“I’ve got a block of land in Howard Springs. Want to have a look at it?” Said the real estate agent.
It’s early 2004, we were in Darwin on holiday. Just taking some time off to relax. But, as usual, I was looking at property. I can’t seem to resist this activity.
“Sure!” I replied. Of course I want to have a look at it. I haven’t met a piece of real estate yet that I didn’t want to check out.
Marieta and I drove to the block; and met up with the agent.
“It’s 5 acres. Got it’s own bore, small transportable, and lots of tropical fruit trees. Everything from mangoes to lychees.” The agent explained.
Marieta started walking around looking at the rows of mango trees. She was amazed. She was sold.
And, so was I.
We Make an Offer
The agent continued, “The contract has fallen through. The owner wants it sold. They had it sold for $175,000 but now he’ll probably take less. Are you folks interested in making an offer?
We did.
We offered $147,000. I figured it would be rejected. But, the agent got back to us almost immediately and said the owner has accepted.
Why did we buy?
I normally don’t buy vacant land because it doesn’t generate sufficient income to cover costs. But, I thought this block may be a bit different. I felt we could rent it out to a mango farmer and generate a little income until we decided to build. Or, we could build a house in the front to rent out and still have a mango farmer renting the rest of the block. I felt we had a good chance of getting some income from the land and therefore reducing the holding costs.
But, the overriding reason was for the long term plan. In the long term we wanted a block of land we could live on and have a bit of a hobby farm. Give us something to do – occupy our time – in our senior years.
In the meantime, I felt compelled to get it returning some income to defray holding costs.
We ended up getting the block for $147,000 plus stamp duty and other buying costs (e.g. conveyancer). These extras ran a little over 5 grand. So, total cost came in slightly over $152,000.
Faulty Plan …
I quickly discovered my plan to generate income has some holes in it. First, I enquired about someone to farm the mangoes. I made some calls to Darwin; no takers. No one wanted to touch it. “Too many mangoes already! No profit! Price of mangoes is too low. Doesn’t make sense to grow them.”
That didn’t stop me. I put an advert in the NT News seeking someone to farm the block. After two weeks, not one person responded. Not even one inquiry. I became worried.
Then I called the local real estate agents asking about building a property on the block and then renting it out.
“No way. Not a good idea. Rural tenants are a real pain. You get lots of druggies in rural properties. I wouldn’t do it!” Were the typical responses.
Then I started to stay awake at night staring at the bedroom ceiling wondering, “What have I done this time? I’ve got $150,000 hanging out there with no income against it! And, it looks like all my ideas are not working. What do I do now?”
I was panicking. I tried to be cool about it. I tried to shake it off. But, underneath, I was panicking.
It’s never a good idea to panic! But, that’s what I did … oh well!
So, my next move looked good at the time, but looks pretty awful now. Here’s what happened …
On 28 July 2004 – a few short months later, we sold the block for $175,000!
The agent took a handsome $6,700 commission and the other selling costs took the total over $7,000. So, in the end we made a handy profit of about, $15,000. Not bad for a holiday trip to Darwin.
Is Making a Profit Always a Good Thing; Always the Best Thing?
So, we made a profit. That’s good right? Not necessarily. Let me explain.
First, I haven’t told you the whole story. In mid to late 2004, we sold up all our properties in the Clare Valley South Australia. “What does that have to do with land in Darwin?” You ask. Well, you could say we traded these properties for the land in Darwin. Meaning, the profit from these sales would easily pay for the land in Darwin. Again, what does that mean? It means this … you could say we got the land in Darwin for free! It all depends on how you look at it.
We held four properties in Clare. Two blocks of land in town and two acreage properties in Auburn – the gateway to the Clare Valley. Auburn in the most southern town in the Clare Valley.
I sold because these properties were not pulling their weight from a cash-flow vantage-point. Two of the properties were vacant land, the other two were rental properties; 3 bedroom transportables. One of the vacant blocks, a 32 acre paddock, was rented to a local farmer at $30 per acre. Not much, but it paid the council rates. The two transportable homes were rented at about break even. So, we only had one block of land in town that wasn’t drawing any income. But, overall, the cashflow was negative.
We made a handy profit on all the properties. The 32 acre paddock in Auburn, fetched $160,000. We only paid $50,000 a few years before. The Auburn property – a 12 acre paddock with a transportable – sold for $205,000. We paid $90,000. The house and land in Clare sold for $130,000, we only paid $14,000 for the land and $70,000 for the house; leaving a handy profit of about $46,000. Finally, we sold the vacant block in town for $50,000 which left us about a $35,000 profit.
It Depends On How You Look At It!
Back to the land in Darwin … So, in reality, I didn’t have $150,000 hanging out there. Essentially, I paid cash for the land but had no income against it. There’s a difference in this philosophy.
It makes a difference how you look at things. I chose to look at it the wrong way; this lead to panic. This lead to my sell decision. If I chose to look at it the other way, I would have been more relaxed. I would have taken a long term view. And, it would have worked out regardless. Let me explain.
Free Land!
Essentially, I got the land for free. I got it from the profit made from properties I no longer wanted.
You see, we wanted the land in Howard Springs (Darwin). It’s where Marieta wanted to grow her exotic fruits and sell them at the markets.
Have you been to the markets in Darwin? They’re are a blast! It’s a carnival atmosphere. Probably Marieta’s favorite thing to do while in Darwin.
But, I didn’t look at it this way at all. I looked at the profit from Clare as – PROFIT. And, I looked at the land in Darwin as $150,000 debt with no income against it.
My thinking affected my decision making. My thinking lead to panic. My panic led to making a short term decision – sell.
Work Out No Matter What!
The deal worked for us no matter what we did. Because we got the land for free, the holding costs were minimal. Taxes and upkeep. And, I’m fairly confident, we could have worked out a way to generate income off the property eventually. I just needed to give it more time.
Even if we were unsuccessful in generating appreciable income, we would now have the land and be ready to build our home and move in. Start harvesting those delicious exotic fruits – mangoes, lychees, bananas, jackfruit – and getting into the tropical, laid-back, “top-end” lifestyle.
I’ve always felt the best way to get a property, is to buy when the prices are low. We got this land for a low price. I knew it at the time. It was another overriding reason for our buy decision. And, my experience tells me that prices – property prices – tend to go up – way up – over time.
“But, what about the US?” you ask. No different. I believe the property prices will go up again; back to their previous levels and further. When? I don’t know. But, I’ll bet there will be a lot of folks sitting around the card table complaining … “I coulda got that house for half of what it costs now! I shoulda got it back then in the GFC. I had the money, but I thought the prices were just going to go down further. Nobody was buying real estate back then. All too scared. I was scared.” And, so on and so forth …
Try Buying that Block of Land Now!
So, if we want to buy that same block of land today, we need to dig deep financially. I tried to look on-line for a vacant 5 acre block of land in Howard Springs; can’t find any. But, I did find the median house price and it’s amazing. For November 2010, the median house price in Howard Springs is – wait for it …
That’s not a misprint. That’s Nine Hundred Sixty Thousand Dollars! (source: realestate.com.au) And, the cost to build a nice house is probably no more than $400,000. So, the rest of that median house price is the land!
Should we have sold? I don’t think so. Even though we made a profit, I still count this as a mistake. And, it seems like a double mistake. In other words we had two chances to correct. First, we could have held some of the property in the Clare Valley. Again, by selling two of them, we could have paid for the other two. Next, we could have kept the land in Darwin. After all, the profit from the Clare properties paid for the purchase; essentially the land was free!
Bottom line: We should not have sold all these properties.
Sell some to pay for others? That’s ok. But, to sell them all – not ok.
Lesson learned …