Putting the cart before the horse
By Geoff Doidge
© Investigate Property Pty Ltd
Many of you would have heard me talk about ‘what’s that smell’ at our workshops, a renovator property that had a horrible smell that we just could not get rid of. I used that many plug in air fresheners I bought shares in the company! Anyway, what a lot of people don’t know is that ‘what’s that smell’ wasn’t just a renovator... or so I thought.
I bought the property in 1999 with multiple options in mind. It was a renovator and this turned out to be very successful: with the assistance of master renovator Paul Eslick I increased the rent by 65% after just 4 weeks, but it was also next door to some units and there were units further up in the street. The week I settled I spoke to the neighbour next door and suggested one day down the track we might do a development, knowing my site on its own was possibly too small.
That ‘one day down the track’ came 8 years later in 2007. I got the call from the neighbour and I had found my latest JV partner! He was in the building industry and had built and renovated before. Perfect. Now to get things moving – I had an army (of consultants) to speak to!
My first call was to Justin Eslick, a town planner and buyer’s agent who I knew I could get some initial thoughts about what was possible. From there it was a matter of lining up my troopers, asking the right questions and doing a feasibility to present to my JV partner.
But I had a problem. My very first call did not go so well. It went something like this:
Geoff: Hi Justin, do you mind confirming a few development numbers for me... I am developing ‘what’s that smell’ with the neighbour!
Justin: Sure, what have you got?
Geoff: My neighbour and I want to develop and I have already determined that we can do about six two bedroom units between us. That’s three each! The combined land area is 1004m2.
Justin: I am just looking it up now. It looks like you have units all around you, is that right?
Geoff: Yes, that is how I know it is a development site.
Justin: Okay. First thing, you are right, it is a development site and the unit blocks are a good indication, but not a reliable one. They could have been approved under an old zoning. As it happens though, you have the right zoning. Secondly, you get a development density increase because of those units. Normally 50% GFA is achievable, but here you can get 60%. Your six units just turned into seven or eight.
At this point I had a little flutter in my stomach – was I onto a winner or what!
The conversation continued:
Geoff: Wow! That’s great. You just made me some money!
Justin: Slow down, we haven’t finished. I am just looking at the contours and I don’t like what I see.
Geoff: What do you mean, the site is flat?
Justin: It might appear flat when you are at the site, but it is deceptive. Yes it is relatively flat, but it is also flat and low. You are the lowest point in the street.
Geoff: That’s okay isn’t it? It doesn’t flood.
Justin: Does anywhere near there flood?
Geoff: Yes, a few streets down.
Justin: Hmmm. Time we checked the pipes. I am not liking this at all... (20 seconds later)... ah Geoff, do you like pasta?
Geoff: What are you talking about? Are you looking up the pipes or the take-a-way menu?
Justin: The pipes, hence the question. You have spaghetti junction under your site. Three manholes and a total of 70m worth of stormwater pipes that change direction on your site. In the street there appears to be about another 10 manholes, another stormwater pipe and a proposed stormwater pipe. These aren’t small pipes either. The smallest is 1.65m wide. You have a water problem.
Geoff: How can I have a water problem – I don’t flood! And these pipes, my solicitor didn’t tell me about them, are you looking at the right site (last shred of hope here)?
Justin: Believe me, you have a water problem. It’s called overland flow. You might not flood, but the water that floods the streets a few doors down drains via your site. Your site is part of the lowest path that water can follow in the area. Also, your solicitor probably checked your private drainage, not council’s drainage, hence you didn’t know about these. I suggest before you go any further that you speak to your hydraulics engineer.
As you can imagine I was pretty upset, but not entirely convinced. I had owned this property for 8 years without any water problems. My solicitor didn’t tell me about the pipes. There was a chance Justin was wrong.
Unfortunately two days later after speaking to my hydraulics engineer I discovered Justin was right. I had a water problem.
There are few lessons to be learnt here:
- Always carry out as much research on the land as you can when you buy. Land appreciates, buildings depreciate, so it does not make sense that we spend a lot of money on building and pest inspections and very little time investigating the land. We usually leave it up to our solicitor. When I bought this property, access to the information I required was not as easy as it is today. Also, most people just didn’t bother. Now I know better.
- Never rely on your solicitor’s searches. You can never be guaranteed that they will check everything. Some do, some don’t. Also, in Queensland, it is not uncommon for solicitors to return these searches to you a few days before you settle. What good is it to you then? I even had one return the results after I settled!
- Never assume that you have a development site just because you have developments near you.
- Make sure your property has multiple options, especially if it is a development site. This property has had 465% capital gain over the last 8 years. That is because it is well located, bought well, had add value potential and we have had some good market growth since then. If, however, it was a block of vacant land I would have had only one option and that was to develop. I would have lost a lot of money.
- Get educated! A lot of this could have been avoided if I had educated myself early on. At the time I knew how to research and buy a renovator, not a development site.
You can learn from the mistakes of others as well as the experts. We have put together a team of development professionals to bring you ‘Developing for Profit’, a two day, information packed development workshop to be held in Brisbane on June 21 and 22, 2008.
For more information visit www.developingforprofit.com.au