Small development on a shoestring
Not every investor has access to a pool of funds that they can dip into whenever they please. Despite this, it’s still possible to get into developments by being a little creative.
“People have to consider their finances, if you don’t have a dollar to your name you can’t just go and buy somebody’s house and not put any money down. It means you need to use creative negotiations, so things like extended settlements with immediate access to get in and renovate,” says Renovating for Profit’s Cherie Barber.
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“I believe that if you are limited by cash then getting into a small development is actually easier than getting into a renovation project because one of the core things that people use is ‘options’ on small development deals,” she says.
Options, she explains, help gain access to a property but crucially, not legal ownership. Essentially, investors may want to find a willing property owner looking to sell and explain the potential profits of a subdivision to them.
“For small developments, a great option is the ‘put and call’ option which means that if we were to find a subdividable block and found a buyer, either a developer or a builder, we could actually settle in their name not ours,” she says.
Find a property on a block of land that has the ability to split it into two blocks. Say it’s worth $700,000, she explains. “If you can get the site under option then you actually only pay a 1 per cent option fee so your actual cash outlay is only $7,000 and then you can get it DA-approved for a higher and better use.”
“And when it is re-valued, it’s of a higher value because it’s for two dwellings not one. It may now be worth $900,000.
“Then they on-sell it to another developer or a builder typically and take away their costs,” she says.
“If you’re buying something for $700,000, you’ll take away the option fee, the $7,000, the council process might take $20,000 and then the stamp duty when they settle, but they are still about $100,000 ahead depending on the values in that suburb. So people can make a really quick chunk of cash without even doing any physical work and just using their brain. It’s working smarter, not harder.”
However, investors should consider the following steps when approaching property owners:
- Be armed with the correct contracts from the start. Don't be going back and forth for weeks after an agreement
- Be prepared to explain what a put and call option is. “Most vendors will say ‘what’s that?’,” says Ms Barber. The plan can fall down if you can’t explain to a vendor, clearly, what the process is
- Decide from the start the division of the profit and the percentages you are happy with
- Consider paying the legal fees yourself, as this can put some parties off
- Don’t expect the majority of people to be keen. This will take perseverance