Value of Development v Subdivision and selling of land

Hello all,

I have a question which I was thinking about for quite some time now.

What is the actual value in developing (subdividing, building and selling end product) versus just subdividing and selling empty blocks of land.

The way I see it, each has it's pro's/con's. Would really appreciate it if more experienced developers can pitch in and help me to figure this out.

Develop- Pro's
1. Potentially more profit - both on land as well as on end product
2. Easier to sell compared to empty blocks of land?
3. Can be significantly cheaper to build if you are a builder/experienced developer compared to alternative

Develop- Con's
1. Higher Risk- more time for end product to reach market, limiting your market (by having a certain specification build), risk of market conditions going to opposide way,
2. Higher financing costs/risks (longer, more complex)

Subdivide and sell land- Pro's
1. Lower risk
2. Potential buyers can design their own dream house/TH/Unit etc rather than buy your design

Subdivide and sell land- Con's
1. Lower profits
2. Harder to sell empty land

I guess my main question is does development extra profits (potentially, compared to only selling land) worth the extra risk?

Also, any consideration I've missed?
Would be great if anyone can come up with some numbers as an example...

Looking forward for your comments!

 

There are quite a few factors and it can be hard to quantify in a generalist sense but always add it in as a scenario when you are doing feasibilities.

Some additional ones for you

Developing cons
- holding costs - this is massive of course. The draw downs on construction loans can hurt especially towards the end when it's at peak
- the risk of not building the right thing at the right spec

Developing pros
- ability for Buyers to visualise the best use of the land

Subdivision Cons
- can be hard to people to visualise what you can put on a small block (sometimes can be helpful to show some indicative floor plans/options but still difficult for some people visualise)
- can be put off by strata land off a common driveway (street front land is easier to sell)

 

Its really a case by case assessment on the numbers, as well as your personal appetite for the risk/costs/time involved.

Usually most sites will have a "better" option than the other when looking at your strategy. For example, I offered on something recently that was just a land subdivision and sell strategy for me, which definitely suited my timeframes and finance capacity.

Personally, I think if you're assessing a site and you don't know which one to go, then there's a good chance you haven't done your proper DD or refined your strategy enough yet.

 

I am wrestling with this very question right now on a small 1 into 2 lot splitter. It is VERY market dependent. The best entry analysis in my opionion is to be flexible about your exit plan, and buy sites with several decent exit options. Then once you buy it you can model the 2 or 3 options side by side and take you time with the decision.

 

Re development, what about the ROI between single v double story development?
In our area (Bayside Melb) I think there is a shortage of quality options for the down-sizer.
A good single level can sell for not much less than a two-story.
The down-sizer will have greater spending power but need to compete for the limited options.

[Our current exit strategy for PPOR is 2 x single level]

 

Having said that, I've run some estimates and the profit might be quite similar for no build, single story or double so the ROI may well be best for just splitting with no build.

 

I've wondered this myself. When doing feasibility, how do you estimate the sale price of subdivided land? There are very very few comparible properties in the areas I'm looking.

 

A reasonable number in our area but still variables regards to specific street, distance to shops, beach, main roads etc and also the $/m2 goes up with smaller blocks such there is virtually a minimum base nothing goes below.

 

I think it comes down to how experienced you are. If you've built houses before and can budget them, you'll get the profit on the house and the land. If you're not experienced, you might end up chewing away the profit from the land by going over budget on the houses.

 

If the land size is such that the builds will require a party wall then that probably rules out just splitting and selling the land as separate lots?

 

This can be a really good thing, if there is demand but no supply. Call the agents and ask them what their enquiry level and expected price is for land if a block did become available. Simple.

 

$$$ - selling land you need to leave some profit on the table for the next bloke!

 

Thanks everyone for your comments! really enlightning! Keep them coming

 

Unless they are an owner-builder?