Learned a big lesson about development sites

[Tulamalula]

I've been prattling on about development sites in other threads. Newbie with no experience in building units, or even subdividing a block for a retain and build. I called the agent about this one yesterday http://www.realestate.com.au/property-house-qld-mount+gravatt+east-115780135

It's on for $565. Hoped the house would be rentable and block sub dividable as on a corner. It's zoned LMR - house is dilapidated, unrentable - asked the agent what it would be worth if it was not zoned LMR, she said low $400s.

So the premium you are paying for a dev site in this case is over $150K!

Unless you are a proper developer there is no point buying such a block to hold, with no rent coming in, unless you've got the money and the know how to get stuck straight into a development - otherwise holding costs are just too great.

Apparently even proper developers are steering clear of this particular black because they can't fit 8 units on it - I assume 8 is the magic number needed to actually turn a decent profit.

I'm going back to looking for a normal house that needs a little reno, that brings in decent rent and leaving development to the experts!

 

[belvoir]

You have it a little wrong.

The price of land for a development site is derived from what you can get on the site. There is no magic number that makes a development feasible. The usual formula to work out the purchase price is:

Gross Realisation (sales prices) - Total Costs (other than land) = Profit

Profit / Total Costs = Development Yield

Development Yield should be around 20% and so anything over that 20% is what you use to pay for the land. If the risk is higher you increase that 20% therefore giving you less money to pay for the land.

If you accept less than 20% you can pay more for the land. The 20% figure is derived from bank funding, banks generally won't lend on a development if you can't show in your feasibility that you are going to achieve a 20% return. However, that was in the old days 10+ years ago, now you can get finance for 15%.

True developers don't buy sites like these because to make it profitable you have to be on site and be an 'owner/builder' developer, they are just too small. Because these owner/builder developers are on site doing a lot of work they can afford to pay more for the site making it less feasible for your true 'developer'.