My Backyard Subdivision - Part 1: The Essentials of Feasibility
Before investing in your idea, test if there is actually a market for what you are selling.
To answer your very first question - is this worth doing? You need to know who you are going to sell the property to. Is your ideal buyer retired with no kids, a working couple who want no maintenance or a family that needs lots of room? What is important to them (4 bedrooms, big garage)?
Then you need to ask a real estate agent “if I do this, how much will it sell for?”
Property development comes with risks (timing the property cycle wrong, extra costs that you did not anticipate). A 15% return might be considered a reasonable minimum return for the risk taken. Some developers would prefer to use a minimum 20% return.
But don’t go making the numbers work by fiddling with the sale price until you get your desired return. Ask a real estate agent.
Feasibility is usually done as due diligence in an agreement, because you get the option to proceed with the purchaser if the property works out. Advise your lawyer what you want to do so that the clause in the agreement allows multiple accesses of your contractors and does what you need. Get this for a month if possible. Two weeks is difficult to squeeze everything in. There is an example clause at the end of this.
Note that if the transaction is taxable, then you will want to factor tax on the profit. If you are developing with the intention of selling, then you will likely pay tax on the profit.
If the property is being sold in an auction, as a tender or multiple offer you should do as much checking as you can even though you have no certainty that you will get the property.
To carry out a feasibility study you will need to have cost estimates for:
- Acquisition Costs
- Development Approval Costs
- Operational Works
- Building Costs
- Survey & Titles Costs
- Selling Costs
Here are the calculations I used:
Ideally, after first talking to your agent, get preliminary advice from:
- An architect or draftsperson to do a quick concept scheme that tells you what size project you could put on the site. Will this work for your target market?
- Confirm with your bank that they will finance the project based on your feasibility and understand what they need (more on bank requirements for construction in a later article).
- Check the council information on zoning. This tells you what size of the section you need and the rules on things like the distance a building must be from boundaries (and many other things). More on this in a later article.
- Check Council information on whether the property has any risks noted on it (e.g. subsidence) and the location of services such as water and sewage – are any of these going to get in the way or be a problem. The WDC GIS link is http://www.wdc.govt.nz/BuildingandProperty/GISMaps/Pages/default.aspx/ and FNDC http://www.fndc.govt.nz/services/fndc-maps
- A surveyor can advise whether you will be able to get the number of titles out of the property you require, how they will be configured (driveway) and have a good knowledge of complying with Council requirements and the cost of doing that.
- Ask your lawyer to check the title for the purpose of subdivision. Are there any impediments on the title that might affect subdivision.
The longer a development takes the less profit you will make. Getting the development sold as quickly as possible will be your main aim. So find out before what obstacles there might be and starting taking advice on how to solve them.
Just when most developers have figured they know everything about property development, something happens they get caught by! I have never heard a developer say “I wish I did less investigation before I bought the property”.
See how my development turns out later in the series and how any number of problems can wipe out that margin and sink the ship before building starts. It’s a go or no go situation.
Look up my article in a fortnight on Step 2 - Buying The Property.
Due Diligenge Example Clause
1. This agreement is conditional upon the purchaser being satisfied with the results of a due diligence investigation of the property and the purchaser's intended development of it by 5pm on [insert date]. If the purchaser is dissatisfied with any aspect of this investigation the purchaser may at the purchaser's absolute discretion by notice in writing terminate this agreement and in such case any deposit paid must immediately be refunded in full. This clause is inserted for the sole benefit of the purchaser and the purchaser is under no obligation whatsoever to supply any reasons for the purchaser's dissatisfaction with any aspect of the investigation.
The vendor undertakes and agrees to:
(a) Allow the purchaser together with consultants employed by the purchaser full access to the property for the purposes of the due diligence investigation; and
(b) Provide to the purchaser any information held relating to the property relevant to the due diligence investigation
My Backyard Subdivision - Part 2: Purchasing Your Property
In my last article I talked about why you should first establish the feasibility of your project. This week I discuss the actual purchasing of your property.