of this is in place, GPD then sell the individual plots for the residential properties to indivdual investors for €100 per square metre
  • The individual investors have the option of signing a building contract for a choice of property designs with the same builder that is constructing the rest of the site. This contract is pre-negotiated by GPD so the individual investor gets to enjoy the same purchasing power and therefore the greatly reduced price that a company the size of GPD pays.
  • The individual investor can then either build at cost, sell the property pre-construction off-plan (this is what I have done in three countries), or simply re-sell the land at a later date without the building contract.

This example works very well and I have laid out some brief figures below form the individual investor’s persepective (this example is roughly based on one of my own personal experiences:

Average cost of a house in area A = €150,000

Investor buys plot as above for €30,000 with planning permission and a pre-negotiated building contract with the master developers constructor to build the house for €80,000.

Investor waits for 2 years until the average cost of a house in area A is around €165,000 and signs the build contract (which then has two years before it would have to be re-negotiated).

Investor then sell the property off-plan for €150,000 – around 10% below market value for a quick sale to a home buyer or general off-plan purchaser.

The off-plan purchaser pays the investor €70,000 at which point the investor exits as the further €80,000 is due to the constructor from the home buyer.

Our Investor walks away having spent €30,000 and is now cash rich to the tune of €70,000 indicating a gross return of 42.8% over around 18 to 24 months. He has not had to spend any money building a house he never intended to own.

The home buyer has purchased an off-plan property on a well-planned development with infrastructure and other facilities being built by the same builder that is constructing his property.

Download your FREE GUIDE TO REAL ESTATE INVESTMENT IN 2009 – Authored by David Garner – Managing Partner of David Garner Consulting – The What, Where, When, How, and Why of investing in property in 2009

In my next post I will go through the particular project I have been working on in specific detail which so far is the most secure example I have seen for two years.

For reference the project is Coral Lake and Beach Resort in Fortaleza, Brazil.

Happy investing

DG

Download your FREE GUIDE TO REAL ESTATE INVESTMENT IN 2009 – Authored by David Garner – Managing Partner of David Garner Consulting – The What, Where, When, How, and Why of investing in property in 2009

If you would like more information on this subject, or you would like to discuss your real estate investment requirements, EMAIL ME at davidgarnerconsulting@gmail.com

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