What are the costs and steps of subdividing?

Discussion in 'Property Investment - Other' started by Superhanc, 12th May, 2010.

  1. Superhanc

    Superhanc Member

    Joined:
    11th May, 2010
    Messages:
    2
    Location:
    Adelaide, SA
    Hi all,

    Im brand new here so go easy on me... Im currently living at home since returning from an overseas backpacking adventure.

    I have 1 IP that ive had since about 2005. 2br detached unit in Seaton (SA) which I paid 210k for, and currently recieve $270 a week rent.

    A collegue of mine has a property that was fire damaged out at Parafield Gardens which sits on an 800sqm block. He was renting it out until his tenants decide to leave the playstation 2 on a little too long and it caught on fire and caused over 100k worth of damage. Since then the property has been vacant and has just been sitting there.

    He's looking to sell the property for $235k. The current blocks of land in that error are being advertised for around the 160-170k mark for about 350-400sqm.

    My questions are -

    How much would it cost (approximately) to knock down and sub divide the block to a stage where i could then sell off the 2 blocks with building plans or without.

    Where should i start as this is all new to me? (council, surveyors? etc) And...

    Do you think this could be a good investment opportunity?

    Cheers in advance!!
     
  2. bcoombs

    bcoombs Real Estate Agent

    Joined:
    20th Feb, 2010
    Messages:
    121
    Location:
    Adelaide, South Australia
    You will need about $10k for demolition and about $20 for division costs. Your first step is to go to the council web site and look up the smallest allotment size the council allows. Unfortunately there are many blocks for sale in northern Adelaide area, so I'd be talking to some local agents about the end value etc. With this particular scenario the biggest cost will be holding costs while your waiting on council approval. Normally we would rent the place out during this process. Of coarse you could sign a contract with a long settlement.
     
  3. andrew_woolman

    andrew_woolman Member

    Joined:
    18th May, 2010
    Messages:
    14
    Location:
    Adelaide, South Australia
    Thanks Brett,
    I'm looking at doing something similar, but I'll be able to rent out during the approval process for around $250.00 p/wk.
    There doesn't seem to be a step by step guide as to the process from start to finish. Is it because it's an art that you have to learn or because there a companies who make money from people who don't know how to do it themselves? Perhaps we could start a list of things to do.
    We'll assume that due dilligence has been done and that the numbers add up.

    1. Buy Block
    2. Demolish existing structure (if applicable)
    2a Contact demo company to organise everything here (demolition approval, disconnections etc). Expect to pay $10 - $11k

    This is where my experience ends
     
  4. bcoombs

    bcoombs Real Estate Agent

    Joined:
    20th Feb, 2010
    Messages:
    121
    Location:
    Adelaide, South Australia
    Yes there are people who charge plenty to go through this process. I charge people to do this when they ask me. There are many who just don't have the time.

    There are many variables to this scenario -

    Council location - some will only give planning approval once slabs are down.
    State - some states only allow you to pre-sale once titles have issued.This adds to land holding costs.
    Lender - all lenders require you to ask permission to subdivide. If you don't have this prior to demolition you are in instant default.

    Your main risk of coarse is that the properties don't sell and if you keep them the rent doesn't cover the debt. I put on the market as soon as I get council approval. In fact if most of the time money is in the land I will flick the blocks asap and move on to the next one.

    A preferred option is to get to a stage where you sell one and keep one.
     
  5. gooram

    gooram Member

    Joined:
    31st Aug, 2005
    Messages:
    1,238
    Location:
    Perth, WA
    Hi Bcoombs,
    I'm just about to undertake something similar, planning to subdivide, keep the front house and sell off the rear block.

    I'm just wondering if you've done a fair bit of this, what sort of margins to you work on, i.e. does there need to be a certain % profit in the development for you to purchase? Do you buy, subdivide and sell straight away or do you give the land some time to appreciate?

    I'd love to hear some more details on your experience on this subject if you care to share?

    Thanks,
    Gooram
     
  6. pjvdl

    pjvdl Member

    Joined:
    25th Aug, 2009
    Messages:
    24
    Location:
    Adelaide, SA
    I am going through this process in Adelaide (Marion council) for the first time at the moment. The steps I have taken so far:
    1. Buy land :p
    2. Find a builder - Aug 09 - Nov 09. It took a while. I had concept plans which I asked builders to quote on, as off-the-shelf plans wouldn't work with the proposed site. Builders either weren't interested or took forever to get back to me.
    3. Engage builder to help with preliminary services - Nov 09. This includes developing working drawings and getting planning and building approval for construction
    4. Get preliminary quote from SA Water for new street services - Dec 09. 8 weeks. I needed to do this, as I needed to know how much SA Water would charge me before I could decide on whether I went with torrens title or community title. There is a Torrens vs Community subdivision - Adelaide values thread on this.
    5. Engage with demolition company to help with demolition planning - Jan 10
    6. Engage surveyor to help with subdivision - Mar 10
    7. Get approval for demolition - Feb 10 - 2 weeks
    8. Get planning approval for construction (with builder) - Started Nov 09. Approved late Apr 10
    9. Get planning approval for subdivision (with surveyor) - Started 9 Apr 10. Approved 12 May 10. This includes finalising SA Water quote, DAC approval and council planning approval. In reality, I started this process once I was comfortable council would give planning approval for the construction. This was well before getting formal planning approval for construction.
    10. Demolition of existing buildings
    I purchased the land August 2009, but negotiated a 6 month settlement. I started this process as soon as I signed the contracts for the land, so I had 6 months to play with before I started incurring holding costs.

    Because I am pushing the limits for council development guidelines, the whole process of finalising working drawings for dwellings that council were happy with and getting council approval for the construction has been the longest part of this process. Once I had planning approval for the construction and a preliminary quote from SA water, getting planning approval for subdivision only took about 5 weeks, as it was really just a rubber stamp from the council's point of view (I have head that this varies with council).

    Next for me:
    1. Finish demolition (happening this week)
    2. Get the site surveyed and pegged
    3. Pay all of the SA Water and subdivision fees
    4. Submit final application to DAC
    Hope I haven't missed anything.
     
  7. bcoombs

    bcoombs Real Estate Agent

    Joined:
    20th Feb, 2010
    Messages:
    121
    Location:
    Adelaide, South Australia
    Hi

    Firstly I have done this a few times and certainly gotten finance for a lot of projects. So my views are purely an opinion. I will say that those developers that base their numbers on holding, building and selling later tend to not be too successful. Talk to some agents, they may tell you what type of property is in demand at the moment. They may even have buyers on the books who are interested.

    Base your figures on today's market and look at whats selling. I guess its research, research and more research. I generally look at a min 20% + 5% for cost blow outs. Under this and its not worth it.

    With your scenario look at other hammer head divisions sold in the area and how long it took to sell. Some cases it maybe better to knock the house and build a new duplex.
     
  8. RumpledElf

    RumpledElf all fun in the big city!

    Joined:
    28th Apr, 2008
    Messages:
    5,641
    Location:
    Sydney
    Lots of steps. Most involve either waiting, or paying lots of money, both of which varies by council. We haven't exactly been rushing things and its now 18 months into the process for us. The most mysterious aspect has been exactly where the title for the new land ended up.

    Builder is pushing us for finance approval though and it looks like we'll actually get our fixed contract any day now (they have taken the soil for the soil tests FINALLY) so I'm fishing for a broker now too :)
     
  9. gooram

    gooram Member

    Joined:
    31st Aug, 2005
    Messages:
    1,238
    Location:
    Perth, WA
    For the first one I wont be using finance, as I only intend to subdivide and sell the land, initial estimates will be about 35k for subdivision and agents selling fees on top of that.

    I think rear vacant blocks are probably the slowest things to sell in the area at the moment, however some are still selling, in fact there is a similar development on the same street that has just sold the rear block and retained front home. So a good yard stick to use there.

    To calculate profit margin in this sort of dev, if you're retaining the front home, I suppose one would do it like this:

    Purchase price: 525k
    Rear block sale price: 220k
    Retained front home value: 420k
    Subdivision and Selling costs: 40k
    Total: 220 + 420 - 40 = 600k

    % margin: 12.5% (65k)

    The cash for the subdiv would be coming from the offset, so what is not factored in is the additional interest costs incurred on the PPOR, which would be pretty minimal depending on the time it took to sell (worst case 12 months @ ~2k)
     
  10. pjvdl

    pjvdl Member

    Joined:
    25th Aug, 2009
    Messages:
    24
    Location:
    Adelaide, SA
    Wouldn't that be 75k :D

    I assume that you are working from the premise that you already own the property as your PPOR? If not, and I was treating it as a buy and sell development, I would also be including purchase costs and holding costs (interest). That would likely give you a very different result.

    [Edit] Just re-read your original post stating that it is an IP that you already own, so scrap that last bit :eek:
     
    Last edited: 20th May, 2010
  11. gooram

    gooram Member

    Joined:
    31st Aug, 2005
    Messages:
    1,238
    Location:
    Perth, WA
    Correct :eek: Profit is 75k at a margin of ~14%

    I guess you're right though, to get a true cost, you would probably have to factor in the relevant % of purchase costs and holding costs.

    The other thing I didn't factor in was capital gains.

    Reworked, it would come out at roughly 50k profit. Which if it can be turned around in 12 months is 50k you wouldn't have made otherwise, unless you back yourself to make a handier profit elsewhere.

    The beauty of this strategy though:
    you reduce the debt on the front home (it will still be slightly neg however)
    you earn 50k
    after the sale, you're in a position to repeat the process
     
  12. bene313

    bene313 Member

    Joined:
    6th May, 2005
    Messages:
    852
    Location:
    Perth
    Below 20% becomes a tight margin.

    Any stuff-ups could slip you into the red.