Do your block in!

by zebra on 25 November 2010 · 16 comments

Sydney’s property market is a subject that has found its way onto the Stubborn Mule more than once. In this post, regular guest contributor Zebra (James Glover) manages to combine property and television with some now-traditional beer coaster calculations.

Channel 9′s high rating renovation show The Block just finished its successful second series on Wednesday night. It concluded with an auction of the four properties that the contestant couples had spent 8 weeks, and in excess of $80,000 each, renovating. The prize for the contestants was the “profit” of whatever they made at auction in excess of the stated reserve. The reserves were varied to reflect unique features of each apartments such as views, an outdoor living area or double garage. The idea was that the couple with the best renovation skills would see their apartment achieve the most above the reserve. In the end the couple who won, John and Neisha, achieved a price of $1,105,000 with a reserve of $900,000 and so made $205,000 (they also won first prize and an additional $100,000 which we’ll ignore for now). Wow! $205,000! Okay that was for 8 weeks of back-breaking unpaid labour. But still. It makes you think that this renovating lark might be a pretty profitable way for making a living. A couple of apartments like that a year and you’d be in gravy! Or would you?

The first thing to consider is the fact that the other couples didn’t do quite so well, making $87,500 (Jake and Erin), $47,000 (Mark and Duncan) and nix (Brendan and Chez’s apartment passed in below the reserve). Okay, you say, but that is still an average of $85,000 for each couple or $42,500 per person for a couple of months’ work. So take $42,500, divide by 8 weeks times by 52 weeks, carry the 2, take off 20% for holidays less breakages tap, tap, tap, that represents an annual profit of about $200,000 each. Still not bad. Break out the champagne!

But buried in the self-congratulatory articles, no doubt generated by Channel 9′s PR department, are some sobering facts. Put away the Kristal and maybe open a cask of Ben Ean and take a seat. The entire unrenovated apartment block was bought for $3.4m. The total amount spent on renovations (not including the couples’ labour) was $470,000 (including $100,000 on common areas). That makes $3.87m. The total sale price was $3.89m. So the total profit was a pretty modest $20,000. And that doesn’t include stamp duty (about $200,000) or agent’s commission ($78,000 @ 2%) plus, let’s say, legal costs of $2,000. So, in reality, the washup of The Block is a loss of $260,000. They don’t mention that in the publicity.

My back of the beer coaster calculations show John and Neisha were still the “winners” having only lost $60,000 on their reno. Jake and Erin and Mark and Duncan each would have lost $66,000 and, still last, Brendan and Chez’s reno lost $67,000. Perhaps Channel 9 should deduct John and Neisha’s loss from the winners’ prize of $100,000 and present them with a cheque for the $40,000 difference.

More revealing than the illusion that this was a profitable business from a renovators point of view is that the total reserve price was $3.55m. Now I’d expect the total reserve to at least equal the break-even cost of the apartments, or $4.15m. In fact it was $600,000 below the actual cost of buying, renovating and selling The Block. If in a very public show like this, with 1.2m viewers, the agents can so blatantly quote below the break-even reserve then what hope for the tens of thousands of buyers in suburbia struggling to match house ads with reality? It’s enough to do your block in.

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{ 15 comments… read them below or add one }

1 Paddy Smith November 26, 2010 at 6:19 am

Great article Mule, though as an ex liquor retailer I must note that Ben Ean comes in a classy green bottle and not a cask!

2 Stubborn Mule November 26, 2010 at 7:00 am

Did Ben Ean come in a cask in the 80s?

3 Robbie November 26, 2010 at 11:40 am

“The total sale price was $3.89m” – you’re valuing the final unit at its reserve in this figure, is that right ?

4 zebra November 26, 2010 at 5:35 pm

Paddy – you could be right!
Robbie – the figure I quoted was the sum of the auction prices inc the highest bid on the one that was passed in. All the facts and figures can be found in these two articles:
http://www.theage.com.au/entertainment/tv-and-radio/cashed-up-the-block-winners-reveal-baby-plans-20101125-187sl.html
http://theage.domain.com.au/real-estate-news/the-block-proves-a-bankbuster-for-nine-20101123-185u0.html
I notice they quote the stamp duty at $160k. But my conclusion is still correct.
For fans of BOTBC calcs I prorated the purchase price, and stamp duty on the basis of the final sale price split the $100k common areas equally.

5 pfh007 November 26, 2010 at 10:44 pm

Good work with the coaster!

Lock your doors tight tonight. Renovate for resale on the back of leverage is what made this country great and your pooping of the party should ensure that you are now public enemy No. 1. Keep clear of the Ouija Board as Kerry may send you some unkind thoughts.

Fortunately, I suspect you have nothing to fear. On the basis of past experience, in the event of the slightest whiff of de-leveraging the housing sector is guaranteed to receive urgent and immediate policy CPR to ensure we keep the dream alive (John Laws is back).

The standard adrenaline shot is usually a combination of limited supply combined with a ramping up of demand via population growth, buyer’s grants and easy money.

What could possibly go wrong with that?

6 Michael Michael November 27, 2010 at 12:01 am

Great piece, zebra.

But obviously it’s never been about the “contestants”. It’s about the network. Yet, even though I don’t watch this s**t, I do try to measure the zeitgeist with my toe in the water, and I honestly can’t believe that The Block season 2 could have been anything near the mad-money-maker it was for Channel 9 in 2003.

Anyone have any data to support my toe in the water?

7 zebra November 27, 2010 at 9:50 am

mysterious phh007. Like a lick of paint on a damp ridden wall a rising housing market covers a multitude of sins in the renovation world.

michaelmichael they say they got 1.7m viewers in the last half hour which is usually an indication of people who have toed the water and been interested enough to watch again. I put myself in that category. Not quite Masterchef final’s 2.2 billion viewers or something like that but pretty respectable. They also do well on the product placement with cars, furniture and t-hub spruiked mecilessly. Contestants were forever checking the t-hub to see what the weather outside was like which as far as I can tell is all it is good for. Product placement is in – research shows that the punters don’t think of it as advertising which is why every second of MC is a product placement rather than ads. Of course that doesn’t mean less ads it just means everything is an ad which is an advertiser’s dream. (I researched that fact on my iPhone – they’re great!)

8 Paul Wallbank November 27, 2010 at 12:23 pm

We should keep in mind the first version of The Block had its finale at about the exact time the Sydney property market peaked in 2003.

Perhaps the program concept is a leading indicator?

I didn’t watch the show and I’d ask how much work was “donated” by various tradies and suppliers hoping to get a two second plug as they do on the lifestyle shows. That would add to the renovation costs for folk not so well connected.

Great article with very good points about the total costs and tricks played with reserve prices.

9 njptower November 29, 2010 at 11:42 am

the champagne is Cristal by Louis Roederer – aside from that, a wonderful expose of a “reality” show.

10 zebra November 29, 2010 at 5:36 pm

njptower – I was probably conflating Cristal champagne with Krystal Carrington from Dynasty.

11 Stubborn Mule November 30, 2010 at 9:12 am

zebra easy mistake to make…probably what I thought when proofing it too.

12 Pertinax November 30, 2010 at 4:50 pm

It’s a renovation based reality TV show, not a lesson in property investment. No one would spend that much money renovating an apartment to try and make money, it would never be worth it.

The “prize” is just to get the contestants to appear on camera for 8 weeks and is a production cost, not a real profit.

13 Zebra November 30, 2010 at 5:48 pm

Pertinax – you are quite correct and I had that in mind as well. My BOTBC methodology may be flawed! The $90k or so spent on each apartment in “renovating” costs included furniture and some fixtures (from a sponsor) which I assume wasn’t included in the final sale. An astute investor would just pay to borrow the furniture from a staging company (I apologise if I am using UK terms here, I spent the noughties in London). But I also didn’t include the finance cost which was described as “vendor finance” which basically means they paid the interest on the purchase price for the duration of the show from purchase through till completion. I am guessing about 6 months at say 9% so about $150k.

I am interested to know what you think would be a reasonable renovation cost and profit in this case. I also wonder how professionals renovators take into account their own labour costs in determining if they made a profit or merely paid themselves a wage. Feel free to reply.

14 Robbie December 1, 2010 at 10:20 pm
15 Brendan December 8, 2010 at 6:49 pm

Michael Michael,
I don’t have figures to hand, but at the Ch 9 Xmas party, David Leckie credited it as one of the things that has saved the entire organisation from the brink of disaster – expect more “old is new” programming for you to ignore.

And a lot of US sitcoms

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