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Do I develop or sell?
If you own property in an area that is undergoing a change in its housing density it is a tremendous opportunity to create real wealth for yourself. You have so many choices to consider. Do I sell and realise some of the increase in value of my land? Do I hang on to the property and realise the potential later? Do I develop the property now? Everybody will answer these questions differently depending on their current situation and what people believe wealth is for them.
Being a developer is all about giving a property a better and higher use. Depending on how much better and how much higher the use will determine how much wealth you create. There are 4 stages of development:
- Development Approval
When a rezoning takes place there is usually a jump in price because the land has a new potential for a better and higher use. Effectively nothing has really changed other than the potential of a better and higher use is now available that wasn’t available before. This rezoning now increases the market demand because a new type of buyer enters the market….. The Developer.
The Developer is NOT an emotional buyer they are purely buying based on their potential to make a profit. If you are trying to profit from a rezoning one of the biggest mistakes you can make as a seller is asking for a higher price than your market can bear. Too many times sellers who experience a rezoning try to sell too high in the Developer stage. They are selling in stage 1 but want stage 3 or 4 prices. To maximise your return in this market you need to understand how much profit each stage needs for a project to be viable and be prepared to sell at the stage you are prepared to participate in.
This is the stage that turns the potential into a reality. At this stage you have obtained an approval to develop your property to a particular better and higher use. The secret to this stage is ensuring you maximise the potential. Also at this stage no soil has been turned, no construction has taken place – all you have done is formalised the planning of what you want to do with your property and you have received a conditional approval to do so. The approval will have conditions the developer will need to satisfy to achieve the better and higher use. The conditions will include meeting the town planning minimums, adequate power supply, acceptable delivery of water sources, meeting drainage and sewer standards. These conditions must be satisfied for either the subdivision and/or the improvement stage.
The Development Approval stage offers a higher return than the Rezoningstage but not as much as the Subdivision or Improvement stages. The costs you incur in this stage are surveying costs, engineering reports, soil analysis and design costs. These costs can range between $10,000 – $20,000 and generate an extra $30,000 to $$60,000 to your selling price.
The Subdivision stage is the stage where the developer satisfies the conditions in the Development Approval to make the land ready for the final improvement, the construction of a building. Some developers bypass this stage and proceed directly to the Improvement Stage where they satisfy the Development Approval conditions and construct the dwelling. Again it’s a choice the developer makes.
This stage incurs costs like land clearing, retaining of land, establishing boundaries, running services to the site and anything else required that creates a freestanding block of land. Again when a developer takes a block to this stage it is an expectation that he/she is rewarded for spending the money to take the development to this stage. Usually the rule of thumb is for every dollar you spend you get at least three dollars back.
You might have seen a property offered as a “House & Land” package, this is where a developer has satisfied the Development Approval conditions and has organised a building contract. You purchase the land and you now become the Improvement Developer. The original developer has done all the hard work and left some margin on the table for you to make a profit. You may have also heard of an “Off the Plan” project. This is where the original Developer has done all the hard work of getting his approvals and wants to lock in a buyer to complete the project. There are higher holding costs for the Developer which get passed on to the buyer and there is usually no profit margin on offer. The benefit for the buyer is in a rising market. You buy at today’s prices and take possession when the market has risen. The other benefit is you get a brand new home without any of the development issues, you just move straight into your dream home.
This is the final stage in the Development Stages. This is the stage where you finally build the dwelling and realise the better and higher use for the property. This stage usually incurs the most cost and it can also yield the highest profit. At this stage you are yielding the Rezoning profit plus the Development Approval profit plus the Subdivision profit and the Improvement profit.
If you choose to keep the development what you have also done is purchased an investment at a wholesale price, locked in your developer’s profit and increased your income yield. You need to be aware of your tax obligations if selling and you may want to consider moving into your new dwelling and selling or renting out your old dwelling. These choices should always be made under advisement from your tax specialist.
So the question of do I sell or develop really depends on your appetite to realise the full potential of your property. Having an experienced property consultant on your team is vital especially if you have no experience in developing. By giving away some of your profits and investing in a property consultant even you can become a successful developer.
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