My Backyard Subdivision - Part 2: Purchasing Your Property
Securing your property on the best possible terms is a great start to your development. Buying well goes a long way to ensuring that your investment will pay you back above your required rate of return.
In this blog we talk about everything to do with agreements and how to buy the right property.
First, find out what you can about the vendor. Why are they selling the property? If the seller does not want to shift for a few months you may be able to trade that for a lower price and be able to start preliminary work on the property (such as survey) as soon as the agreement has been signed.
The ideal agreement might include a small deposit, long due diligence clause, early access and possession of the property, vendor finance and a long settlement date. Making the date of payment as close as possible to the date you can sell is ideal. Seldom is that possible unless you are prepared to pay above market purchase price.
Here are your top 9 considerations when purchasing for property development:
Your real estate agent is a vital member of your property development team. Not only will they advise you how much your properties can sell for, but also the features and benefits of the property and what might be important to the seller.
The selling agent will often provide a copy of the title, LIM (Land Information Memorandum), what comes with the property, what doesn’t, and any other relevant information about the property. Your lawyer can advise on the title and whether the LIM shows any problems.
Record your name with the agent because they know you are serious and will keep you informed. They will know that when you put in an offer you are serious. But remember, the agent is there for the seller not the buyer.
I have been to many auctions. They still get the blood pumping. The difficulty with auctions is you have to do all of your investigations before knowing if you have an agreement with the seller. Unless you know the property very well, an auction may not be suitable for property development.
3. Back up agreements
Be careful with backup agreement and agreements conditional on another sale. The backup agreement should include conditions for a building report, meth test, etc so that if a problem is found in the first agreement and it does not go ahead, you are not caught with an unconditional agreement. Your lawyer can guide you through this.
The legal reason for a deposit is if you enter into an unconditional agreement and then don’t go ahead, the deposit will cover the sellers actual costs (like agent’s costs, legal, etc).
Make the deposit payable only when the agreement is unconditional - not on signing (other than say issue of title). That way you are not exposed to the deposit holder going bankrupt and you will have no hassle getting the deposit back if the agreement does not go ahead.
5. Building Report
When buying an existing house, get a building report. If issues are found in the building, then you get an opportunity to require the seller to fix them.
If the house if old (pre 1945) you will probably need to get the electrical wiring checked. This requires a registered electrician.
Insurance companies have different rules about what they will insure, and will probably require at least an electrical certificate to show that the wiring is safe.
Fireplaces may also need to be checked.
When an insurance lawyer told me about the elderly couple who built their dream home, I knew things had changed. When they sold the property, the buyers test found the house was contaminated meth. What? How? Their grandson had stayed over some weekends and was smoking “P”. Insurance paid for the cleanup costs, but not the loss in value of the house.
I recommend to every purchaser to include a “P” test in all agreements, regardless of who the vendor is.
You cannot include meth tests in a building report because builders are not usually skilled in meth detection.
The current rules about acceptable levels of “P” are changing so this is a minefield at present. It is not yet clear what level of Meth is dangerous. If ‘P” is found in a house and cooking has taken place, then that may be recorded on the records held at Council and will appear on the LIM. The cost for a test is about $200.
An interesting article around this and leaky homes here.
A LIM can alert you to any problems with unconsented building work, stability issues and other information about the property. But this only goes part of the way.
A LIM comes with one thing nothing else can – a promise from Council they have told you all the relevant information they hold. If Council fail to do this and your property is affected you may have a right to compensation from Council. If your name is not shown on the LIM then this does not apply. Review the LIM with your lawyer.
One example is if the Council did not advise you of a flooding risk, but they should have. You can only get this insurance if you pay the Council $380 for a LIM. You do not get compensation if you get a copy from the vendor or the agent.
You can instead just get a building report from the Council for about $50 and do your own investigations. But this comes with no guarantees of accuracy.
A LIM is really an insurance policy for what is not in it. If Council misses something that affects your property value and they should have told you, then you can claim compensation.
Just to make things harder, subdivisions and earthworks are subject to the Environmental Standards regime (HAIL) which is about soil contamination (for example pesticides if the land was used for an orchard or sheep dip on farms or an old dump site). A soil report may be required to prove the land is not contaminated and is suitable for a residential dwelling to be constructed. Contamination may not, and does not, have to show up in a LIM.
Your bank’s requirements about financing developments change rapidly. You must get written confirmation of the finance you require if you wish to rely on it. If your bank considers that you are an investor, then the LVR restrictions may apply.
For most back yard subdivisions people use the equity in their existing house for finance.
Banks will often require a valuation at the start of the project so you will need to leave sufficient time to obtain a valuation.
Make sure you understand your bank’s requirements on construction loans, insurance and how the bank will allow you to draw down the loan as you require it.
A soil report may be required to prove the land is not contaminated and is suitable for a residential dwelling to be constructed.Tony Savage — WRMK Lawyers
There are many risks with property development. Interest rates can increase, as can construction costs. There may be a property market downturn before you sell. Disputes with contractors, delays, changes in law or council policy can be costly and reduce your return. Improvements you make to the property may not increase the sale price enough. Building defects and problems can be costly. The property may have unexpected features such as incorrect boundaries, title issues, hazards that increase costs and difficult ground to build on.
You need a decent return for the risk you are taking. Minimise the risks by buying well and having an agreement that suits your needs, and by carrying out investigations on the property and house before committing unconditionally.
In the next article we look at titles, boundaries and getting your team ready to start your development.
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.
My Backyard Subdivision – Ten easy steps to property development nirvana
Property development is a great way to add value to your property. A backyard subdivision (dividing one property into two or three titles) is straightforward if you know what to do, who should do it, and more importantly in what order things are to be done!