“Always leave a little salt on the bread” might be an odd turn of phrase for a rogue in Bryce Courtney’s book The Potato Factory (well worth the read btw), but the meaning is critically important when it comes to real estate – always leave something for the next person if you want to make a deal.
Now this isn’t about leaving money on the table (selling for less than full value), its about acknowledging that unless there is a benefit to a potential purchaser, then there is no value and they aren’t going to buy it (or at least, shouldn’t). One of the absolute best examples of this, and one that I have found true for at least the past decade, is in the case of development sites which, oddly enough have rarely ended up turned to that end.
Over the years, I have come across many an owner convinced that because their block, or amalgamation of blocks, was big enough to support a unit development, then of course it must be worth more than merely the value of a house. After all, more units SHOULD mean more money, right?
Well, only if there is some crust left for that next buyer, rather than just crumbs. A buyer making a purchase with the intent to develop is generally going to do so in pursuit of a commercial return, rather than just out of the goodness of their heart. A well-prepared developer will therefore approach any deal from the end, and then go backwards. That is, they work out what the end product is worth, calculate the costs to get there (allowing for a profit margin, of course) and then set themselves what they can reasonably pay for the land that starts the journey.
Set between the immovable objects of a price ceiling and building and development costs which only get higher every year, the price per site or per developable lot gets squeezed and squeezed. Pre-COVID that squeeze often meant that you were better off keeping the old queenslander or whatever might have been there originally and sell it as a house, rather than conduct the exercise of a development for a lesser profit with much more work.
The maths IS changing to a degree, with the lack of land supply making some small scale developments more viable, but it still comes down to leaving a margin, if you want to make a sale