The basic premise of subdividing land with an existing dwelling is simple: two is better than one. But how can investors use these projects to turn big profits?
It’s hard not be swayed by the fierce logic of doing a subdivision project. If you’ve got a larger sized property in an in demand area,what could be easier? You split the land in two, sell off the one half – or both – and make almost twice what you would if you’d sold the property as a whole.
It’s the kind of thinking that sounds great on paper. It could even work in movies – it certainly wouldn’t be out of place among the many seemingly logical, yet questionable things we’ve seen Hollywood throw at us: cars that explode when shot at or a cop who jumps off a high building to land safely in a skip of trash.
The question for subdivisions is: can the logic work out in real-life experience? Is it really that easy?
“In subdivision projects there’s a certain feeling of expectation meets reality – at least for most people who are novices at it,” says Jason Ashworth, a Sydney-based quantity surveyor. “They might think it’s relatively straightforward, but it can be a lot more complex than they realise.
“Most people are probably aware that there’s a lot of red tape involved, but I think few take into account how their properties may or not be eligible for a profitable subdivision on a purely physical level.”
Ashworth says that certain attributes make some properties better candidates for a subdivision than others. “On the simplest level, the property has got to be in an area where the local town planning council legislation and policies indicate that subdividing is allowed.
“Then you’ve got to consider the area’s popularity. This would seem like a no-brainer, but you’d be surprised how many people are dividing up properties in suburbs that are in far out parts of cities where not many people want to buy. For a subdivision project to be a profitable venture, it works best when the area is highly desirable. Think of it this way: people have got to be so eager to get into the suburb that they’ll pay a high price for a property that’s been subdivided.”
One way to spot if an area has subdivision potential is to see if there are many other subdivided properties in the area. “It’s not crucial, but it’s usually a good sign. A lot of subdivided properties usually suggests that the town council policies support subdividing and that there’s a good market of buyers who are willing to buy the divided properties,” he says. Andersen adds that areas where a lot of properties have been divided makes it easier for valuers to establish what your property will be worth at the end of the project. This is important because valuers are likely to be involved at some point of the process.
Measuring a property up
The due diligence process requires finding out three primary things. For most properties to be eligible for subdivision, the two new split properties need to conform to their local town planning council’s minimum lot size.
The first requirement pertains to width, the second to overall area. A third requirement is zoning – subdivisions in some types of zoning are not allowed.
The exact details of each requirement normally differ from council to council, but this information is easily accessible via each council’s town planning scheme. These days, save a few areas in Australia, these town planning schemes are readily available on most council’s websites.
Where the problems start
While finding out whether a property is suitable depending on its zoning, width and lot size is relatively straightforward, Andersen warns that certain attributes in a property can increase the cost of subdividing.
Part of the process of subdividing will mean allocating the intended new lot the same services that are available in every other property in the area – water, sewage, electricity and storm water draining. However, connecting the property to some of these services can be tricky.
“Electricity is easy. Water reticulation isn’t usually a concern either, because it’s pressurised. What you need to look at is sewage and storm water drainage. Those are where you can sometimes come unstuck.” A good trick for circumventing the entire issue of both storm water and sewage is to look for properties that slope up from the road – if possible.
“Sewage and storm water run under gravity, if a block slopes up from the road it’s usually an advantage. It will often mean things flow from the block downhill to the road where the services are. If the block slopes away from the road then you have to think: how do you deal with the sewage and storm water? It won’t flow uphill naturally, so that’s when you’ll probably have to go into someone else’s property.”
The biggest costs
Aside from making new connections, there can sometimes be other considerations that also impact the speed and costs of a subdivision project. If the council looks at the property and believes that it might have issues with overland flow in particular rain events, they may require a report from an engineer. This can cost up to $5,000. It also often requires a couple of months to complete.
It is for this reason that Ashworth stresses how important it is to have a professional involved, such as a consulting surveyor, right from the start. They will be able to advise you about such issues before you’ve lodged a development application, minimising any surprises.
In lots that are over a hundred years old, there could be other potential snags. If part of the existing house needs to be moved or demolished to create the second lot, heritage issues often apply. This will make the project significantly more complicated.
“If you’ve got someone to tell you from the beginning what may be a problem for the property from the point of view of a development application, you’ll save yourself a lot of time and money. It’s better to know what you’re in for before you’ve gone to the council, so I’d recommend anyone thinking about this to engage the services of a professional at some level,” says Ashworth.
Andersen agrees. He says that one of the biggest surprises that subdivision applicants get is if contribution fees apply for their area. These are fees levied by certain councils to cover infrastructure costs such as water and sewage whenever a development occurs that increases the number of lots. In some capital cities these fees can cost as much as $50,000 to $70,000.
“If you didn’t do your homework and, say, got a loan to do the subdivision and only then found out that there’s a $70,000 contribution fee you didn’t know about, that will obviously be a big problem,” he says. “Generally speaking, subdividing is a pretty easy way to get into a property development, but it’s the people who try to do everything by themselves that usually land in trouble.”
To discuss this article or anything to do with your finances, please contact us today and we will be happy to assist you.