SPI INVESTOR TIPS AND INFORMATION

The Select Property Invest website is the only site you will ever need to bring thousands of investment opportunities across Australia to your attention. All you have to do is decide which opportunity best suits your needs, budget and management capabilities.

We at SPI appreciate the fact that not every person using our site is a professional property investor or developer. That is why we have put together the following tips and information on all the different procedures associated with the purchase and development of real estate. We hope they help answer questions you may have or inform you of things you never knew.

Choosing the right property

When choosing an investment property many factors can influence the outcome and profitability of the project profoundly.

A feasibility study should always be undertaken prior to purchasing any investment property. The questions you need to ask are largely the same, depending on the type of property involved. For example, with a development property what are your holding costs going to be (financing the property until on-sale)?; what is your realistic budget for the works needed?; how much can you sell your project for once complete, less the costs of the project and various fees and duties? At the end you should, hopefully, be left with a profit.

When conducting a feasibility study on any property or site, there are things you should be aware of, and take into consideration. Research and information is key to a successful project outcome. Profitable developments are not handed out on a platter. A lot of hard work and research must go into the exercise for it to be successful.

Location

Recent sales of similar properties in the area you are considering buying in, can these days, be easily researched using the net. The date and sale price of most sold properties are listed on real estate agent websites. An indicative value of similar properties in a particular area can be derived with a little research. Be aware that some properties sell at a reduced price due to certain influences. These can include mortgagee in possession, deceased estate, forced or distressed sales, but generally, an accurate picture can be drawn of a suburbs median price. If you intend building say a row of 3 bedroom, single garage villas, then these are the types of property you should be researching. Recent sales of similar properties in the area, gives you an indicative price only. Location, street, aspect, proximity to parks, public transport and other services should all be taken into consideration when formulating an average expected on-sale price for your project.

Infrastructure

Infrastructure can play an important part in the desirability of an area when it comes to selling your completed project. Some features of an area to look for are proximity to public transport, shops, hospitals, parks, schools, restaurants, community, bowling and golf clubs, churches and easy access to major motorways just to name a few. They can help you achieve a premium price and add to the desirability and selling potential of your project.

The site and Council

The site offered for sale may be sold with a council approved Development Application or it may be a "raw" site. A raw site is a site that has no approvals to develop connected to it. These sites sell for less than development approved sites because of the time and uncertainty associated with trying to procure development approvals through the local council. On the other hand, DA approved sites have many advantages and a few limitations. Approved sites come with a council approved development proposal for a particular project. This may be a house or a block of units or a row of townhouses, but whatever it is, the project must be built in accordance with the approved, council stamped plans. No deviation to design or otherwise is allowable without the prior consent of council. Minor changes or additions to the design can only be made with the consent of council. Any modifications to the original design have to be furnished in a ready to be assessed format ie: architectural, engineering and hydraulic plans, or any other relevant information, associated with the changes. These are lodged with council as a section 96 Application to Modify Consent. Approval of the changes is not guaranteed however. If council deem the changes to be significant enough to warrant local resident input then it can refuse consent or ask you to submit a new DA for the changes. The result would be council re advertising the changes for local resident comment or objection. This procedure can take weeks to conclude so be sure the DA connected to the site you are buying allows you to complete the project you want to undertake and does not warrant too many changes or additions. DA approvals are usually current for five years. The approved project must commence within this time or the approval could lapse.

The type of property you decide to build or develop can be influenced by many factors. There may be a great market for say units in some areas whereby townhouses or villas may be in demand in others. Councils can also have a bearing on what you can or cannot build in a particular area. Land zoning can vary from 2a residential to 5a special use. You should always ascertain the correct zoning of the area or street you are looking to buy in before wasting resources pursuing land or property with unsuitable zoning for your plans. Council websites can show you all the different area zonings in a particular municipality or shire. A section 149 certificate, which is provided with the contract of sale of most residential properties also shows the zoning and allowable development on the land being sold. This is the most important, initial observation you must make as zoning's cannot be changed for a particular property without very good reason and a very long and expensive legal procedure that may not have the desired outcome. If a site is bought with say a 2a residential zoning then you will only be permitted to build whatever that particular zoning allows. In most cases, the land size has a great bearing on how many dwellings can be built on the site in question. If council have set a minimum land size of say 1800sqm before subdivision is allowed then you will, in most cases, only be permitted to build one dwelling on that land.

Property boundaries and setbacks is another area to be cautious of. Because a building has a particular setback from the street or the side boundaries are a certain distance from the neighbouring property, does not always mean a new dwelling can be built using the same setbacks. Older buildings were built at a time where setbacks were kept to an absolute minimum. Changes in council policies may mean that those old setbacks are now obsolete and new ones put in place. This could reduce your building envelope by up to 20 percent and limit greatly your building design options. Consideration should be given to retaining the facade and boundary walls of existing premises in these instances if possible and designing your new building with retaining these in mind. Check councils Development Control Plan and Local Environmental Plan for different building construction designs allowable on your particular site. Some councils permit Integrated Housing, Villas or SEPP 5 developments in certain zonings that allows for a higher density development. Development Control Plans outline councils' building codes and permissible building within their municipality or shire, while their Local Environmental Plan outlines councils vision for the area in question including restricted development and use of the land. These Plans should be read and referred to in order to build a picture of the area you are considering developing in. Knowing councils' codes and requirements for the area is worthwhile information that can only be advantageous in your quest for conformity. Remember that in any development project compliance with building and council codes is critical. If you are able to build a fully compliant structure on the purchased site, it will save time, money and inconvenience. Haggling with council over non-compliant designs or amendments only wastes time. You will soon find that councils rarely bend the rules to appease developers over the local environment or residents.

Another cost imposed by councils is section 94 contributions. Councils impose these contributions to fund and provide extra public infrastructure like libraries, playground facilities and public car parking spaces etc due to the increase in population in the area. The amount charged per dwelling built is usually pre-set by councils and imposed on each extra dwelling (one dwelling is exempt from contributions) built on land depending on the number of bedrooms. These contributions can vary from council to council and can be as high as $10,000 per extra dwelling or more. In order to include this cost in your building calculations, it would be wise to find out from council the correct contribution figure beforehand.

Contract for the sale of land

When you have found the property you wish to purchase, ask the selling agent to forward you a contract of sale. A copy of the contract should also be sent to your solicitor for scrutiny and interpretation. Contracts contain information that can affect your future plans for the site or be adverse to you once you purchase. They can also contain special conditions included by the vendor. Mostly these conditions are favourable to the vendor. Some examples are large land tax adjustments, high penalty rates for late settlements and favourable conditions for the vendor should they wish to default on the contract just to name a few. Usually though, these special conditions can be amended through negotiation so as to appease both parties. Contracts for the sale of land in each state are usually generic in nature. Annexures and additions to the contract however, usually would include drainage diagrams, showing the position of storm water and sewerage pipes, a current section 149 certificate, a title search showing all the current owners of the property, any registered dealings like caveats, a schedule of all the mortgagees and any right of carriageways or easements affecting the property. This information is all important in helping you make an informative decision on whether the property is suitable for your investment and development needs. If purchasing a property with caveats and mortgages over the property, then your own special condition should be included to ensure an unencumbered property. An example of the wording would be "The purchaser cannot make any claim, objection or requisition or rescind, terminate or delay completion regarding any lease, mortgage or caveat affecting the property and will accept an executed discharge of mortgage(s) and withdrawal of caveat(s) at completion in satisfaction of the vendor's obligation to give an unencumbered title. As circumstances and conditions vary, your solicitor will know the appropriate wording for your particular situation.

Negotiating the terms of a contract costs you nothing so if you want something added as a special condition before the auction or tender closing date, then negotiate with the vendor as early as possible. You can, for example, ask to pay a five percent deposit on exchange instead of ten and extend the settlement period from the usual 42 days to say 56 days or whatever suits your circumstances. Another example could be to ask for access to the site before settlement for survey or engineering assessment purposes. This could save you valuable time and get the ball rolling on your project as soon as possible after exchange. If the vendor agrees with your requests, then your solicitor can draw up a comfort letter, stating the agreed negotiated terms, a copy of which is sent to the selling agent in the event you are successful in the purchase on the day.

GST

Some properties are sold as a taxable supply. This means that the vendor is registered for GST purposes and in some circumstances must charge GST on part or all of the supply. Be aware that if this is the case and you are buying through an entity that is not registered for GST purposes then the GST payable on the purchase price cannot be claimed back by you. Neither can the GST on the construction cost. You will however be required to pay GST on the margin between land cost and completed project sold value. The contract will indicate whether or not the property is being sold as a taxable supply and your solicitor or accountant will be able to inform you of how much GST is applicable on the purchase. It would be wise to speak to your accountant about GST implications and the merits of applying for GST registration.

Land Tax

Some properties offered for sale, have a land tax adjustment clause in the contract. Again, your solicitor will be able to inform you of exactly how much the adjustment represents.

Stamp duty

Stamp duty is applicable on land purchases and should be included in your costings. Stamp duty is non refundable and the correct duty should be calculated by your solicitor, as in some Australian states, properties over a certain price attract a premium duty in addition to the normal duty payable. Stamp duty is usually due at settlement or within three months of exchange of contracts, whichever comes first. If you purchase a site with a delayed settlement of more than 90 days, then penalties and interest are added to the stamp duty from the 90th day and until it is paid.

Pre-lodgement

When you are happy you have conducted all your due diligence and your feasibility study meets your outcome requirements, you are almost ready to move on to the next stage. By this time, you would have attained all the relevant information pertaining to the property or site you are considering purchasing and commissioned your architect to draw up some preliminary plans representing your wishes for the site. You will then need to book a pre-lodgement meeting with council. These meetings are important in order to discuss your intentions for the site before you buy it and whether any issues can be identified prior to purchase that could affect the integrity of the project you are considering. Although councils do not like to commit to specific design details or make any definitive remarks about individual proposals at these meetings, they generally give a broad indication of councils position regarding certain aspects of your intentions. These may include access and density restrictions, ecological and environmental issues, soil remediation requirements and design factors just to name a few. Also usually present at these meetings are council's engineers who can indicate any special drainage or flood issues that may affect the site. All the information sourced at these meetings will help you decide whether your plans for the site are viable or not. Notes should be kept of what was discussed at these meetings for reference purposes.

Setting your purchase limit

To set your purchase limit, you would have already ascertained, through the selling agent, how much the vendor is hoping to achieve for the property. You also would have conservatively calculated how much the completed development would be worth. As an example, the completed project you calculate to be worth $2.7mil and the construction estimate you procured is say $700,000 plus GST of $70,000 (which is refundable if you are registered for GST purposes). This leaves you $2.0mil towards the land, stamp duty, legals, contingencies, bank fees and profit. The vendor wants around $1.0mil for his site. Stamp duty is $40,000 that leaves $960,000. Your bank can give you a figure for interest and bank fees on a pro rata basis for the estimated length the project will take to complete. Say $150,000. Gross profit on project is $810,000 Remember, GST will be applicable on the margin between what the property or site cost you and the selling price of the completed project. In this case, it would be $2.7mil less $1.0mil (if this were the purchase price). $1.7mil divided by 11 = $154,545 GST from $810,000 leaves profit of $655,455. If you are happy with these figures then your purchase limit could be more than they are seeking in order to put you in a better position should a bidding war develop. You could set your limit at say $1.1mil to $1.2mil. This would still leave you with an attractive profit and some breathing space should your project not sell as quickly as you would like.

Finance

When you have decided on the property or site you wish to purchase, you will need to approach your lending body with a finance proposal. Among other things, this proposal should include a covering letter outlining your intentions for the site or property. A copy of the front page of the contract, your solicitors details, your actual proposal for the site, any plans to show your intentions, a summary of the council pre-lodgement meeting and a detailed costing of the development should also be presented.

Some banks require pre-sales of the finished project before they will lend you any money. Pre-sales are not easy to achieve unless you are in a position to show the prospective buyer what it is exactly they are purchasing. The bank will indicate to you if pre-sales are required by them before they lend you funds for your project. Most banks will only lend up to 70 percent of the project value. The other 30 percent will need to be made up by you, using either your own funds or secured against other assets you own.

When detailing the required funds, be sure to include holding costs and loan establishment fees. These can equate to a great deal of money that needs to be represented in your loan. Your holding cost is the monthly interest charged on borrowed funds paid for the site. This figure will increase once construction begins. As construction and development funds are paid out, pro rata interest on the amount will be added monthly. Your lending body can give you an estimate of this figure. Once approved, you will be able to attend the auction or tender for the property you want, knowing your funds to purchase are secure.