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July 31, 2014

Property development pre-purchase checklist

By SAM SAGGERS

1. Micro market demand

Most of us think we know which markets are in demand from an investor or owner-occupier point of view, but when choosing a small development site you need to take a microscopic view of the local market.

A great tool to use is REA Group’s Neighbourhoods. Enter the suburb name where your development site is located, and the profile gives you a wealth of free information on listing statistics and the overall average visits per property in comparison to the state average.

This allows you to compare suburbs against each other as well as similarly priced development sites, which may be located in different suburbs.

Always choose “high demand markets” above any other choices, if your feasibility stacks.

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Source: www.realestate.com.au

2. Vacancy rates

If you’re building a product aimed at investor buyers, you want your site to be in a market that will give them peace of mind with regards to one thing and one thing alone, “Am I going to have a long period of vacancy?”

Regional markets are notorious for high returns accompanied by higher vacancy rates. As profitable small developers, our goal is to minimise our own risk and pick an area that we are 100 per cent sure will sell and in a timely manner. A handy free tool I use on a daily basis is SQM Research’s Vacancy Graph. It’s important to look at two things on these graphs:

1)    What is the current vacancy rate in the suburb?

2)    What has the historical average vacancy rate been over the past few years?

The current vacancy rate isn’t always the be all and end all as the figure could be slightly skewed due to the time of year. Vacancies in Australia usually increase over December and January due to the summer holidays, so if checking a vacancy rate during this time of year, I’d look at what the average vacancy has been in the suburb for the past three years. An average vacancy rate of three per cent or less is considered low, so an average of approximately three per cent would be a safe bet that investors won’t be stressing about not having tenants.

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Source: SQM Research

3. Planning regulations and precedents

Often the best opportunities are raw development sites with no approvals in place. But as with most things, the greater the opportunity, the greater the risk. However, there are a few things we can do to minimise this risk. There are two types of development scenarios with most councils – code assessable or impact assessable.

a)    Code assessable development

Code assessable developments are scenarios that tick all of the council requirement boxes and are thus “by right”. The only thing that you need to be weary of is the actual size and dimensions of what you’re building, to ensure the plans comply with setbacks from boundaries and that you aren’t pushing your build envelope. A site that ticks the boxes for a code assessable development is usually safe to sign a contract with a minimal due diligence period.

b)   Impact assessable development

When you’re trying to push the envelope with what council planning allows your application becomes impact assessable. Two things are important when purchasing an impact assessable site. Look for precedents set by previous developers. If the neighbouring site is carrying a larger project than what the local council allows, you have a precedent to do a development of similar size, though there’s still no guarantee that you’ll get approval from council.

Secondly, try and get a lengthy due diligence period in your contract on the land or better yet, try and make your contract subject to development approval. A subject to DA (development application) contract is safest but due to the timeframes involved, usually you’ll need to pay a premium for the land to secure it.

4. Flooding and bushfire overlay

You’ve found a site with a development approval in place, it’s been on the market a while, is discounted far below its actual value, ticks all of your boxes, has no easements or encumbrances and is flood free! If you ever find this site, please let me know as I can guarantee that it doesn’t exist.

With our climate and topography, our country is prone to flooding and bushfires. When you can secure a development-approved site in one of these zones, there isn’t usually an issue with going ahead with the development. The question is, will you be able to sell it?

Often there are raw blocks of land for sale with the correct zoning, at what would seem to be a reasonable price. In major cities, checking what overlays apply to a property can be quite simple. Brisbane has a negative stigma with historic floods but checking if a property flooded in 1974 or 2011 is easy, thanks to Brisbane City Council’s interactive Flood Awareness Map. Other councils have similar tools as well. Often searching for the term “PDOnline” and the local council name will provide you with this. The PDOnline mapping tools can be used to check the various overlays that may affect your potential purchase.

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Source: Brisbane City Council

5. First in best dressed

First in best dressed is usually a positive term in life. With property, this isn’t always the case. Plenty of markets in Australia consist of older properties in need of renovation or detonation and in many instances the local councils are pro-development with their planning. One of the problems we can run into is a lack of comparable new stock. This can cause issues with development finance, valuations for buyers when they attempt to settle and benchmarking.

Benchmarking usually affects investor buyers the most as they argue they can buy an old house on a block of land for a similar price or less than your brand new stock which you’re trying to sell. If you’re the first in an older suburb, ensure that it’s a high owner-occupied suburb, as you might be able to attract local downsizers to purchase. Otherwise, it’s best to let someone else get in first, suffer all the hurdles you would’ve faced, and follow in their footsteps at a later date. Check on property listing sites to see if there are new or near new properties for sale in a similar price bracket as your stock for an indication.

About Sam Saggers

Sam Saggers is the CEO and co-founder of Positive Real Estate, an author and a regular contributor to the Australian national media. Sam is a passionate educator, a sought-after spokesperson and offers his wealth of experience to educate investors on the complexities of real estate investing.

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