In this, the second installment of our 12-part series on small development, we look at the ins and outs of finding a development site and what type of site is suitable for beginners.

Initially, you have to determine whether you're going to be an active or passive developer. In the first part of our series, we defined a passive developer as someone who employs a development manager to do the work for them.

In this case the development manager would source the site and manage all of the development processes from start to finish.

On the other hand, active developers are more hands on when it comes to the development process. Active developers would be most likely to source the site themselves, or if it's the first project, they may employ someone to assist them in finding the right site for them. But then, they would handle most of the rest of the development on their own, or use a development manager as a mentor.

Once you've determined whether you have the time and resources to be an active developer, or are happy to let someone else do the work for you, it's time to determine what sort of development site will suit your investing requirements.

Criteria for your site

It's hard work finding development sites in most of Australia's capital cities. Michael Yardney, director of Metropole Property Investment Strategists says his firm looks at about 100 potential development sites a week.

"We would closely follow up one in 10 of which we would only purchase maybe one in every 25 we closely investigate," he says.

But there are many options available to those prepared to do the hard work to find appropriate development sites.

Before jumping into the hunt for a site, it's vital that you determine how much you're prepared to spend on the site and whether you can manage the holding and developing costs. Once you have set a price bracket, then you can begin your search.

Author and development manager Bob Andersen says you have to determine your comfort level – that is, what your financial capacity is for the type of development you're after.

An important consideration is to determine what kind of development you are interested in. That will considerably narrow your search.

You may want to start with a relatively small project, such as buying a property with an existing home on it but with a zoning that allows you to subdivide and build another dwelling at the rear. If this is your aim, then you will have significantly narrowed the parameters of your search.

On the other hand, you may be looking for something a little bigger such as a site on which you can build three to four townhouses. This can be a vacant site or one with an existing dwelling that can be demolished to make way for the new development.

Once you've chosen the type and size of the project you are able to afford, the next step is where to develop your project.

"That will be dictated by planning schemes as to where that type of development can go on," Andersen says. "For an investor at an entry level that could be building three or four townhouses or keeping a house on a block and putting two or three townhouses behind.

"It all comes down to zonings and that has to do with town planning."

He says you could discuss the zonings with a town planner or work it out for yourself. It could be an area you are already familiar with.

Andersen says there are two methods to finding a site. One is to look at a large area and the second is to pick a smaller area of say two or three suburbs and narrow your search.

You may want to employ a development manager to help you with the initial step. Often development managers have contacts with a wide variety of people who specialise in sourcing development sites. They may even have some developments sites available themselves.

When you have chosen your area and the zoning allows your type of development to go on, it's time to proceed to the next step.

Researching the market

How do you know whether the development you have in mind will appeal to buyers or tenants (if you plan on holding the property)?

Peter Cerexhe says if you're planning a residential development, you need to determine what is a desirable dwelling for your development site.

"People tend to go with their emotions but they can be way out of step with what the market wants," he says. "For example stainless steel kitchens are fashionable at the moment, but by the time your development is complete, will that trend have moved on?"

He says small developers in their 40s may have completely different ideas about what first homebuyers find attractive in a home.

"You need to see what your target market wants," he says. "If you get it right, then you'll sell quickly."

Yardney says the key to getting it right is research. In finding a development site, you have to know that what you build on it will attract the buyers or tenants who want to live in that area.

"Keep an eye on demographic trends and research what type of property is going to be required by the people that want to live in an area you are considering," he advises. "Are these people single professionals, young couples, retired couples or established families? Are they looking for apartments, townhouses or houses on blocks of land with room for the kids to play?"

He says it's important to research, study and educate yourself about people and places, how people want to live, what sort of spaces they want to live in.

"Look at what is a passing fad, what will date a development and what is a new design feature that will attract buyers to your project," he says.

Andersen says once you've narrowed down your area, you should find out what the real values are – what properties are selling for, not what the advertised selling price is, plus the length of time they're taking to sell.

"Open houses are a good way of getting a handle on what's out there," Andersen says. "You can get a good feel for the design of townhouses and what works and what doesn't. You can talk to the agent at an open house and get feedback that way. It will give you an idea of what your project will be worth at the other end."

Yardney agrees, saying you should monitor other developers' projects to see what's selling well and what's not selling.

"Your competitors provide you with some great market intelligence," he says. "Take a close look at design features, building materials and construction techniques and see what is selling and what you consider could be improved."

Sourcing good development sites is all about knowing your market, Yardney says.

"By this I don't mean just the property market but the bigger economic picture as well," he says. "Because a development project has a life of at least one year, more frequently two to four years, if you want to be a successful developer you need to inform yourself about not only the property market but economics in general. Then you'll need to make an educated decision about where you think the markets are heading over the next few years."

He says good research means you will be making informed decisions instead of just throwing a dart at a map.

If you plan to hold on to your development and rent the properties, you could save a lot of money, says Andersen.

"For an investor who's going to hold on to the project, in the long term, the capital growth is going to be there," he says. "But there's also savings because they've only paid stamp duty on the land, not on the finished product. There's also no agent's fees or advertising costs. So their actual profit margin is actually greater because they don't have those extra costs."

Yardney says one of the most important aspects of research is just getting out there.

"Get into your car and have a good look at the areas where you know there might be opportunities."

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On or off market?

For most novice developers the first place they will be able to source a site is on the market. This means sites which are advertised and out in the public domain.

Andersen says beginner developers would generally go to a real estate agent, or private sales.

"If you're going on market and using a real estate agent you need to find one who specialises in redevelopment sites," he says.

To get to know which ones specialise, you can look at advertisements for development sites in newspapers or on the internet.

Another way is to get a buyers agent to look for you. The drawback is that they will charge you a fee to source a site. But Andersen says you can factor that into the cost of acquiring a development site. If you add the fee to the cost of the land, usually about 3 per cent, you can determine whether it is still feasible.

He says the advantage of using a buyers agent is they can take a lot of the legwork out of finding a site. But you have to ensure they understand development and are not just experienced in finding investment properties.

The other avenue is private sales, usually advertised in newspapers. Andersen says the advantage of private sales is that you're dealing directly with the landowner and have less competition from other people looking for sites.

Off-market sites are generally a bit harder for the novice to find. But you can advertise that you are looking for a development site.

"You'll get calls from agents who have sites and from private owners," Andersen says.

Town planners and surveyors are another useful resource in locating a development site. They may be preparing a development site where the owner wants to sell it and not proceed with the project.

Andersen says you can do direct research by approaching landowners that have sites suitable for redevelopment.

He says you can access free information from local councils about development applications.

"You can go through those and pick out ones with say three townhouses that have a development permit," he says. "It will have the address and the name of the applicant. This is a classic off-market deal. If you contact the applicant they may want to sell for a number of reasons – changed circumstances for example. You might be able to negotiate a better price and you'll have no agents fees."

There are also what Andersen terms "site flickers". These are people who purchase sites with development potential and then proceed to get the necessary approvals before selling the site. He says many people do this as a full-time job and are not interesting in going on with the development.

"They can be a good source of finding a site with development approval," he says. "It can also save money, because you don't have the cost and time of getting the approvals in place. You can get in and build it and get your money back quicker. You may pay a little bit more but at least you're going in with your eyes wide open because you know it has been approved and what the development conditions are."

Where to look

Yardney says you should watch for suburbs in transition: older, rundown suburbs that are being gentrified.

Andersen agrees, saying you should also make sure the area you've chosen has good services, and is close to the city and areas where there's a café culture being developed.

Yardney says look at areas where young people are moving in and renovating older properties and bringing new life to a tired suburb.

Get all the information you can about the area you're interested in. Often real estate agents publish newsletters and industry analysts put out market reports.

Much of this information is freely available on the internet.

Some good sources include: the Australian Bureau of Statistics (www.abs.gov.au), which puts out regular releases of statistical information; property bulletins from valuation firms and banks; the Master Builders Association (www.masterbuilders.com.au) and the Housing Industry Association (hia.com.au), which interpret and analyse housing statistics; and fee-charging services from forecasting groups such as Residex (www.residex.com.au), Matusik (www.matusik.com.au), Midwood (www.midwoodaustralia.com) and BIS Shrapnel (www.bis.com.au).

Yardney says another great resource is RP Data (www.rpdata.net.au), a subscription-based service with maps, aerial photographs and listings of individual properties recording past sales. Although RP Data is not cheap, Andersen says it's a valuable tool for serious developers.

Of course you can always use API magazine as a great resource, with its monthly publications of Australian Property Monitors data on house and unit prices and rental statistics.

Reed Construction Data (www.reedconstructiondata.com.au) outlines development approvals and building approval applications in an area as well as detailing what stage those applications are at in the approval process.

Yardney says you should keep in touch with professionals who work at the local councils.

"They have an overview of any planning changes coming up in their area," he says. "It also pays to keep an eye on the local newspapers and watch for any changes to the planning schemes."

If you're planning on retaining the property or properties, it's important to find out what rents similar developments are achieving.

The best way of doing that, says Andersen, is by talking to managing agents.

"Even when it comes to finance, the banks will want to know what the units will rent for," he says.

 

This article was first published in Australian Property Investor Magazine and is copyright and reproduced with their permission.

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