Why are sub-dividable blocks rarely 80-100% times the price?

[jerrybee]

I've seen it a lot. A sub-dividable block will be next to a regular block, and only commands a small premium, say 20% (e.g. 400k regular vs. 500k sub-dividable).

But someone could come in, tear it down, and cut it up and sell each one for 70-80% of the price of a regular block with a house on it.

So why is it the premiums are generally small compared to what people could make out of it? I'm a little confused...BASICALLY: doesn't it stand to reason that if you can almost double your money, then the property should be worth almost double as much?

Is it because the market for smaller houses is limited? Or that it's a lot of trouble to get DA? Or is it that the vast majority of people simply prefer to buy established homes and therefore they tend to take ages to sell and therefore have high holding costs?


EDIT: I think I've figured it out.

Say on average 50% of properties can be legally sub-divided. Now let's assume only 5% are worth sub-dividing (in really good areas, near shops, transport etc). I bet this number outweighs the amount of developers out there. So if there are only enough developers out there to consume 2% of these properties, there's another 3% being sold to regular people who just don't care and therefore aren't willing to pay a premium. Since demand doesn't outweigh supply, this leads to only a small premium. I'm pretty sure this is it!

 

[thatbum]

Have you done a subdivision project before? There can be a lot more time, effort, and cost involved than you might think.

Its rarely easy money, even for those that know what they're doing.

 

[jerrybee]

Have you done a subdivision project before? There can be a lot more time, effort, and cost involved than you might think.

Its rarely easy money, even for those that know what they're doing.

Yes this could be the answer I'm looking for, thanks

 

[DavidMc]

It's to compensate for the PITA process it is to make it sub dividable, allowing for risk (in case it get's knocked back) and holding costs.

 

[RPI]

Allow $70k in costs for the subdivision. Then allow 6 months interest (it it all goes well)

 

[MTR]

...and in Perth around 45k and 6 months interest

 

[jerrybee]

...and in Perth around 45k and 6 months interest

45k fee. 75k fee. That's still a tiny, tiny percentage relative to the potential gains, hence my original question!

So it costs you a small 20% premium to buy a sub-dividable block. Add in another 10% costs. But you get a huge ~80% ROI...

I imagine the stress and red tape alone accounts for most of it.

 

[perthguy]

I've seen it a lot. A sub-dividable block will be next to a regular block, and only commands a small premium, say 20% (e.g. 400k regular vs. 500k sub-dividable).

But someone could come in, tear it down, and cut it up and sell each one for 70-80% of the price of a regular block with a house on it.

So why is it the premiums are generally small compared to what people could make out of it? I'm a little confused...BASICALLY: doesn't it stand to reason that if you can almost double your money, then the property should be worth almost double as much?

I have a subdividable block with an existing house. I have a provision sum for demo, clearing, servicing, subdivision application and titling for around $80k in Perth.

It was sold with subdivision potential for a small premium of maybe 20%.

It is a fairly complex, costly and lengthy project to divide the land into separate lots. Lucky for me the rent on the existing house covers the interest currently.

Oh yeah, that is the other reason why they are not more expensive. The returns are lousy. With the house in the original condition, I was lucky if the rent covered half the original interest bill. I am only barely breaking even now because of an extensive reno and dirt cheap interest rates.

 

[Corey Batt]

In SA where subdividing is relatively cheap and accessible, every man and his dog has done one or knows someone who has. As such pricing of simple splitter blocks can equal the value of the end development values, or worse attach an even higher premium, ie a 420k site where the end blocks are only worth 200k each + 30k in development costs.

 

[jerrybee]

And here I am thinking splitter blocks are basically gold, when in fact you need people with a lot of experience and some luck on their side to make it work. Interesting feedback, thanks guys.

 

[DavidMc]

$80k in taxes and government fees to split a 'regular'-ish block?

Now THAT is the real thing people should be protesting against rather than negative gearing!!

 

[CHAOS]

$80k in taxes and government fees to split a 'regular'-ish block?

Now THAT is the real thing people should be protesting against rather than negative gearing!!

+1


In recent days we've both had someone throw a NG comment our way. They don't consider landtax, stamp duty, CGT, and the above. I don't have the stats but I would expect that Gov receives on a whole more $ from the PI than they pay out in NG.

 

[sanj]

45k fee. 75k fee. That's still a tiny, tiny percentage relative to the potential gains, hence my original question!

So it costs you a small 20% premium to buy a sub-dividable block. Add in another 10% costs. But you get a huge ~80% ROI...

I imagine the stress and red tape alone accounts for most of it.

Do the maths, 80% roi for a basic 2 lot subdivision is far from the norm.

You need to take into account stamp duty, subdivision costs, holding costs, contingency, profit, selling costs, marketing costs etc.