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Misled

Misled

As a buyer’s agent, a town planner and an investor I hate it when I hear someone say “the sales agent said I could build up to 4 townhouses”. I hear it at least once a week, quite often from my clients who have just found a great deal and want to share it with me, which scares me. My clients tend to be sophisticated and educated people, so they should know better than to listen to the sales agent.

Let me give you a couple of examples of claims made by agents to me in recent times and how devastating listening to the agent can be.




Case Study 1 – How to instantly double the development potential

I actually got into quite a heated discussion with this agent. They were selling an 800m2 site zoned for units and townhouses. The rules state you can have a maximum of 50% Gross Floor Area (GFA) and a maximum of 2 storeys. The definition in Brisbane of GFA is essentially the internal area of a building excluding garages and balconies, expressed as a percentage of the site area. So if you are allowed 50% GFA on an 800m2 site you can have a maximum of 400m2 of internal area. In this example that can be spread out over 2 levels and roughly equates to 5 x 2 bedrooms units (or 6 smaller units). The trouble is the agent was confusing the definition of GFA and there was no telling him he was wrong! He worked out you can have 400m2 of GFA, but you can build to 2 levels, and two multiplied by 400m2 is 800m2. His mistake meant he was doubling what was allowed and as a result he was telling people you could develop about 11 units, double the reality.

Imagine if you listened to this agent and didn’t do your own research or employ your own experts? In theory you may pay twice what you should for the site, but boy do your numbers look good! At least until you discover the error of your ways.

Lesson: Listen to the agent, but never trust them! Do your own research.


Case Study 2 – There is more to it than just town planning

This case study is an example of something that occurs on a very regular basis. An agent will make a claim of what can be developed, say 5 units, and according to town planning rules they actually have this correct. The trouble is they have only looked at the town planning rules and have not taken their research any further. There are other factors that may influence a development, sometimes in the positive, but in most cases in a negative way. What if there is a 1.8m diameter pipe through the site? What if there is an overland flow path or flooding? Perhaps you can build 5 units, but only if you remove the existing dwelling, which just happens to be protected and cannot be taken away.

In this instance the issue is the agent has only done a limited amount of research and the reality is you need to carry out a lot more research in addition to town planning rules before you can be confident about what can be developed.

Lesson: Listen to the agent, but never trust them! Do your own research.




Case Study 3 – The splitter block that can’t be split

Another common one, especially for Brisbane, is the property that is advertised as a potential splitter (subdivision site). The property is either large enough to be subdivided or already consists of multiple lots. This is often enough for an agent to proclaim ‘rare splitter block!’. Just like the example above, there is more to it than this. Just because you have the right zoning or the right land size does not necessarily mean you can develop. There are numerous pitfalls you can run into. The existing dwelling might be protected and can’t be removed and also can’t fit onto any existing lots while maintaining required setbacks from all boundaries. This is probably the most common problem in Brisbane. Another issue is access to services and drainage of stormwater. You might have the room to create a new block, but you might not be able to service that new block with water, sewer or be able to get the stormwater to a legal point of discharge. Another common problem is the price! Perhaps the site can be turned from 1 property into 2, but the agent has priced the site incorrectly because of a limited understanding of the development process. Their methodology for pricing the property is flawed. They determine you can create two vacant lots, each lot is worth $300k, therefore the asking price for the original site before development is a steal at $550k+. But it isn’t 2 properties yet! You need to install services, possibly shift or remove the house, pay for consultants and in a lot of cases pay for infrastructure charges (in Brisbane these are often $35k+ per new lot). Yes you can subdivide, but you won’t make any money!

Lesson: Listen to the agent, but never trust them! Do your own research.


Case Study 4 – The under-sell

This is a positive case study. It is less common than the case studies detailed above, but a beautiful thing when you come across it. It is when an agent understates the development potential of a site. The best example I can give is where an agent didn’t know about a Local Area Plan that over-rode the main Planning Scheme. As a result he didn’t realise that the site could be developed by 40% more than he was quoting. In effect, he under sold the property by 40%. Ouch! Another one (and this has happened numerous times) is where the agent has the zone wrong, usually because they don’t go to the correct source for the zone. Zones and land uses are generally set by council and are detailed as part of their Planning Scheme (town plan). Yet they may get their zones from a whole range of other sources... other buyers, other agents, or in most cases from a property data provider like RPData. The problem is planning schemes are very complex documents and frequently the data providers misquote or are out of date.

Lesson: Listen to the agent, but never trust them! Do your own research.


Solution

There is one way to ensure you don’t fall into the trap of buying a site that can’t achieve the outcomes as stated by the agent and it is simple – don’t trust them! Do your own research. Employ your own consultants. Or better yet get yourself educated. As demonstrated, there is so much you need to know before buying a development site and we have only covered one aspect within this article – research. To get optimal performance from a development you need to ensure you buy in the right entity to ensure you don’t get caught out with taxes. You need to know how to deal with an agent, how to get them working for you and not against you. You need to know the right time to employ your consultants, why they are important and what their role is.

To help you on your way we are hosting a Site Inspection with Adam Jones - see how Adam made $250k in equity gain from a property nobody wanted - on Sunday 17th April 2011 in Brisbane. This event is already 50% sold out, so be quick to secure your ticket. Visit www.developingforprofit.com.au/site-inspection-2011/ for more information.

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