How To Gain $250,000 On Adding Market Value Equity
Mark Heritage is a successful property developer who will share with us a client case study. He gives us a detailed run-down on his latest development project, starting from when he was invited onto the project, to how he managed to make approximately $295k in equity for his vendor.
Listen to this episode to discover how Heritage applied his property development strategy to this project, some renovation challenges he faced and how he resolved them, and how he was able to add market so much value to the property in a complete transformation in just 5 weeks.
Heritage and his company specialises in adding value onto properties through renovation and development and satisfying their clients with large sums of equity gain.
My name is Mark Heritage I’m the director and general manager of Over and Above. We are property partners and we work with vendors and homeowners to help realise the full potential of their asset from simple evaluation to renovation to an end project of full-scale development.
Adding Market Value To Property
Heritage had been tasked with this particular development after receiving a call from a previous venture partner asking for his help.
Once we get to the end of it you’ll realise how important it was to the vendor and it’s you know we’re working on a project actually in South Australia earlier this year and I had a phone call from a previous partner and the question was are you based in Melbourne at the moment. I said No I am actually in South Australia. They said as soon as you can get back to Melbourne can you contact this guy. He needs some support quickly. I said okay so effectively I wasn’t too far off jumping in a plane and heading back to Melbourne and straight on the phone to see what the situation was. So it was basically the network that provided this opportunity to us in the first instance so you know working with people, having the experience that you have people knowing what you do and where you specialize to then be able to reach out for some support and help.
While the property was in a good location, it was certainly not attractive and needed to be cleaned up.
This was this is an interesting one. It was a gentleman that needed to sell his assets for personal reasons and unfortunately, the property was in a fantastic location of Glen Waverley but the property was in a condition where it would realize its full potential and he had agents involved in the process to evaluate that because he did have to sell and there was pressure and unfortunately the feedback consistently across the agency was you know you need to do some work to improve the property to clean it up to give us the best chance to get something for it. And you know what that something looks like who knows. But based on the condition it was in it was going to be you know not an attractive offer to realize its full potential. So it was a matter of at that time seeing what other opportunities were out there and who could step in and assist. And fortunately within the network, someone had made the contact with us to engage the over and above team to evaluate the situation of the vendor to see where it was that we could actually provide that real needed solution and stop that short term pain. And fortunately enough we were able to step in and really evaluate the situation quite quickly to put some pre-planning in place before we even negotiated anything further to realise what could be achieved.
Due to the vendor’s personal circumstances, there was a tight time limit for Heritage to develop on the property as well.
Unfortunately for the vendor, his wife had passed away late in 2017 and some circumstances are changed and he was equity strong and didn’t have a lot of cash available so there were debts to pay in terms of funeral parlors and there was also personal situations where debt had started I suppose compile a little bit to the point where you know we need to sell. We need to offload this asset and get ourselves out of this short term situation to benefit the long term. But unfortunately, that came with its complications.
Before starting on the development, Heritage made sure to build a good relationship with the Body Corp and make his plans according to their guidelines.
This unit was one of the front unit of about 12 in a complex so that was probably not in our favour for a start because we knew we’d be dealing with body corp, etc. because if we did need to get it in its current condition and improve it both internally and externally it was going to come with you know potential objections and you know we put a plan in place knowing that there was absolutely full potential internally and externally that could be achieved with that property and tried to work within the guidelines of what body Corp outlines and we built a really good relationship with the body Corp and they supported us through the project and gave us some really really strong guidelines to follow.
We worked within that and we provided all the content information we needed to them and they came back with some solutions for us that we hadn’t thought of. So it’s from that perspective building that relationship early was very important and pivotal into what we could achieve particularly externally for the property but internally we had, we engaged early on the first day a structural engineer to come out on-site and determine what could and couldn’t be achieved with the property and that really laid that strong and solid foundation for us to be able to realize the full potential from this asset.
Why Change The Layout?
In order to improve the property, Heritage planned to dramatically change its layout.
Effectively there was a lot of internal walls very pokey two bedroom, one bathroom unit that was in a condition that was quite poor and the living conditions internally weren’t great. So it just exacerbated by smell and appearance. So we, based on our experience we were able to look through that and see the possibilities of the feedback the structural engineer had provided us to then engage our builder to work through how quickly that could be achieved and then knowing that there were several items that would take time to plan and prepare in order, get onto those items so promptly such as you know bathrooms tilers and in terms of kitchen design and layout as well.
Having said that, the property did have some appealing qualities as well.
This is one unit this is the front unit owned and separately titled I by the vendor. So they are all individually titled. And we were just dealing with the front which had greater appeal and street frontage in comparison to the other units so that was a massive positive. So we had off-street parking had a good frontage area. We had a nice little area at the back that some of the units it didn’t have.
It was a single level so it was appealing more to a downsizer so we knew that it had a lot more qualities than some of the other units that were double story in the actual complex.
Before officially starting on the project, Heritage made sure to clear up all the details of his development plan with the vendor.
The immediate solution was it was clearing some short term debt for the vendor to make it viable for us to be involved. So we evaluated our processes quite stringent and we need to understand before we get involved or we pass any money to be involved in a project that we’re clear with what activity there is on the title of the property. So we’d done our due diligence and asked a few questions in relation to that and were quite clear with where we would stand if we did proceed. So that was reassuring for us from the start and it was also reassuring from the point of view that if we needed to get investor funds in to actually fund the renovation works we could actually achieve that also.
Heritage values the transparency he is able to achieve with his evaluation process despite how long it usually takes.
From initial contact to a meeting and basically evaluating the property and the situation and coming to heads of agreement and preparing the legal contracts, it was probably a two-week process. So once that was all formalized and it was really the legal process that held things up not the negotiation or content of what was going to be done. You know we got along famously with the vendor because we were quite a transparent upfront as to how we worked and we got a clear indication from him how he seen things or how he saw things and what possibilities he would like to see as well. So it was a real buy-in from both parties to the initial agreement to formalize it so quickly to then be able to be in a position to act quickly.
The vendor was quick to trust Heritage having known about his successful track record as a property developer.
The owner had a look at a couple of projects we’d completed previously and he was surprised with how quickly and how much quality was in our actual projects from design to finish. And that gave him the assurance that he was in good hands knowing that he’d been referred to us by another party so it was, he knew that he would be in trustworthy hands we’d hold his hand all the way through the process and we built that solid relationship upfront in the first two conversations that we’d really had. So it was important from his perspective that he was in good hands because it was his asset and he was effectively handing it over to us to realize its full potential.
He made sure to have the partnership agreement and other legal documents crystal clear for all parties involved.
It was purely a partnership agreement there was no contract style involved there was no option agreement because in Victoria we have stamp duty implications with option agreements so it can be quite tricky but to achieve the same outcome we just had a separate contract that was put together by our solicitor and that was forwarded through to the vendor’s solicitor and through some simple negotiations we were able to compile a document that was legally binding and protected all parties involved including the investor. So it was a really really straightforward process because we had a really solid head of agreement that we’d sat down and we’d made crystal clear for the vendor and for ourselves as to what we’re all getting into and what our roles and responsibilities within that look like.
The vendor simply had to hand over the keys to his property and Heritage and his team took care of the rest.
For the vendor, the responsibilities were quite simple. It was a matter of trusting in us to hand the keys over and give us full access to design, to manage the project and also to achieve the best outcome in that situation. Besides of course the benefit for him was that we would provide some funding to relocate his son from the property into something that was more suitable for him to allow the vendor or to sell the property as well.
It’s hard for us to have access.
Did the vendor stay in the property himself as well?
No, the Vendor has another property that he lives in reserve. This was just purely a property that he’d inherited and had his son living in and it was time that he needed to sell.
This becomes basically an investment property for him to be able to do something or add market value to it to make you feel in his way correct. So now that you’ve signed after two weeks of negotiation and sign all these contracts what happened next?
So what happened next is as soon as the contract was binding and we’d had signatures from both parties that had been distributed to everybody involved.
It was a matter of arriving on-site handing the keys over from day one, us developing a scope of works and plan which we’d preliminary started drafting up anyway even partway through the negotiation process, we had that drafted just in case for when it was ready to go. So we were sort of a week ahead. We’d already intended to meet the structural engineer on the day of signing the contracts. So we met out on site it was quite simple within half an hour what could be achieved. That was a massive boost along in terms of confidence and process and time for us because some internal walls could be pulled down, everything was on us so effectively we could have pulled every internal wall out wasn’t the way we went about it. Also pivotal to this at this point was the engagement of the agent on day one as well who ultimately sold the property. He met us on site took some ideas away fed some ideas back so had really buy into the process as to where value could be extracted based on the target market for the area.
Despite agents estimating a low selling price for the property, Heritage’s development strategy added much more value to the house more than expected.
So initially the agent came in and sort of appraised the property at around 550 and that was consistent across a few agents.
So the ballpark because the agents hadn’t worked directly with us before they sort of said you know you do a good job of renovation, you’re going to be able to achieve list price probably around seven to seven hundred seventy thousand. As a result, we thought, well if we step in and we spend X amount of money in that’s going to give the vendor a great outcome but also beneficial for us also. But as the project sort of really kicked into gear within the first sort of two to three weeks the agent came back to provide some feedback on his thoughts on the colour scheme and some final layout design issues and was absolutely blown away by the project and how open the property had become. And you know the perceived makrvalue that we’d created in such a short period of time by just removing walls and removing the floor coverings and you know the obvious areas that were of concern prior to then say look you know we could be nudging 740 to maybe even you know 790 if we can finish it off to the level that I can start to see. So we started to get a bit more excited as did the vendor and you know that really gave us the confidence to push hard in those final two to three weeks to get the best possible outcome we possibly could knowing that that’s what we would achieve anyway but it was just the extra driving factor behind us to know that that is the potential. So it wasn’t until really that he came back through upon completion to say look you know it wouldn’t surprise me if we got eight hundred thousand dollars for it and he said that might Maxus out but you know he said the feedback I’ve had through the Open’s is in that mid-seven to maybe eight hundred thousand dollar range. And you know ultimately we surpassed all expectations.
That’s phenomenal. So this is you know a two-bedroom unit initially right room bedroom and so does have our arm.
Then there was an actual car spot which there was an undercover.
There was undercover parking and there was a nice area outside with no decking or entertainment at all. So we were basically able to come back in.
Look at the area, convert the laundry and toilet into another bathroom and create an en suite from the existing bathroom. And you know ultimately we had a two-bedroom two-bathroom plus a study nook, everything brand new throughout and created amazing entertaining area with new fencing boundary, inside fencing which provided really really good screening and security from the other units and had a massive 25 square metre deck installed and just gave it that finish.
And once the property was fully styled out it was just a total brand new transformation within five weeks, mind you.
In the end, Heritage managed to gain a net equity value of 295 thousand dollars for the vendor.
From our perspective initially, we thought that we could spend anywhere between 50 and 100 thousand dollars on the project just depending on where it led. So we were hoping at the bottom end of the range. Ultimately our budget was set at 60000 and we’re confident to say and really proud that we achieved that 60000 budget and the uplift we achieved from the 550000 as I alluded to earlier, initial appraisal price which we may have been top dollar we don’t know that but to realize value and result at auction of 845 thousand dollars under the hammer is 295 thousand dollar equity gain for the vendor. You take your costs associated with that is a two hundred thirty-five thousand dollar net gain. So it’s you know obviously there was there were some fees and stuff we’d negotiated in that as under our partnership agreement as to where we would benefit from that but that was secondary to the actual solution that we provided in that situation.
After the project’s incredible success, Heritage and the vendor have managed to keep in contact for potential developments in the future.
Sold at auction on the day, that was early June and we had settlement occur on Friday the 20th of July so funds to all parties and everybody’s happy day. So the vendor has been in contact and said make sure we keep in contact. He has another property as well and he wants to more so just focus on the relationship that we’ve built so far and caught up for coffee and have a chat about life in general which is fantastic.
Just overall looking at this whole situation I would say it was more of management from your side of things because you probably didn’t lift a hammering and get on with the trains organised for that. Is that correct?
A lot of coordination from our perspective and coordination of trades and our role was quite pivotal in securing an investor to lend the funds to complete the project and secure their interests on the title of the property and the agreement between us and the vendor. Making sure that was watertight to the point of yeah coordination of trades organization of materials and design and colour scheme and involving all the trades in the stylus into providing input to then be able to digest and say okay this is the way or as a group collectively we decide to go.
However, by no means was the development project easy, as there were many challenges Heritage had to overcome in the short time frame.
Look you know I suppose internally you know once we started to pull internal walls out we had ceilings starting to move.
We had props to prop up ceilings in the short term because internal walls were effectively holding the plaster in place, nothing more than just the plaster in the ceiling. So it was you know those types of minor issues but then they start to cause what is that going to set us back in terms of time based on our project timeline. Is that going to impact on that trade coming through or is it going to impact on the next you know quite we get for this and is that are we then comfortable on the design and layout of our kitchen knowing that that potentially could occur? You know there’s a lot of variables but I think we just backed our instinct and engaged the people that needed to have the quality input for us to make the final decision and you know besides that it was dealing with body Corp as a great experience and look not a lot of people can say that because somebody Corps to deal with aren’t so proactive I get that but it was from our perspective a really worthwhile experience and once again another relationship that we’d built in a positive way to be able to move forward with the projects.
We had boundary fences that were falling over and these sorts of things and they wanted us to replace the locks alike but it was so old in design that we couldn’t replicate that. So it was a matter of just taking photos as evidence. Sending those through getting consent that was replaced with timber piling fence etc of this type and this size and design. And once again sending photos through for their compliance and everything was, everything was great.
Great. Well, one last question is how old was this unit?
The unit, I think it was the 60s the 70s unit red brick construction, tiled roof. So once again you know it was quite dated and faded the roof. So we’d sort of had to speak to body Corp about you know what do we, what can we paint the roof because we need to tie it as best we can with the other 11 properties in the same complex. Yet they looked either brown or grey so it was a matter of all which one do we pick. They were great to work with they sort of said look get as close as you possibly can see the original taupe colour we engaged a tile expert to help us with that process and we went ahead and sprayed the roof and boarded up fantastically to the point where other vendors in the same complex said look can we do the same as you and I said you know you need to contact, this is a contact and they’ll be able to support this issue.
This episode was produced by Alex Cooper with narrations and interviews conducted by Tyrone Shum.