Buying a Property to Develop?

Buying a Property to Develop?

When buying a property to develop, understanding your own investment parameters must come first: how much money do I have to put towards this venture? You then need to understand what sort of properties you want to be involved in. Finally, and most importantly, you will need to know what the development potential of the property in question is.

This information should be used to make an informed decision on whether to proceed with the purchase and development of a property, as property is an expensive and high-risk environment. Remember, the bigger the deal, the higher the risk.

Protect yourself against a bad deal

To secure and protect your investment and have a long and profitable property journey, a deep understanding of what you are investing in (i.e. property) is crucial. Always protect yourself against the potential of a bad deal.

This could be:

  • Over paying for the land;
  • Not being able to develop what you envision on the land;
  • Over capitalizing on the land;

A bad deal is also when your purchase is in fact not what you thought it would be and the purchase is not as profitable in the end as you planned.

Define development potential through proper research

I believe that the investor should be making their decision based on the same information the architect would have needed to analyze to give a professional recommendation.

(Note: Recommendations carry liability [financial] and as such, must be well researched.)

When advising a client to risk money on a development deal, our firm defines, through research, the development potential of the site from an analysis of the following:

  1. The Title deeds and Surveyor General (SG) Diagram for potential restrictive clauses, such as height restrictions, single dwelling only, bulk limitations, servitudes etc.
  2. Heritage, specifically in the Western Cape, but also in other regions as well. This could potentially stop developments or delay them considerably if not understood correctly.
  3. The city zoning scheme: to define the Permissible floor area, height restriction, coverage, building lines and parking requirements. This can also be done by approaching Council and verifying it with zoning certificate.
  4. Full inspection of the site, looking for any clues that would stop you from doing what you planned to do.
  5. The National Environmental Management Act (NEMA), December 2014, for vacant sites ‒ in case there are any environmental issues pertaining to the site i.e. natural water courses etc.
  6. The Building regulations (SANS 10400) and the Municipal by-laws which may apply.
  7. Other
    • Urban Development Zones (UDZs) – these offers create tax relief benefits.
    • Health & Safety in the interest of liability.
    • Asbestos – there are specific costs attached to the removal of asbestos from a site.
    • Existing structure – if the development consists of minor refurbishments, study the existing building, look for dampness or signs of leaking. Check that all toilets are flushing and check the water pressure.

The above should be done in a secure environment. To create this environment, an offer to purchase (OTP) with suspensive conditions must be entered into, which will allow you a Due Diligence period to do all your homework and research without the risk of losing out on the deal.

In conclusion, we believe that property investment is not an individual sport, it needs team work to yield the most positive outcomes and limit financial risk. Find your team mates! An architect should definitely be one of them, as they should be able to guide you through all of the above pointers. You can then base your final decision on what you know and on bankable recommendations received from your team i.e. “is the juice worth the risk/squeeze?”

Resources: UF Architects




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