Here’s what you need to know to make money
BY BARRIE SWART
Many first-time or small-time property investors buy dilapidated homes to fix them up and sell for profit. If you have the time and the skills, there’s a lot of money to be made this way. But is the same true for buying a home and then demolishing it to rebuild from scratch?
Because the primary value of a property lies in the land itself, theoretically it makes sense to tear down a less-than-ideal home and rebuild something that is more likely to attract a great buyer. However, the reality is that buy-to-demolish is a risky approach and is both expensive and bureaucratic. Your investment can get tied up with various bodies, failing to earn an income for an unknown amount of time, and remain at risk of being turned down. It’s important to have a Plan B in place, should your project end up being rejected.
In effect buy-to-demolish is a niche strategy demanding very careful consideration of a multitude of factors.
- Demolition itself is pricey and subject to the National Building Regulations Act. If the local authority finds that your site is dangerous in any way, you will be required to secure it. If you fail to do so, they have the right to secure it themselves and send you the bill.
- You will need a property lawyer, surveyor and town planner involved from the get-go to assess the property and advise on the specific zoning rights of the area you wish to develop – even subdivisions are governed by these laws. Be especially careful about heritage buildings – you may be surprised by what is officially considered ‘heritage’ and therefore demolition is either ruled out altogether or subject to extra processes.
- Aside from lodging an application with the local authority, the development will be subject to public participation – and your neighbors may not be keen to have bulldozers on the street.
- Once objections and responses have been dealt with, an engineer will have to perform a technical assessment, and only then will the council decide to approve or decline the application.
- Once approved, you will need to plan for a number of other factors. Environmental issues – such as the presence of asbestos – could complicate the issue. Dumping and hauling the rubble will also require permits and further costs. Likewise, water, sewage and electricity cannot simply be switched off and ripped out. There are many requirements for safely disconnecting or abandoning utilities that you will have to adhere to.
- Most banks will not allow you to demolish a mortgaged home because you are destroying the security for the loan. In which case, you will have to have equity on hand – either your current home or cash in hand. Talk to your lender about an investment or construction loan upfront and be sure to study the fine print of any mortgage agreement you may enter into. You will have to be able to prove that the home you will be building will be worth substantially more than the one you are tearing down. This will require significant amounts of documentation from a surveyor, the builder, the architect and other parties.
If you can find a property and a loan that is free of liens and conditions, and you have the time and resources to go through the lengthy approval process, you may be able to successfully buy-to-demolish. One alternative is to go through the process and then sell off the land at a premium with all approvals in place to another party to do the building.
In most cases, though, you are much better off salvaging the existing home than demolishing it entirely. (After all, the chances of you building a R4-million house for R1-million are very slim). And if you are able to live on the property as it is being renovated and to rent out your current home, you can still earn an income from your investment during the process – providing that you and your loved ones are able to put up with the constant noise!