This six-part series offers valuable advice to new property developers who are considering buying and developing a residential property (adding an additional home). It covers how to test the feasibility of your project, buying the perfect property, common traps with titles and boundaries, getting the right building team in place, banking and finance requirements and what you need to know about insurance. WRMK Director Tony Savage also shares his own backyard subdivision journey.
Part 1: the essentials of feasibility
In the first of our six-part Backyard Subdivision series we discuss the importance of testing the feasibility of your proposed development.
Is this worth doing?
The very first question you need to answer before embarking on a property development is “Is this worth doing?” Before investing in your idea, test if there is actually a market for what you are selling. Think about who you are going to sell the property to. Is your ideal buyer retired with no kids, a working couple who want no maintenance or a family that needs lots of room? What is important to them (four bedrooms, big garage, or an extra bathroom)?
How much will I make?
The next question you need to ask, of a real estate agent, is “If I do this, how much will it sell for?”
Property development comes with risks, such as timing the property cycle wrong, delays, or extra costs that you did not anticipate. To cover those risks, you need to plan for at least a 15% return; some developers would prefer to stick to a minimum 20% return.
But it’s no use making the numbers work by fiddling with the sale price until you get your desired return – base your planned sale price on advice from a real estate agent, or a registered valuer.
Note: If you are developing a property with the intention of selling immediately, it’s likely you’ll pay tax on the profit. Make sure you factor this into your numbers.
When and how do I assess feasibility?
Feasibility is usually factored into a sales and purchase agreement as a due diligence clause, giving you get the option to proceed with the purchase if the property works out. Advise your lawyer what you want to do during the due diligence period so that the clause in the agreement allows your contractors multiple opportunities to access the property, and generally does what you need. Allow a month for this clause to be satisfied if possible – it’s difficult to squeeze everything in in two weeks.
Example due diligence clause
This agreement is conditional upon the purchaser being satisfied with the results of a due diligence investigation of the property and the purchaser’s intended development of it by 5pm on [insert date]. If the purchaser is dissatisfied with any aspect of this investigation the purchaser may at the purchaser’s absolute discretion by notice in writing terminate this agreement and in such case any deposit paid must immediately be refunded in full. This clause is inserted for the sole benefit of the purchaser and the purchaser is under no obligation whatsoever to supply any reasons for the purchaser’s dissatisfaction with any aspect of the investigation.
The vendor undertakes and agrees to:
- Allow the purchaser together with consultants employed by the purchaser full access to the property for the purposes of the due diligence investigation; and
- Provide to the purchaser any information held relating to the property relevant to the due diligence investigation.
If the property is being sold at auction, as a tender or in a multiple offer situation, you should do as much checking as you can prior to putting in your bid, even though there is no certainty that you will get the property.
Tony’s Backyard Subdivision
WRMK Lawyers Director Tony Savage knows what he’s talking about when it comes to property development – in addition to his legal expertise he’s learnt first-hand. Throughout this series he shares insights and lessons from his own project subdividing a residential property into two sections and building a second dwelling.
To carry out a feasibility study you will need to have cost estimates for:
- acquisition costs
- development approval costs
- operational works
- building costs
- survey and titles costs, and
- selling costs.
Tony’s project: example feasibility calculations
Bank cost (6 months)
| Build costs |
New garage for existing
|Development approval costs|
| Council costs |
Survey and engineer
|Survey and title|
|Surveyor and legal||$10,000|
| Contingency |
| Existing house value |
New house value
|Value of properties||$1,225,000|
After you’ve talked to your agent first, ideally you should get preliminary advice from:
- An architect or draftsperson to do a quick concept scheme that tells you what size project you could put on the site. Will this work for your target market?
- Your bank – confirm with your bank that they will finance the project based on your feasibility and understand what they need (see more about bank requirements for construction in part 5 of this series).
- Local and regional councils – check the information council holds on:
- Zoning – it will tell you what the minimum subdivision size is for the property, and the rules like the distance a building must be from boundaries (and many other things). (See Part 4 of this series for more information about titles and boundaries), and
- if the property has any risks noted on it (e.g. subsidence) and the location of services such as water and sewage – are any of these going to get in the way or be a problem? Visit the Whangarei District Council GIS link here and the Far North District Council GIS link here.
- A surveyor can advise whether you will be able to get the number of titles out of the property you require, how they will be configured (driveway) and will have good knowledge of complying with Council requirements and the cost of doing that.
- Ask your lawyer to check if there any impediments on the property’s title that might affect subdivision.
Getting the development sold as quickly as possible will be your main aim – the longer a development takes the less profit you will make. Find out before you start what obstacles there might be and start taking advice on how to solve them.
Just when most developers have figured they know everything about property development, something happens they get caught by! We have never heard a developer say “I wish I did less investigation before I bought the property”. Good due diligence always pays for itself.
Read on for part two of our series: Purchasing the property.
Our thanks to Tony Savage for writing this article