The residential land developer is a special breed of business person. They will purchase a block of land, generally farmland on the outskirts of a town or a city, and then hold on to that land sometimes for many years waiting for council regulations to change the zoning so they can build on the land. They may also then wait for market conditions to deliver the best possible sales price, at which point if they have been able to hang on for all this time they should be in a position to make a very large profit.
This practice of course causes problems in the New Zealand housing market, because the houses are being built at the time of the developer’s choosing and not when they are actually required, hence putting pressure on existing houses and driving up prices.
And experienced residential land developer will probably have sufficient cash reserves to enable them to purchase the land and sit on it for many years, but the newer residential land developer will probably have to raise a mortgage for this, and will probably not be in a position to hold onto the land for a very long time before actually developing it into a residential subdivision.
The developer will need very good mortgage brokers in the Rotorua area to arrange for the finance for this stage the process, and the finance will generally be fairly short term and could be fairly expensive because of the risks associated with the project at this stage. The developer won’t bind us if they are able to capitalise the interest payments will cover them in any way, as these costs will be substantially less then the potential profit on the project.
While the developer is holding onto the land they will also be carrying out all the planning and consenting work, partly because this takes a long time and I will need to get things happening fairly quickly, and partly because the further along the project gets in the easier it is for the developer to pre-sell some or all of the sections. This can be a cash windfall that can be used to offset the land purchase and other expenses.
Once all the appropriate planning and consenting is complete then the developer will want to start on the actual development, and a different set of financing will be required from the mortgage brokers who are based in Taupo. This generally will be much shorter term finance, and also will be flexible, so that the lending can be reduced as sections are sold and paid for as deposits or even the final price.
The further along a land development proceeds into the subdivision the more attractive the sections will look to buyers, and the developer will be able to command a higher price and a higher deposit as the project proceeds. At some point the developer will have sold enough sections so that all of their costs are covered, including the previous and the upcoming costs, and from this point on every section they sell is share profit. The mortgage terms will have meant that they can pay down the mortgage and then attack the process of making good money.