Happy New Year everyone!
On reflection of our 2020, the team at Premium Property Profits wanted to share one of our biggest challenges investing in property and a frequent roadblock that we kept running into, especially in the post pandemic financial climate.
If you are investing in property and looking for a development site, you might think that purchasing a property with plans and permits already endorsed and approved to develop on is an ideal solution.
Makes sense at first. Most real estate agent’s ad copies never forget to claim that the “hard work” has already been done for you !
You might even see the inherent benefits of not having to go through the expense, aggravation and the waiting involved in drawing up and submitting plans and permits yourself. This is enough to entice you to pay more for a property than its worth just because they are selling with approved “plans and permits”.
There are 2 major reasons why buying or selling with plans and permits can work against you when investing in property.
- Inefficiencies :
In our experience, every property with plans and permits we put under contract and didn’t pass Due Diligence, had poorly designed plans and permits. There were always a lot of changes that needed to be made to the design to improve the cost of construction as well as improve the appeal to our target market. It made no sense to pay more for plans and permits when we had to apply for changes to plans and permits anyway, so we were not really saving enough (if any) time, money nor aggravation in the end. There could be little changes here and there that add up in the end, or it could be that the whole set of proposed plans need to be redesigned entirely. Inefficient designs yield inefficient results when investing in property. A big part of being a successful investor is to spot the inefficiencies and improve upon them.
2. Finance :
The other major issue we kept running into was that Finance for property developers got very tough in 2020. Finance for homebuyers eased up in a big way, however if you were investing in property , chances are you were struggling to get even the most basic finance.
Something that may not be common knowledge is if there are plans and permits approved on a site, there is no property valuer on any of the 1st or 2nd tier lender’s panel that would value the property for the loan on land value. If there are any endorsed plans and permits for a site, the property valuers submit a valuation for those plans and permits to the financial institution. So a poorly researched and designed set of plans and permits will not be an attractive investment for the bank. Nor should it.
Remember that if you are to convince the bank to lend you money so you can continue investing in property, your project must convince the property valuers first.
For one of the recent projects, we even spoke to a couple of the property valuers and then the bankers directly to advise that we had no intention of implementing and developing the existing approved plans and permits.
However this bore no fruit.
None of the top 4 , and none of the 2nd tier lenders were prepared to lend based on land value when there are endorsed plans and permits on record. When we investigated a 3rd tier lender they would only lend us 65% LVR on a quasi commercial facility with additional security.
This was not worth it so we pulled out of the deal.
I have little doubt that the agent we were dealing with will struggle to sell this project, unless a builder buys it and builds it at cost. Even then the margins are very tight.
When investing in property “margin is margin” attitude will send you broke very quickly.
This is why the right designer is so crucial to your success as a developer.
If you own property and are looking to add value by selling plans and permits endorsed please ensure you are not wasting your time and money. Get the right advice from competent designers. Speak to the right designer who can maximise the efficiency of your plans.
If you execute the wrong design and development strategy it could leave you working hard to sell a project that someone can’t develop.
The buyer won’t be able to use your plans, you will waste money on plans and permits (at least $25,000), and the banks may ask the buyer to buy with commercial finance hindering any potential buyer from putting a meaningful offer to you. In our experience investing in property, it is a must to have a clear strategy that either yourself or the future purchaser will be able to profit from and execute successfully, anything else is actually counterproductive in your investment.
This is why obtaining plans and permits does not necessarily raise the value of your land, it an actually reduce the value.
The most recent example was plans and permits stamped and approved for 4 x 3 bedroom townhouses on a main road in a suburb North of Melbourne. The designs were so poor that they were not going to fetch the desired sales price. After consultations with multiple real estate agents to price up the end sale price for the project, the results were disappointing.
The project was not going to fetch a desired ROI based on the time, money and aggravation profile of the project.
Instead of 4 x 3 bedroom townhouses, the highest and best use for the site would have been 6 x 2 bedroom units. This change would not only have improved the efficiency of the construction , but it also supplies the local market’s real demand.
Thereby equalling a higher profit for the same time, money and aggravation. A huge miscalculation by the current vendor was not researching the right demand for his site. When investing in property, one of the fist things we research is local supply and demand in real time. Historic data is good (and expensive) but if you don’t overlay that with real time data by on the ground research your project might suffer.
Remember that when investing in real estate, we get paid to solve problems. If half the problem is solved, you are paying someone else for the solution, and thereby foregoing getting paid yourself for solving that problem.
To find out more about how we can help you, get in touch with me @