In this episode he continues explaining his seven strategies for maximising profits in property development. By explaining joint ventures, vendor finance, option contracts, and more, he highlights the significance of formal legal documentation. Plus, he touches on the role of private loans in funding development projects and discusses how these strategies can be tailored to match the strengths and weaknesses of parties involved in the deals.

Timestamps:
00:30 | Seven Strategies
01:59 | Vendor Finance
07:25 | Agents and Vendors
11:30 | Creative Conversations
12:03 | Joint Ventures
14:38 | Make Sure That Everything is Documented Through a Formal Legal Document
18:35 | Legal Advice is Highly Recommended
23:52 | Option Contract

Resources and Links:

[00:10:05] And then there's the greed gland. The greed gland is if you can activate the greed gland, then that person will want to get the most amount of money humanly possible out of the deal. And so for that person, then they want to share the reward. So they need to share the risk as well.

This is Property Investory where we talk to successful property investors to find out more about their stories, mindset and strategies.

 

I’m Tyrone Shum and in this episode of 'Property Investor vs. Developer', we’re chatting with Rob Flux from Property Developer Network. Continuing his seven strategies to financial freedom, he reveals further secrets to maximising profits through the art of understanding seller needs. Plus, he explains how going tax-free can boost your earnings by $200,000!

Tyrone Shum:
Flux has a strategy for every day of the week, and he’s happy to share them on any day that ends with a ‘y’. Within his seven strategies, he reveals where untold opportunities may just be lingering beneath the surface. With this, he unveils multiple pathways available to traverse towards property success.

Rob Flux:   

[00:00:30] Another approach might be come to a larger developer that is doing many, many projects. And because of the fact that they're running many projects, they may not have the bandwidth to run all of them at once. So they might want to take on a junior that will do a lot of the work for them. So take that as a wage, and you're going to, again, earn as you learn, someone else is going to give you guidance, and mentoring and all that sort of thing to actually go through that process as you go. 

  

[00:00:30] Or you might find a high net worth individual who's got more money than God, who, I guess, wants to tell all their friends and family that they are the property developer. But in reality, they don't do any of the work. And you're going to actually run the process for them.

Tyrone Shum:   

[00:01:16] I think I like that one, too. It's not a bad one. Having a financial backer is always, always handy, especially when you're running projects as well. But I guess that also comes as a skill too, especially when you're saying with a vendor, if they've never run a project or done a development before, it's very risky for them. 

  

[00:01:35] But if somebody with a bit of experience in project management, may actually de-risk the whole project. And that means at least the project will be completed and they won't be stuck and feeling as frustrated if they'd run it themselves. 

 

[00:01:45] And I've seen that happen many, many times. Because most of the time, people would just want to get out of a project if it's been running for too long. And they've been trying to do it themselves, because they just get frustrated, and they're too close to it. So that's interesting. Very interesting. 

Tyrone Shum: 

[00:01:59] Well, [the] third strategy is vendor finance. And we've touched on that already very much early in the piece of this episode. Is there anything else you wanted to add on that strategy?

Rob Flux:   

[00:02:08] Well, let's firstly start with a definition of what vendor finance is. And that's the vendor, the person selling the property, effectively becomes the bank for you. So at this point, you don't need to go and prove your serviceability, you don't need to do a credit reference check, you don't need to do all of those things. And you don't need to fund the purchase, because the vendor themselves are actually bankrolling you. 

  

[00:02:35] Now, that typically takes one of two forms. So it might be that you've got a huge amount of serviceability. And that serviceability could fund the purchase, the 80% part of the deal, but you might not have the deposit part of the deal. 

  

[00:02:53] So the vendor would be happy, if you can get a bank approval for the 80%, they'll get 80% upfront cash today, which might be enough for them to go on and buy their next property or do that round the world trip that they were looking for, or whatever that might be. 

  

[00:03:11] And the 20% deposit, they become the bank and they bankroll you for that 20% deposit. So they would take a second mortgage against the property in order to secure it, because at that point, you already own it. And you would pay them a flat interest rate for the duration of the project. So that's the most common scenario we see with vendor finance. 

  

[00:03:33] But it might be even you have some deposit. Maybe instead of the 20%, you might have 10%. So they're only bank rolling that 10% shortfall, for example. So lots of different ways of actually carving that up. No one circumstance is right. 

  

[00:03:51] If you take that to an extreme, the vendor could potentially fund the entire purchase. So they have the property, they know that you're going to run it for the development process, they know that you're going to get a whole bunch of cash at the tail end. And they want to profit from that as they go. 

  

[00:04:09] In many instances, this is their principal place of residence. So any uplift that they get for that property at all, is going to be capital gains tax free. So it's about how do you structure that deal in such a way that it reflects the savings of interest, and potentially some other savings that you're actually going to get in there. 

  

[00:04:29] And so at that extreme, the vendor finance, actually changes to the next strategy. So when you get it to the full funding, it actually changes the next one, which is called delayed settlement with early access. 

  

[00:04:43] So in that instance, and I'll give a perfectly good example here. Let's just say you've got a project that's going to take 12 months to run. It's $1 million to purchase the property. You know that if you get a delayed settlement for 12 months, you may potentially be able to have completely run the project and sold the finished product before even owning the first one. So you might be able to sell off the plan the finished product and never have to actually bankroll the purchase. 

  

[00:05:16] Now, in that instance, we've got a couple of things that go to our favour. So if I use that $1 million purchase, as an example, interest rates today [are] 6.5% [to] 7% interest. So there's $70,000 worth of interest that I'd be giving to the Commonwealth Bank, the ANZ, Westpac, whoever is their bank. 

  

[00:05:34] Well, rather than give it to them, why don't I give that to the vendor? Now, if I don't settle for 12 months, that's 12 months that it's not in my name, that's 12 months that I won't be paying land tax on. So rather than giving that to the Office of State Revenue, why don't I give that to the vendor? So now we're at $80,000.

  

[00:05:55] My rates side of things? Well, there's probably another $10,000 in rates. So rather than giving that to the council, why don't I give that to the vendor? 

  

[00:06:03] So what we're trying to do here is we're trying to look at all of the holding costs that we would have incurred, if we had purchased it, that would have impacted our cash flow. And we instead give it to the vendor at the tail end of the process. 

  

[00:06:16] And by doing that, we uplift the cost of the property, in many instances, close to the 10% uplift in purchase price. And you may even round it up to 10%, just so that it actually looks good. So you might say, 'Well, I can give you $1 million today, or I could give you $1.1 million if you can wait 12 months'.

  

[00:06:37] Now if that is their principal place of residence, that $100,000 extra, because it's tax free, is effectively kind of $200,000 that they would have had to have earnt in order to get there. 

  

[00:06:51] And it's all about how you position that to them. And I guess the key element there is understanding: Do they have time on their hands? Sometimes people aren't in a hurry to sell. 

  

[00:07:04] Now, if we're going through an agent, the agent believes that they're always in a hurry to sell. Because they want their commission. But if you're dealing directly, it's a lot easier to actually understand it. And I think if time permits, we can actually talk to how do we tease some of those needs out of the vendor.

Tyrone Shum:   

[00:07:25] Since we're on that topic, let's keep going. I really like that. And it's really important to share this because there's so many different ways you can approach it with a vendor, especially if, as you said, it's a principal place of residence, they're happy to stay there. And all you're really doing is just all the background paperwork and stuff, getting the DA approved, etc. 

  

[00:07:44] There's this huge upside for a vendor to go into a deal like this, because the fact is, is that they know, it's pretty much then say 12 months time they get their money. And for them to go and work in making, like, $200,000 to keep $100,000, it's a no brainer.

Rob Flux:   

[00:08:01] So trying to understand that vendor's needs is really the key to that. And I'll talk to how do we tease it out of them in a sec. But fundamentally, there's only a couple of things that people are actually looking for. 

  

[00:08:16] They either want certainty, so they don't like risk. So I need certainty, I need to know that I'm actually categorically going to get that cash. So some people that is their primary driver. 

  

[00:08:30] Other people are prepared to be a little bit more risky, because they know there's a little bit of reward at the tail end. So when you understand where that person sits, you can immediately look at some of those strategies to go, 'Well, doing a joint venture with the landowner, if they want certainty, that's probably not the one for them'. As an example. 

  

[00:08:50] But a delayed settlement with early access, well, that gives them certainty you've guaranteed their price point gives them the certainty. So they're happy. 

 

[00:08:58] Other people, time is their driver. So they might have some cashflow issues right here right now. So they might have already bought the next property, for example. So they need their cash now. They might have some expenses, maybe they're behind on their bank payments, or things like that. So maybe they don't have huge cash flow needs right now. But they might have some, so they might not need all of the money, they might only need $100,000. 

 

[00:09:32] So for example, if they've lost their job, and they've fallen behind on their mortgage repayments, and they're a little bit behind in that, then that $100,000 might be able to get them to catch up with that. And you might offer to, for the duration of that 12 months, you might offer to actually pay the mortgage repayments for them. 

  

[00:09:54] So you're not cash flowing everything for the purchase. You're just cash flowing a small amount. So understanding those short term cash requirements. 

  

[00:10:05] And then there's the greed gland. The greed gland is if you can activate the greed gland, then that person will want to get the most amount of money humanly possible out of the deal. And so for that person, then they want to share the reward. So they need to share the risk as well. 

  

[00:10:34] So fundamentally, when you break it down, there's really only two drivers that you can use to actually pay more for property. So one is time, and we can actually calculate the exact holding costs. So if they give me 12 months, then I can calculate the savings in that 12 months. 

  

[00:10:51] And then risk, if they share the risk of the deal so that they stay in the deal, and they use their property as equity for us to secure the construction loan, they're sharing the risk, they should share the reward. So they should have a share in the profit.

Tyrone Shum:   

[00:11:07] Very well said, and what you've said there sounds really like it makes absolute sense in my opinion, sounds really simple. When it comes to actually application, it's a different kettle of fish, I guess you can say. Because we don't know what the vendors are thinking exactly, and so forth. And this is why this process, in my opinion, takes a lot longer.

Rob Flux:   

[00:11:30] It takes some creative conversations, that is for sure. And the ability to tease those needs out of the vendor.

 

[00:11:36] And we've still got three more strategies that we want to talk to. But I think we can probably have a small bit at the end to try and help people to actually work out how to tease that out.

Coming up after the break, he delves into the journey that is joint ventures…

[00:12:57] But basically, you're going arm in arm with somebody else.

Outlines the potential risks and benefits…

[00:21:26] Now, the interest rates that people pay are very subjective based on how much money, how much risk, what is the security protection?

He breaks down an often misunderstood concept behind one strategy.

[00:25:14] This is the hammer, this is where everything starts looking like a nail.

And that’s next. I’m Tyrone Shum and you’re listening to Property Investory.

Tyrone Shum:   

Flux has ventured into vendor financing, delayed settlement, and early access, leaving joint ventures as the next intriguing topic.

Rob Flux:   

[00:12:03] So joint ventures are really having a look at the strengths and weaknesses of the parties involved. And sometimes it's two parties, sometimes it's many, and joining forces to say, 'Well, I'm weak in one area, but I'm strong in another, how do we dovetail that together so the two of us can actually solve a problem?' 

  

[00:12:22] So you might be really good at and skilful in the how to run it, you might have some cash, but not all the cash, and you find someone that actually matches the difference, and you plug that gap. 

  

[00:12:34] Sometimes that's the vendor themselves, because they've got a whole bunch of equity in the property. Sometimes that might be friends, family, that sort of thing, who have a high serviceability and some liquid cash, they might have a property that they've owned for 20 odd years that's got a whole bunch of equity built into it. So lots of different ways we can tap into the cash requirement. 

  

[00:12:57] But basically, you're going arm in arm with somebody else. And between the two of you, one person will fund it, the other person will run it, okay, they're typically the scenarios that tend to happen. 

  

[00:13:13] And in the early days, if you've got absolutely no money, if you're missing all three of those elements, then you might find a single person that will plug all three gaps. For the entry level projects, that's typically a 50/50 profit split. You are the sweat equity partner, the other person's [the] money partner, 50/50 is generally how that goes. 

  

[00:13:34] Now, as the deals start to get bigger and bigger and bigger, then the financial contribution starts to become a bigger contribution than the running of the deal element. So that might change to a 60/40. And then later on as you get bigger again, that might change to a 70/30. But it's 30% of a much bigger pie.

Tyrone Shum:   

[00:13:55] Joint ventures [is an] interesting strategy, because it does require also a bit of [a] creative way of looking at how to find and, I guess you can say, fund the different things. Especially when... usually I see joint ventures happen, where there's someone who's starting out in development, they don't have much cash at all. And they need someone to be able to help fund the deal, just exactly what you said. And those kinds of deals usually start off with great intentions, and everything goes really, really well. 

  

[00:14:23] But obviously there's a lot of inexperience that comes along in that. And I think that's where I just want to caution, when you're doing joint venture, get a lot of discussions going and work with experienced people so that way you can avoid some of the pitfalls that I've seen happen as well.

Rob Flux:   

[00:14:38] And make sure that that is documented through a formal legal document. So a formal joint venture, not a handshake, that sort of thing. So I absolutely categorically endorse what you're saying there. 

  

[00:14:50] That said, everyone has to do deal number one. So it's about well, is this person the path to actually solve my particular issues and challenges? Do I know how to run the deal? No. So then I'm happy to invest in someone who's invested their time and effort and skills in actually learning it. So that's why I guess the profit split is typically those sorts of scenarios. 

  

[00:15:17] In drawing up the legal document, this is a key consideration. My joint venture template is about 40 pages. And the reason is that even... I'll use a marriage. So you love someone, and you go into a marriage with all the right intentions, and 50% of them fail. So a marriage is a contract of sorts. 

  

[00:15:43] So imagine what's going to happen when you've got two personalities that are going into something that has a little element of risk, has a lot of money involved. Personalities can start to grate on each other, very, very quickly. So it's key that firstly, you understand each other's personalities and strengths and weaknesses and that sort of thing. And secondly, you put together effectively what in the marriage world we'd call a prenup, or a binding financial agreement. 

  

[00:16:09] You're putting the joint venture document together to say, 'Well, if this doesn't work out, the rules of engagement say that we're going to disconnect in this particular way', or, 'When this particular problem happens, then we're going to engage it in this way'. 

 

[00:16:22] So we want to deal with all the things that could possibly go wrong. So what happens if our money partner gets hit by a bus and can't work and hasn't got any money anymore? What happens if the sweat equity partner gets sick, cancer, that sort of thing, can't run the deal anymore? So the ability to swap people out during the project, that sort of thing, and how does that actually work? When does that actually get triggered? 

  

[00:16:52] Who is the decision maker? Who's going to make the decisions in the deal? If there's two people as a JV, one person wants to do one thing [and] the other person wants to do something else, that's a split decision. Is there a requirement for a tiebreaker? Or has one person got, I guess, the full power to run the deal, because they've put all the effort into getting the skills in order to do that? 

  

[00:17:17] What happens if, from a profit split perspective, one person wants cash, the other person wants to keep stock? So there's got to be mechanisms in how to actually capture all of that. So there's a whole bunch that needs to go into the joint venture document, which is why mine is 40 odd pages. 

  

[00:17:36] And it sounds complex, but it's actually fairly plain English to read. And when you look through the individual elements you go, 'I can see why that's there, [it] makes common sense'. But I've seen a lot of people go in with a handshake. So bad, bad, bad.

  

[00:17:54] Or joint venture documents that [are] only three or four pages long, and it's not thought about any of those particular circumstances.

Tyrone Shum:   

[00:18:02] And I think this is the good thing about what you've mentioned, those examples, and those questions that you raised, is definitely a portion of what you need to sit down. That's why I'm saying you [have] got to have a lengthy conversation with potential joint venture partner. 

 

[00:18:15] Firstly, really get to understand their personalities, don't just jump in in the first hour or two of having a great conversation and a great chat and stuff, you've got to really start to work with them first, before you actually do anything serious with them. And that takes time. So all I say is just think about it carefully before signing anything on a dotted line with doing any of these type of things, because it takes time.

Rob Flux:   

[00:18:35] And [I] highly recommend legal advice to actually put that together. In doing that, I guess there's a couple of things to consider.

  

[00:18:47] If you go and go engage a solicitor, that solicitor is motivated, incentivised, to protect you. They go and get a separate lawyer, they are motivated and incentivised to protect them. And so there's going to be a difference between them that's going to cause conflict. 

  

[00:19:04] And it's about understanding that the joint venture is not about the difference. The joint venture is about the bonding and the joining of those together. 

  

[00:19:11] So there will be an element of risk. And it's about making sure that that element of risk is shared appropriately between each other. That understanding that any stick that's going to beat one person up has to be the exact same stick that beats the other person up. [It] can't be one sided, it has to be very equal, you know, the carrot and the stick kind of thing, equally, the carrot has to be equal as well. 

  

[00:19:35] And so I've found that rather than getting independent solicitors who they charge on an hourly rate basis and they've just got to find reasons to fight. Instead, go arm in arm with your JV partner to the same solicitor and say, 'We together are the one client. So we together are the one client, you are going to write a JV document that's going to work for both of us'. 

  

[00:20:01] You are both then getting your independent advice. If you need to then take that out to an independent solicitor to review that, that's okay. But you know that the foundation pieces that are sitting in there are based on the mutual benefit of both.

Tyrone Shum:   

[00:20:17] That's excellent. I think that's really smart. Well, we've covered off on joint ventures as a strategy, we've got two more to go, and the last two is private loans. And I will talk about that afterwards. Let's jump into talk a little bit about private loans.

Rob Flux:   

[00:20:31] So private loans is where you might have someone that's got some loose cash lying around, that is prepared to invest in your project in order to contribute along the way, where you've got most of the money to run the deal, but you've just got a small shortfall. 

  

[00:20:51] And typically, what I find is the journey that novice and entry level developers actually go through is, 'Hey, I've got no cash'. So deal number one, I'll do a joint venture. And then I now have some cash. 

  

[00:21:09] And so deal number two, I probably don't need a full joint venture, because I don't want to give 50% of the profit away. But instead, I've got a shortfall. And I might give an interest rate to someone to just fund the shortfall. And that's typically the journey that I see people actually go on. 

  

[00:21:26] Now, the interest rates that people pay are very subjective based on how much money, how much risk, what is the security protection? Is it a first mortgage, second mortgage? Is it a caveat? Is it just a personal guarantee? So the higher the risk, then the higher the reward that actually goes into it. 

  

[00:21:48] So you could pay anywhere from 10% to 30% interest rate for that cash. And I can straight away hear the screams in the crowd going, '30%, what are you talking about?' 

  

[00:22:03] But I want to say when we're talking about that, typically, it's that 15% to 20% mark is the most common part. But it's 15% on a small number for a small amount of time. 

  

[00:22:17] So as an example, if you are short $100,000 and you only need it for 12 months, that's $15,000 worth of interest. But if you're making $150,000 or $200,000 profit, then that $15,000 is really just a line item in your feasibility as a cost. 

  

[00:22:35] And so we need to look at it like that to say, 'Well, I couldn't do the deal if I didn't have it'. And rather than begrudge what the interest rate looks like on paper, we need to instead look at what is the dollar cost of that? And is that the enabler for me to actually do the deal?

Tyrone Shum:   

[00:22:52] That's exactly right. You hit the nail on the head, Rob, because that's exactly what I say, because I deal in the private loan space and speak to a lot of private investors and so forth. And a lot of people ask the same question, it's like, wow, that's a lot of interest that they're paying. 

  

[00:23:05] But in actual fact, if they didn't actually get the loan, the deal falls over. And they'll actually lose out a lot more and not even get the project finished. So for them, they go, 'Okay, look, it's only a small price to pay, it's only short term. Andit helps fund the project to get it to its completion, which is going to be profitable, and therefore, it's a win win for everyone'. 

  

[00:23:24] So it's a very, very good point and it is a space that's now becoming more and more popular, because especially when banks and large institutions taking a long time to provide loans, people are moving into private space. So that's private loans. 

  

[00:23:42] And then one final last one, which is a very creative way to look at strategies, is the option contracts. So let's take a look at that one.

Rob Flux:   

[00:23:52] So an option contract is a very misunderstood concept. And so there's a legal definition of it. And then I'm going to break it down into a lay term, so that it's a little bit more, I guess, understanding.

  

[00:24:05] So the legal definition is it's the right, but not the obligation, to purchase a property at a predetermined price at a point in time in the future. 

  

[00:24:17] So what that means in lay speak is, 'Look, I've negotiated a price that I, at some point in the future, I will decide if I want to go ahead. And I might not go ahead because I might not get the approval, I might not [go] ahead because the market conditions have gone against me, I might not go ahead because the cost of construction has gone up. But if I go ahead, then I've negotiated typically a higher price point to actually purchase that property'. 

 

[00:24:46] So for me, it's a de-risking element. So I have the ability to run away where humanly possible. And for the vendor, it is the uplift in price that they are likely to get from that outcome. 

  

[00:25:01] Now, there are lots of people that, I guess, when we were talking before about having many, many tools in your toolbox, when they've only got one, it's usually the option. This is the hammer, this is where everything starts looking like a nail, because they want to make everything an option contract. 

 

[00:25:20] So it allows you to control a property for a period of time. To allow you to run the development approval, get that soft equity uplift. But at some point in time, you must settle if your intention is to construct. If your intention is not to construct, if your intention is to flick it on, it gives you time to find the ultimate buyer, and you've controlled the property without ever owning it just for that small option fee. 

 

[00:25:49] But if your intention is to construct, then you have to ultimately settle the property. So you've bought time to find investors to do that, you've bought time to allow another project to finish so you can get the cash. So it's really good to actually buy the time to actually allow you to shuffle things under the covers. 

  

[00:26:10] But you can't actually start to construct, and that's probably where it breaks down its strength. So it's really, really strong up until that point, but, 'Hey, I want to start and get on with things'. If I want to start to dig up somebody's backyard, or if I want to start to knock down their house, there is no way on Earth that they're going to let me do that when I have the right but not the obligation to purchase. 

  

[00:26:33] So I'm going to knock down your house. No way. If you may not purchase it, no way will I let you do that. 

  

[00:26:40] But if we compare that to the delayed settlement with early access, where we've given them a guarantee we're going to settle, they go, 'Well, sure, if you need to knock that down, if that's what it is to get your cash flow out, absolutely'. Because they know that the money is coming. 

  

[00:26:57] So that's the subtlety between a couple of these, is knowing which person, if they want certainty, then delayed settlement with early access, if they want to share the risk, then an option contract might be able to give them an uplift in that process. So there's subtleties in how that works.

  

[00:27:16] That's a fairly complex way of explaining it. But strangely, we use an option contract of sorts in our day to day world a lot of the time, and people don't even realise that that's what it is. 

  

[00:27:29] So if you have ever laybuyed anything at the shops, that is fundamentally an option. So you will put a small deposit down for them. And the people who advertise this the most, Target do these Christmas specials for the toys. So Christmas special in July, 'Hey, buy your toys right now, put it on layby'. So you put down a deposit, they go put the toy behind the counter for a period of time, and somewhere between now and Christmas, you have the opportunity to pay the balance and pick up the toy. 

  

[00:28:05] If you don't pay the balance, then Target gets to keep the option fee or the deposit. And they also get to keep the toy and sell it again. So it's a win for Target. And it's also a win for you because you actually get the illusion, at least, that you're gonna pick that up. 

  

[00:28:29] So in the property space, that becomes an advantage to the buyer, because in that time, you would have funded and run the process to actually get the development approval. So if you never actually settle, then they didn't fund the DA, and they got the benefit from the DA. So in many instances their property is actually worth more if you don't settle. 

  

[00:28:55] But the likelihood is that you will, because why would you spend all that time and effort and money in the process unless you actually had intentions to complete?

Tyrone Shum:   

[00:29:03] And on top of that the only reason why people who have to let it go is, as you said, there's increasing costs or the markets change, etc. And they have no choice. But at least the vendor will have an upside, so that's the reason why they would probably jump into an option to contract because of that.

  

[00:29:23] Well, I think we've covered all the seven strategies. And we've done pretty well actually, in this that we've provided so many creative strategies, and I hope that all those creative strategies that we've talked about can potentially be one that you've just pull out the toolbox, and then try and use it as a potential solution for one of your development deals. 

  

[00:29:41] Now, did you want to add anything else, Rob, to this? Because it's been a fantastic discussion about all these strategies.

Rob Flux:   

[00:29:48] Rather than adding, it's probably just summarising what we've said in a nice succinct package. 

  

[00:29:55] So the key to making this work is to not make it about you, but to make it about the vendor. What is the need of the vendor? And can you solve that need in a creative way? Rummage around in your toolbox of seven creative strategies and find the gap in your shortcomings and their need, and see whether or not you can actually make that happen. Have all the tools in your toolbox and not just the hammer.

Thank you to Rob Flux, our guest on this special episode of Property Investory.