JOINT VENTURE OR NOT
We’ve all read and/or heard stories about homeowners who manage to sell their house to a property developer for a healthy above market price. Many other homeowners hope they could do the same one day. Often not asking why a property developer would pay more for a property which they could get for possibly less in an open market.
We need to first understand property developer motivations. Property development just like any other business revolves around generating revenue to derive profit after all expenses have been taken into consideration. Average gross profit margins being 20% to 30% of Total Development Costs. This means for a property developer to pay above market price for your property they need to see value in your property and believe they will be able to generate a healthy profit in the end.
There is a level of risk associated with any business venture. To minimise that risk, property developers often will negotiate a longer settlement with the vendor, 12 months is not uncommon. In conjunction with the insertion of special conditions in the contract of sale. For example, subject to obtaining relevant planning permits within a specific timeframe. In a nutshell, allowing the property developer to secure your property with an option to exit if they cannot obtain a planning permit. A privilege for which the developer is often happy to pay a premium to help reduce their holding costs during the planning stage and give them a way out should their plans be refused by the local municipality.
If all goes well this can be a win–win situation for both the developer and the vendor. But there are other ways.
Instead of selling the property to a property developer and waiting for a lengthy settlement with a risk of it falling if permits are refused. A homeowner could consider a Joint Venture with the property developer. Where both parties enter into legally binding agreement essentiality becoming business partners in the development. Providing equally or proportionately equity, debt, and/or experience. Resulting in a proportionate share of profits at the end.
This may sound more attractive to some homeowners but this level of commitment requires a higher level of legal sophistication. Agreements need to be drafted by both parties’ lawyers. For the inexperienced homeowner there could be a lot of pitfalls requiring the need of a legal team they trust greatly to help them navigate through this process. There also needs to be a very high level of trust and transparency between both parties entering into an agreement as you are essentially going to be in business together for approximately the next 18 to 24 months.
Such joint ventures or business partnerships are often compared to marriages. Be careful who you entering into a relationship with. Spend a good amount of time on “dating”, getting to know each other before you commit. As divorce can be painful and costly.
A third option exists, giving homeowners a greater level of control and retention of the majority of the profits from the project. This is achieved through the engagement of an experienced Development Manager to manage the entire property development process for the homeowner from start to finish. The homeowner essentiality retains their equity in their property, fully funds the project, and pays a fee for service to the Development Manager.
Self-funding of the project by the homeowner can be achieved through either cash they put forward to cover the costs of the project, or most often through equity release. Essentiality the homeowner gains access to available equity in their home through refinancing with their existing lender or a new lender. Giving homeowner access to funds to complete the development with guidance and advice from the Development Manager.
If this is something that interests you and you would like to enquire more about, feel free to contact us at TOPHAT & MAYFAIR for an obligation-free 30 minutes consultation.