Selling Your Development Site: What property owners should know before going to market

Selling a property with development potential can be very different from selling a conventional home.

The value of a development site is influenced not only by the land itself, but by what can realistically be developed, who the likely buyer is, how that buyer assesses the opportunity, and the terms on which the property is offered for sale.

A well-managed sale therefore requires more than simply finding a developer and asking them to make an offer.

Below are some of the key questions property owners should consider before going to market.

How do I know if my property has development potential?

There are many factors that can influence what may ultimately be developed on a property.

These can include:

• The property's zoning and overlays

• The size, dimensions and shape of the land

• Easements and title restrictions

• Covenants

• Access and street frontage

• The slope of the land

• Significant vegetation and protected trees

• Existing buildings and their position on the site

• Development approved or constructed nearby

• Relevant council and planning requirements

These factors can usually provide a useful preliminary indication of a property's development potential.

However, the fact that another property nearby has been developed in a particular way does not necessarily mean the same outcome will be possible on your land.

Where development potential is likely to have a significant influence on value, advice from a suitably qualified town planner, architect or other relevant professional may also be appropriate.

Does development potential automatically mean my property is worth more to a developer?

No.

One of the first questions when assessing any property is:

Who is likely to place the greatest value on it?

Sometimes that will be a developer. In other cases, an owner-occupier or investor may be prepared to pay more.

For example, an attractive existing home on a good parcel of land may be worth more in its current form than the land would be worth to a developer who intends to demolish it.

The objective should therefore be to establish the property's likely highest-value use before deciding which buyers should be targeted and how its value is calculated.

Development potential can be an important source of value, but it does not automatically mean that a developer will be the highest-paying buyer.

How does a developer decide what they can afford to pay?

Most developers undertake some form of feasibility assessment before purchasing a site.

At its simplest, they are considering the likely value of the completed development, less the costs of acquiring, designing, approving, financing, constructing and selling it, together with an allowance for risk and profit.

Importantly, no two developers will necessarily reach the same conclusion.

Their assessments can vary because of differences in:

• The development outcome they believe can be achieved

• Their architect, planner and consultant team

• Construction costs

• Building methods and efficiencies

• Finance costs

• Expected sale prices or rental returns

• Timeframes

• Risk tolerance

• Required profit margin

• Experience with that particular type of development

One developer may therefore consider a site unviable at a particular price while another sees considerable opportunity.

This is one of the reasons competition between suitable purchasers can be so important.

Why shouldn't one developer's offer simply be used to set the price for another?

Because each purchaser should be encouraged to independently determine what the site is worth to them.

If one purchaser's offer simply becomes the figure another purchaser is asked to beat, the negotiation can become anchored to the first buyer's assessment rather than the property's true market potential.

A better approach is to create genuine competition and encourage each interested purchaser to put forward the strongest price and terms they are independently prepared to offer.

The goal is not simply to find a developer.

It is to find the purchaser who places the greatest value on the opportunity.

Are development-site offers about more than just price?

Absolutely.

The highest headline price is not always the best overall offer.

Development-site transactions can involve important terms such as:

• Settlement period

• Deposit

• Due diligence

• Finance conditions

• Planning conditions

• Purchaser access before settlement

• Other special conditions

These terms can affect both the value and certainty of an offer.

For example, a higher offer containing extensive purchaser-controlled conditions may carry substantially more risk than a slightly lower offer with fewer conditions and greater certainty.

A development-site offer should therefore be assessed as a complete transaction rather than by price alone.

Can a longer settlement increase the price?

Usually, yes.

A longer settlement can be valuable to a purchaser because it may allow additional time to arrange finance, undertake planning work, coordinate future projects and defer some of the costs associated with owning the site.

Where the purchaser values that additional time, they may be prepared to reflect it in their offer.

However, not every purchaser will place the same value on a longer settlement, and not every seller will want one.

The important point is that settlement should be treated as part of the negotiation.

A term that costs the seller relatively little may have considerable value to a particular purchaser and can sometimes be exchanged for a stronger price or better overall offer.

Should a developer be given access before settlement?

A purchaser may request access before settlement so that their town planner, architect, surveyor, engineer or other consultants can inspect the site or undertake preliminary work.

In most circumstances, allowing this access can make a longer settlement more attractive to a purchaser and may improve the overall offer.

However, access should not simply be granted informally.

The extent of the access, the work permitted and any related responsibilities should be clearly agreed and, where appropriate, documented with the assistance of the seller's legal representative.

Will obtaining a planning permit before selling increase the value?

It can, but not always.

An approved planning permit may add value where it:

• Demonstrates a development outcome that was previously uncertain

• Achieves a particularly strong development yield

• Removes an important planning obstacle

• Saves a purchaser significant time

• Provides a commercially attractive development scheme

However, a planning permit does not automatically add its cost to the value of the property.

A purchaser may have a different design in mind, or may consider the approved project too expensive, outdated or unsuitable for the current market.

There is also a risk that the time and money spent pursuing a permit will not be recovered through the eventual sale price.

For that reason, obtaining plans and permits purely for the purpose of selling should be considered carefully and, where appropriate, discussed with experienced planning and property professionals first.

What is the best way to sell a development site?

There is no single method that suits every property.

The appropriate strategy depends on the property itself, the likely buyer pool, the level of development certainty and the seller's priorities.

In many cases, the most important steps are:

1. Understand the property's realistic development potential.

2. Establish which type of purchaser is most likely to place the greatest value on it.

3. Identify and reach those purchasers.

4. Create genuine competition wherever possible.

5. Allow each purchaser to independently determine their strongest offer.

6. Negotiate both the price and the terms of the transaction.

7. Compare offers according to value, certainty, timing and risk, rather than simply the headline price.

A development site should not be treated simply as a residential property with a different buyer.

The land, planning controls, purchaser feasibility and structure of the transaction can all have a significant influence on the eventual result.

A carefully managed sale aims to identify where the property's greatest value lies and then give the market the best opportunity to recognise it.

Important Information

This information is general in nature and is not intended to constitute planning, legal, financial, taxation or accounting advice. Property owners should obtain independent advice from appropriately qualified professionals where specialist advice is required.