I rarely share details of the deals that our clients do.  However, this deal was so simple, so clever and so profitable that I just have to share the story.  It is an inspirational true story of what is possible.

The client, who I will refer to as Alex, turned an every day transaction into a deal with a $167,636 profit in just over a year.  Alex had limited funds but was aware of what was possible, got the right team and tenaciously pursued a goal.

To protect the client’s confidentiality the client’s name has been changed and I have adjusted some details.  However, I assure you that the story is closely based on a real transaction that settled in the past 14 days.

Background

In late 2020, Alex needed to lease a commercial premises to conduct Alex’s business. Most people would simply sign a standard lease. If Alex had done that the story would have ended before it began. However, Alex wanted an option to buy the leased premises.

This made the search a little harder as many landlords weren’t open to the idea. However, Alex persisted and eventually found premises that were a little run down and both suitable for the business and had a landlord that was prepared to grant an option.

In early 2021 Alex signed a two year lease with some options (to renew the lease). Rent was $40,000 per annum plus GST and outgoings. Importantly, the lease contained both an option for Alex to purchase for $900,000 within 12 months and another special condition that allowed Alex to repaint, recarpet and undertake some other cosmetic improvements to the property over the first year.

Late 2021

By late 2021 the cosmetic improvements were complete (paid for by Alex’s business), the factory looked great and Alex was ready to sell the Property. That’s right, Alex was looking to sell the property even though Alex hadn’t (yet) exercised the option to purchase the property.

Alex selected the right estate agent to sell the property. Many agents would struggle with the idea of marketing a property for Alex that Alex didn’t own yet. The agent that Alex selected was open minded and, with some reassurance, prepared to market the property. Importantly, Alex also got some advice about market rentals and, knowing that commercial property prices are often yield based, what sort of price could be achieved.

With that advice, and with the cosmetic improvements to the property, Alex committed to sign a new lease with the new purchaser at $63,000 pa plus GST and outgoings.

The Option is Exercised

In early 2022 Alex was running out of time. The option was about to expire – but the Agent hadn’t found the right purchaser. The Agent assured Alex that a purchaser would be found. Alex bit the bullet and exercised the option to purchase. Alex reasoned, that if a purchaser couldn’t be found, Alex would buy the property instead.

Alex also got some tax advice and ensured that the option was exercised by a trust to ensure that Alex didn’t pay any more tax on the profit than was absolutely necessary.

One effect of exercising the option was that this simplified the Contract of Sale and Vendor’s Statement.

The Agent secured a purchaser for the property for $1,150,000 – $250,000 more than Alex’s purchase price! Not all of this was profit however. There were agent’s fees to pay, legal and other costs and the largest expense of all was stamp duty. I did explore with Alex all the stamp duty possibilities. When we reviewed the possibilities it wasn’t possible in this case to avoid stamp duty on Alex’s purchase. An attempt would have over complicated the transaction and likely caused a larger reduction in the sale price than the stamp duty saved.

Settlement

We arranged the contracts so that we could have a simultaneous settlement. This means that both settlements occurred at once. The practical effect of this is that, in simple terms, Alex received $1.15 million at settlement from the purchaser, used that money to pay the Vendor $900,000, paid some expenses and received $167,636 in clear funds into Alex’s account that afternoon.

Amusingly, the Vendor’s conveyancer tried to tell me that we couldn’t do this. The conveyancer (wrongly) believed that you can’t contract to sell property before you have settled the purchase. I pointed out that it was eminently possible and that it really was none of the Vendor’s business what Alex was doing with the property as long as the Vendor got the contract price the Vendor agreed to.

Whilst Alex did pay stamp duty, Alex didn’t need a loan or short term finance to fund the deal.

What I Like About this Story

There are a number of elements to this story that I think we can all learn from:

Persistence – Alex faced a number of potential road blocks. Issues finding the right property and delays finding a buyer didn’t deter Alex from executing the strategy. Alex also had a Plan B (buying the property) if it was necessary.

Advice – Throughout the transaction, Alex sought the right advice and had great team members to help work through the complications. Alex also listened to and was flexible enough to adjust the plan where necessary.

Confidence – Alex backed the strategy and Alex’s ability to make it work. Alex wasn’t always sure how it was going to work – but keep asking questions until solutions were found.

Knowledge – Alex had the knowledge required to know what might be possible. Alex knew about the impact of rents on commercial property valuations, options and what cosmetic improvements would help improve the capital value.

I look forward to Alex’s next transaction. With an extra $167,636 (less tax) in capital, more experience and a can-do attitude – the sky is the limit!

Your Turn?

If you are looking at an opportunity and need some advice to realise the opportunity – contact me! I can contribute 25 years of experience with a focus on what’s possible.

Click here to book a 30 minute consultation at a low fixed fee.

I hope to be able to help you realise your next property opportunity!

Lewis O’Brien

Victoria’s Property Lawyer of Choice!