development series // part 4
©Australian Property Investor magazine - www.apimagazine.com.au. Reproduced with permission.
Due diligence
begins
With 14 days for due diligence it’s time for Shane Hiscock
and his joint venture investor to determine if the Everton
Park property they have under contract stacks up to a
profitable deal.
Nicole Navarro
P
art of doing his due diligence means
pulling out the spreadsheet again to
verify the numbers and to ensure the
deal stacks up, Shane Hiscock explains.
As we’ve reported in previous issues,
Shane has found a large block across
two lots with a three-bedroom house in
Everton Park, Brisbane, which he intends
to demolish before splitting the block,
selling off one vacant block and building
a two-storey, four-bedroom house on the
remaining block to sell.
Regardless of the profit margin of a
project, he notes, whether it’s $64,000 in
¿¿The bus stop relocation
Shane’s first port of call was the local
council, to determine the cost of
relocating a bus stop – literally just a
pole with a sign on a concrete slab, no
shelter or seat. He was given a rough
estimate and some basic rules on what he
needed to consider when relocating the
bus stop prior to exchanging contracts
on the property, however he needed
greater certainty.
The reason he needed the bus stop
relocated was because it sat to the far
right of the block, which meant if a bus
was to pull up out the front it would
actually block the planned driveway.
Naturally this couldn’t happen from a legal
and saleability perspective.
“Before we put it under contract the
council told us the bus stop was no longer
used, so it could be relocated. All we
needed was to lodge an application and
it would be our cost to create a new slab
of concrete for the pole, which would cost
almost nothing,” Shane explains.
He says he’d never buy a property if
it had a bus stop out the front with a
shelter, or where one was potentially to be
installed with a shelter, “because buyers
would instantly perceive it as noisy, plus it
doesn’t look great in front of a new home”.
Council told Shane the bus stop was
positioned on a district route not included
as part of a regular service and it wasn’t
in use, however he needed to check
this himself. Shane found the stop on
Brisbane’s Translink map – so it existed
as far as the map was concerned, but he
couldn’t tell if there was a schedule.
Where to relocate the bus stop was his
next decision, and how would this impact
the development? The two blocks were
10 metres wide each and he needed
three metres for a driveway. The rules
state that the bus can’t block a driveway
and he can’t have an “unbroken curb”
(which means a driveway) within seven
metres in the lead-up to the bus stop
(basically the length of a bus). Despite this
rule, Shane found dozens of driveways
across Brisbane that wouldn’t have met
the regulation.
While he only had one choice of
placement for the bus stop given the
dimensions of the block and bus stop
requirements – to move it three metres
josh kelly
the case of this Everton Park development
or $200,000 in the case of another one he
has on the go in Brisbane, it’s important
to take the time to obtain quotes and to
eliminate any surprise added costs that
might jump out during the project.
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part 4 \\ Development series
©Australian Property Investor magazine - www.apimagazine.com.au. Reproduced with permission.
¿ VeriFYinG cosTs
While liaising with council on relocating
the bus stop at the front of the property,
Shane sourced a quote from a demolition
company to knock down the house and
clear the site. The company did a quick
drive-by and gave him a price of $15,500.
While he would source another quote
following settlement, and probably even
find something slightly cheaper, the price
satisfied his initial feasibility.
Shane had checked out the free
‘Dial before you dig’ website prior to
exchanging contracts, which showed
him where the sewer and water lines ran.
He now needed to source a price through
a builder on how much extra it would
cost him in footings to build over the
lines and the sewer manhole. He was told
around $4000.
This is also the stage to source a couple
of quotes for the house construction, he
says, however after building a number of
times he had a good idea on the turn-key
cost of different sized dwellings suitable
for the block.
“We already knew what a vacant
block would sell for in this area but now
was the time to stress-test the deal,”
Shane explains.
“We needed to consider what our profit
margin would be if, worse case scenario,
we had to sell the block for a lower price
of $270,000 (the sale price has been
estimated in the feasibility at $290,000).”
Shane is confident, however, that he’ll
sell the vacant block for the price he
has estimated because a less desirable
block sold around the corner for
$280,000 recently.
“It was sitting on a roundabout!”
He’s also confident of achieving the
estimated $720,000 for the new build.
In this due diligence stage Shane and
his investor partner considered the option
of building a smaller house and selling it
for a lower price point, however the twolevel higher-end house was more viable
because it was virtually the same amount
of work on his behalf with greater profit
potential for both his investor and himself.
The beauty of the lower profit strategy
that Shane’s investor chose was that it
also happens to be very low risk, a good
starter point for mum-and-dad investors
who want to gradually climb the ladder
into profitable developments but don’t
have enough capital yet to move into
bigger projects.
He says the way his investor looks at
the situation is that he can earn an extra
$30,000 to $40,000 from this project,
which is as much as some people earn
in a year, but without the need for him to
work a second job or extra hours.
“Then he could use the profits to move
onto another bigger and more profitable
project and let the profits multiply
from there.”
Shane is also still at the stage of
climbing the ladder as a developer. While
he’s able to make around $31,000 from
this deal ($11,000 for his spotter’s fee and
$19,000 for managing the project), at this
stage it’s about building relationships
with his investors so they move onto
bigger projects
with him.
See API’s iPad
One of Shane’s
edition for a Q&A
first investors has
with Shane:
already signed
www.bit.ly/api-ipad
up to a second
project with him. The investor’s first
project at Wavell Heights wound up
with $70,000 profit from splitting and
selling two blocks without construction,
now he’s onto his second project with
an estimated $200,000 in profit. So for
Shane, it’s worthwhile starting small and
building confidence. He considers the first
project ‘just dipping the big toe in to test
the water’.
If the Wavell Heights development
earned around $70,000 by just splitting
the block and selling both blocks vacant,
API asks Shane why he wouldn’t do the
same for this Everton Park project and
save himself the construction effort?
He explains they simply weren’t able to
buy at a low enough price to undertake
this strategy. If they did apply that
strategy the profit would have only been
$20,000 to $30,000, but Shane wasn’t
prepared to do all the work for such a
small return, and neither was Richard,
his investor partner. Api
Next month: In the lead-up to settlement,
estimAteD proJect DAtes
Date
Description
May 2012
Contract on property exchanged for
$498,000.
IN THIS
ISSUE OF API
to the left – at least he knew it was a
viable and affordable move that wouldn’t
put a dent in the profit margin. Doing
the research was a worthwhile process,
because if the relocation couldn’t be
easily achieved it could have jeopardised
a driveway, which would have seen Shane
pulling out of the contract on the property.
To start the process of relocating the bus
stop, council told Shane he would first
need to lodge his application to create a
driveway, which would then trigger the
issue of the bus stop. Quite a roundabout
way to sort out the issue, he thought. The
total cost for all this would be well under
$1000 for the cost of a slab of concrete
with dimensions of two by three metres.
Before the contract is unconditional
complete detailed due diligence
including verifying costs and profit
margin, and gaining further detail on
the bus stop relocation.
June 2012
June 2012
After the contract is unconditional:
request power abolishment from
vendor, request sewer and water
design quotes, apply for demolition
permit, apply for permit to
disconnect and cap off sewer and
water services. Devise marketing
plan for selling one block, consider
builders to list house-and-land
packages (more on this next month).
Finance finalised.
June 2012
Settlement.
June 2012
Request separate titles from titles
office, list both blocks for sale, list
house-and-land packages with two
builders (more on this in upcoming
issues). Accept design quotes for
sewer and water design.
July 2012
Demolish house and clear site.
August 2012
Contract to sell one block –
settlement occurred at the end
of August.
August 2012
Survey, complete provision of new
sewer and water connections.
September 2012
Complete house design and pricing,
carefully considering house features,
facade, and fixtures and fittings.
October 2012
Select builder, sign a fixed price
turn-key construction contract.
November 2012
Building and plumbing approval,
commence construction – frame
starts.
December 2012
Finalise colour selections, electrical
plan layout. Frame and roofing.
January 2013
Construction industry on holiday
for one month over December
and January.
February 2013
Continue construction – lock-up
stage.
March 2013
Continue construction – fitout.
April 2013
Final inspection, correct defaults,
handover/completion. Property
staging and photos. Begin property
marketing campaign.
May 2013
Sell the property.
June 2013
Settlement.
Shane gets cracking on service and
infrastructure permits. He also takes us
through the finance and vacant block
marketing process.
api connect
Do you have a question for Shane? Email
it to [email protected] and we’ll
do our best to publish the answer in a
future issue of API.
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