29 May Finding real estate GOLD!
So, you’ve found what appears to be the perfect “splitter block” for your first potential property project. To help with the due diligence, Nhan Nguyen, from Advanced Property Strategies, runs through his checklist of items to ensure the project is viable.
Kevin: Say you found what appears to be the perfect splitter block for your first potential property project. Maybe not; maybe you’ve done it before. Well, we’re going to talk about due diligence with splitter blocks now. Nhan Nguyen from Advanced Property Strategies has had a lot of experience with this and helped many people do it. We’re going to ask him some questions about due diligence.
Nhan, thank you very much for your time.
Nhan: Excellent, mate. Thanks for being here.
Kevin: How do we go about finding a splitter block, Nhan?
Nhan: One of the easiest ways to find splitter blocks is you need software, which is the ability to see – x-ray vision as I say. We use PriceFinder or RP Data; they’re subscription programs that you can use, and it allows you to integrate with Google Maps and see what double blocks look like from an aerial view, because they’re all there.
Kevin: Are all double blocks the same?
Nhan: No, definitely not. There are a handful of different types. One is what we call the widow block, so two triangles added together; it becomes a big rectangle. That’s what’s called a widow block. They can be a bit more cumbersome and you may need to get a development approval, or reconfiguration as we call it, to make them usable.
The standard splitter block that you have is a 20×40, and when you split them, you’ll have two lots that are 10×40 each. The other block, which is the third option that you have, is a double block we call it in generic terms, but really, it’s just one block that does need to be subdivided into two, and that’s a 20×40 subdivision block.
There’s a technical difference between a splitter block and a subdivision block. The subdivision blocks, you actually have to get a development approval, because you’re going from one into two and you’re creating a new lot, whereas a splitter block is already on two titles and you don’t have to get an approval as such.
Kevin: Apart from finding out what sort of block it is, what other due diligence methods or steps should we take in terms of services?
Nhan: There are two key parts to due diligence. With the services, you generally can check it out before you dig. There’s a website – it’s just 1100.com.au – and on that, you can log in and once you give the address, and it will spit out for you where the location of the services are.
Generally, I use the five finger technique, where you look at the five services. There’s water, sewer, stormwater, Telstra, and power. Generally, the connections that you have to connect straight away are the water and sewer. If it’s what is called an infill block, where there’s power and telephone directly nearby, then you may not need to worry about that, but generally, the main ones that people have to connect are water and sewer.
Kevin: In your experience, Nhan, where have you seen potential developers go wrong with this? What could go wrong?
Nhan: There are a lot of things that can go wrong. One of the reasons we suggest to beginning investors and developers to start with splitters is you don’t need to get a development application most of the time, but one of the things that may stop you from doing the splitter block is the house may not be actually removable from a council regulation point of view.
If it’s built pre-1946 and the council have an overlay or a zoning where you cannot remove the house, the house may straddle both blocks and let’s say it’s brick, part of it, but the council said “No, it’s tin an timber in this part, and you cannot demolish it,” for example, then you won’t be able to realize those blocks, because you may not be able to move the house, or if the house is too big and you may not be able to cut it to make it fit on the block. That’s definitely one part of due diligence that you need to check out if you’re doing a splitter block.
The other part is just knowing where the services are. With the services being across the road, for example, or around the corner, it may just cost you a bit more to be able to access those services and cost you a bit more in terms of designs. I actually had one client who did a splitter block but he had to move a manhole to make sure that the block was workable, and that just took a little bit longer, a fair bit more cost, and a bit more challenging time-wise.
Kevin: In your experience, do you find that people who own these properties and they’re aware that it is what we call a splitter block, do they end up having an over-inflated opinion of value – in other words, they say “This is two lots, so therefore it has to be double what it’s worth now”?
Nhan: I find that most people actually don’t know that it’s on two lots, even though it’s on their rates notice – it says “Lot three and lot four” or “Lot seven and lot eight.” They may not be aware of it; they’re just aware that the size is, let’s say, 800 square meters.
Yes, they definitely do inflate the price. They don’t take into consideration the services, which might cost $10,000 or $15,000 at the higher end, and they don’t take into consideration the ability or the cost to remove the house, which may be somewhere between $12,000 and $20,000 depending on the size of it, asbestos, and things like that.
Yes, they generally just make up figures on “One block is worth this,” they double it and that’s what they sell it for, but there are a lot of expenses in between – stamp duty on the purchase, GST on the sale, holding costs, things like that. So as a developer and investor, there are so many other expenses that I need to take into consideration. Agent’s commission on the selling end, as well.
Kevin: Just in terms of expenses, those two you mentioned there – that is, removal of the property, if it can be removed, and/or getting services to the lots – are they the two biggest expenses?
Nhan: Yes, they are. They’re the two biggest expenses from a cash outlay point of view, obviously from purchasing the property, stamp duty and agent’s commission on the other end, as well as GST is a serious consideration, as well. Those other two costs – which are the services, which is the water and the sewer, as well as the demolition of the house – are other major costs there.
Kevin: Nhan Nguyen from Advanced Property Strategies, great knowledge here when it comes to splitter blocks.
Nhan, thank you for giving us your time today.
Nhan: Absolutely, my pleasure. Thanks for having me, Kevin.