When it comes to property development sites, never take the selling agent’s word on its “potential” end value and project costs. The agent will give you rough figures, but they may leave essential components out because they're not developers – they're sales people – and this is what too many people get wrong.
In fact, I’m going through that experience right now with a property I’m looking at in Melbourne.
It’s a multi-lot subdivision and the agent is saying: "There’s plenty of money in this one. You’ll make at least make $1 million out of it."
The thing is, whichever way I look at it, it is only about $500,000.
So that’s a substantial difference and if it’s only $500,000, then you just need one delay and that’s the profit wiped out.
Of course, they never put that “advice” in writing.
They make you their best friend and basically tell you whatever you want to hear, especially when they see that there isn’t a lot of experience behind you.
One of the keys to property development is to make sure you keep greed and ego out of it above almost anything else.
As I have written about previously, you shouldn’t attempt a property development until you’ve invested for a while and have also completed a few cosmetic renovations.
The next step then is a simple subdivision, but you need to understand that they’re not as simple as they might appear.
Firstly, if you’ve got a block large enough and the house is in the perfect spot – in other words to one side – you need to check with council what the minimum lot size is.
You must also find out the council’s appetite on whether they will allow you to do a subdivision or not.
Just because it’s a big parcel of land doesn’t mean you can subdivide it.
Different councils and different areas will have different appetites and different guidelines in terms of subdivisions.
As an example in Victoria, in some council areas you can subdivide any parcel of land so long as the first lot is 330 square metres.
They don’t stipulate what the size of the other land is so technically it could only be 20 square metres, not that you would do that.
The next step you need to look at is whether it will be viable – that is, will someone buy it off you – and will it actually accommodate another dwelling.
The thing that most people tend to forget is infrastructure costs.
Things such as upgrading the sewer line, and if that’s the case, because you are adding more burden to the lot and to the street, will the Water Board require you to replace the sewer connections for everyone downstream of you?
These are the things that could blow out your costs and they are also the expenses that you can’t look at until you’ve started your due diligence.
Often people just consider their baseline cost and say: “I bought the property for $300,000 and if I subdivide it, the front house will sell for $280,000 to $290,000, the piece of land will sell for $100,000 and therefore I'm in the money.”
The problem is they don’t take into account the survey works, the upgrade of the sewer and the council fees, etc.
One of the biggest mistakes people make is looking at the project very superficially.
Generally, about 10 to 15 per cent of the cost of a subdivision is in the ground, so you don’t see it.
I like to call these expenses “soft costs” that you can’t recoup because you can’t say: “Hey, I’ve priced the land this way because I have put down new sewer connections.”
Buyers are only going to see the land, which means they don’t see the money you spent getting that land carved off, the fencing and the set-backs, getting services connected to the lot etc.
Another major problem that novice developers come across is not understanding the time frame required to complete the project.
It is going to take you two to three months – or in most cases a year – and so you have to take into account the holding costs as well.
Plus, if you can’t pull it off, then you’re generally sitting on a fairly expensive property with usually really high negative cash flow.
That will hurt you financially very quickly, especially if the market softens.
Before undertaking a simple subdivision, you should have a few buy and holds under belt, and have completed a few renovations, so that you’re used to talking to the tradies, making decisions and holding people accountable for time frames.
For your first subdivision, you actually want to go to a provider who will do everything for you, and will also allow you to look over their shoulder.
The first subdivision I did, each time the surveyor reached a milestone he would come to me and say: “This is what I’ve done and these are the people I had to talk to” – and I happily paid him extra to do that, as I learnt off him.
The secret is that in every subdivision the key person is actually the surveyor.
There are some surveyors who will just peg out your land – and that’s it.
There are others that will help you from the start all the way to the finish where you’ve actually got registered land – that’s the one you want.
The way to find the latter type of surveyor is to simply ask them whether they do end-to-end.
Unfortunately, most novice developers ask their solicitor to organise the subdivision, including the surveyor, and the solicitor then add their margin on the cost and simply charge it to you.
One of the easiest ways to source a local surveyor is to go to council and ask who the surveyors are that they work closely with as well as who are the most active in the area.
You also want a surveyor with local knowledge, because they will know what they can get around in terms of the council rules.
It’s all about finding the surveyor with the right knowledge of the area as well as an existing rapport with council’s planning department.
You also want someone who you can set up a time to chat with them – and someone who is happy for you to look over their shoulder so you can learn along the way, too.
To conclude, you need a team around you who will do all the heavy lifting for you, and be readily available to guide you through the maze.