Deciding to develop your home or sell it as it is, is a huge decision that should not be taken lightly. If you are weighing up the options then I’d recommend doing some research, seeking advice and taking your time in determining what action to take but here’s some guidance that will hopefully assist you to work out which way will work for you.
Expanding families, finances, lifestyle and work needs are all significant reasons to take a step back when considering the options. You must balance the pros and cons, get a realistic idea of what the costs look like and work out how they will impact you.
Here are some questions to ask which will help you evaluate these factors and come to a decision that is best for you and your family.
Is my property sub-dividable?
To find out if your property is sub-dividable check out the zoning (‘the R-Code’) through your council’s Intramaps site. Almost all councils have one these days, and you can find Melville’s here.
Once you know the zoning, you can refer to the State Planning Policy 7.3 – Residential Design Codes which can be found here. On page 53 of the Volume 1 document, you will find a table that details how much land you need in order to sub-divide based on your R-Code. For example, for R20 it shows that you need to have an average site area of 450sqm for each lot you develop. So, if you have a 900sqm lot and an R-20 zoning, you are in business. There are however possible concessions on the minimum and average lot sizes. Read Development Control Policy 2.2 — Residential Subdivision to find out more, but the general guide is up to a 5% concession can be sought for the average and minimum lots sizes in some instances. This is of course still subject to approval by the relevant authority. If you are wanting to dive into these more complicated areas though, I would recommend seeking advice from an industry expert as it’s not always as clear cut as you might think.
Let’s assume your property is sub-dividable and it suits your current circumstances to go ahead, here are some of the key factors to consider:
Are there any planning restrictions or local planning policies relating to development in your area?
You can have a look on your council’s website in the planning section as the starting point. But to be safe, it’s always good to seek direct advice from the council before taking any further steps.
Would the sub-divided lots be capable of accommodating a good home design?
We shouldn’t automatically assume that sub-dividing a piece of land means someone will buy the lots for a good price, if they are difficult to build on. Lot width, lot depth, gradients, setbacks and other areas all affect what can be built. At the end of the day we buy land to build a home on it so that’s really what we need focus on.
What are the costs needed to complete the sub-division?
There are plenty of hidden costs you’ll be unaware of unless you have been through the process at least a few times, therefore it’s usually best to seek advice so there are no nasty surprises.
Do you have the available funds to complete the sub-division, or will you obtain finance from a bank?
Getting bank assistance with finance is always a possibility, but the development may need to meet certain financial criteria. A development expert or finance broker can help with this.
How you will deal with any budget blowouts?
Avoid the risk of getting stuck halfway through a development after a cost blowout by making sure you allow for contingency funds.
What does the market look like at the moment?
Timing can mean everything. In a booming market, it can be easier to sell property and make money but in a soft or declining market it might not be so straightforward. However, sometimes it’s not this simple. For example, what if there is a sharp rise in construction costs during a booming market? You might not make any money! Get to know your market and the costs before you start.
Are you overcapitalising or are you meeting the market’s expectations?
If you are building as well, make sure the design and fit-out is in line with the local market’s expectations and that you aren’t overcapitalising as this can really reduce on your profit. For example, gold-plated tapware and marble flooring might only get you a return on your dollar if you are living on the river in Applecross.
Do you have the time to invest?
If you are only sub-dividing a couple of vacant lots, then the timeline could be as sharp as 9-12 months from start to settlements. If you are also going to build, that could add on an extra 12 months or so.
What are the capital gains and/or tax implications for you?
The answers to this are going to vary from person to person so I won’t answer it here, but definitely run it by your accountant to make sure you get the right information that accurately reflects your situation.
Will you actually make more money sub-dividing and selling, as opposed to selling your home as it is?
Now this is what I find is often the most relevant question, and there’s a different answer each time. In the case of most developed inner urban areas, if you’re only sub-dividing two or three lots then once you’ve worked out all the costs and worked out the potential profit, you would often be better off selling the property as a home for someone else to live in rather than developing and then selling.
To give this some context, you can only sell a new home on 450sqm in a given area for so much, let’s say for $1m for each. The cost to sub-divide and build the home is a relatively fixed cost and let’s say $20k to sub-divide per lot plus $450k to build each home. All the marketing, planning, and approval costs to get there are also relatively fixed and could be close to $20k per lot. That would be $1m, less $450k, less $20k, less $20k and you had two lots that you developed. This works out to leave $1,020,000 which still must cover any interest, agent’s fees, possible GST and probably some holding costs.
So, once you add up all the costs and subtract them from the sales price, you are left with a pile of money that needs to cover the value of the land and of course provide some profit. However, your original property is a 3×1 home on 900sqm that is still liveable, and you could sell it for say a touch over $1m as it is. Sometimes that pile of money is less than (or very close to) what you might get if you sold your house to the next person so they could live in it. The above scenario is general, but it is actually quite close to the reality in many situations, especially around the Melville area.
Unfortunately, having a sub-dividable property does not necessarily make it worth more money than the home up the road that’s very similar but isn’t sub-dividable. It’s not always the case but this is a pretty common misconception, especially when an area undergoes a rezoning.
Making the decision
If your answers to the above questions don’t tick enough boxes, then selling your home as it is may be the better option. It’s going to be quicker, much less fuss and possibly very similar in financial return.
I’ve looked at many small sub-dividable properties over the past six years and I often find it’s worth more to someone else as a home than it is to me as a development site. This is because I know that I couldn’t make profit purchasing it at the price that they could sell it to someone else to live in. That being said, I’ve also still managed to find a few inner urban properties that have turned into profitable developments, so I guess it comes back to the old case-by-case situation.
If you have owned your property for over say five years and the market has grown since then, it makes it a little easier to justify developing as the best option, but if you bought your house within the last few years and the market hasn’t changed much, or maybe construction costs are astronomically high like they are now, selling your home as it is could be your best bet. Let someone else deal with it at a later date and enjoy what your next move might have to offer.
If you want to have chat with James about your real estate matters, he is happy to help. He is best contactable via email at james@mgpproperty.com.au or on 0447 120 125.
You may also be interested in these articles:
- Presenting Your Home For Sale – A Real Estate Agent’s Top Tips
- 5 Things to Consider When Choosing an Agent
- Things to consider when selling your home in a surging property market
- Things to consider when buying property in a surging market
