Development Due Diligence Series – How much should I pay for a development site?

You’ve probably heard the saying “you make your money on the way in” when it comes to property development. But what does this mean?

In the world of property development, the land acquisition stage is arguably the most crucial. If you overpay for the land or acquire a site with expensive-to-fix challenges, your profits will be squeezed no matter what you plan to build.

Lateral Partners have collaborated with Relab to write a Development Due Diligence blog series where we will cover off topics such as financial feasibilities, service connections, flood zones, contours, planning zones, title records and so much more. This series was designed to help guide you through the tools that Relab provide and the knowledge through these blogs to use those tools guide you through the due diligence process in acquiring land.

In this blog we will be focusing on how to determine your ideal purchase price for your next development site acquisition.

So, you make your money on the way in, let’s first focus on how to calculate this. The most common way is to forecast the anticipated end value of your completed development and work backwards in the form of a feasibility to determine what your land acquisition cost should be. In this blog, we’ll walk you through how to do that.

Firstly, there are two key questions to consider:

1. What is the market value of the property?
2. At what price point does my feasibility stack up?

Let’s break these down.

1 – What is the market value of the property?

A helpful tool to determine this is the Current Market Analysis (CMA) function on Relab. Relab is an online platform that aggregates data from sources such as REINZ, Councils, LINZ and more, creating an easy to use all in one due diligence tool. Although there are many features Relab offer that are useful to property developers, for the purposes of this blog we’ll focus on the CMA function here.

By conducting a CMA, you can view recent sales of comparable properties in the area, how long they were on the market, $/m2 rates for land, current listings and more. Using similar data that real estate agents use to form their appraisals to the vendor, you can estimate the property’s market value and determine what price range to expect.

This is not only useful for determining land value, but also for determining the anticipated end value of the completed development when it comes time to create a feasibility.

2 – At what price point does my feasibility stack up?

Now that you have an anticipated end value of the completed units and an anticipated purchase price range based on market values, it’s time to draft up a feasibility to ensure it will be a viable project and that there’s going to be sufficient profit in it for you.

Click here for a link to our feasibility guide and template to help you build your feasibility. Make sure to read through the guide as it goes into detail about the important line items to consider and include in your feasibility as well as minimum profit levels to consider.

Once you have your feasibility filled in, adjust the land price to different levels to get an idea of where your profit level would sit relatively. This exercise helps you determine what your walk away price is based on your minimum acceptable profit margins, and in conjunction with the CMA results what your ‘this is a good deal’ price is.

And just like that you’ve figured out how much you should pay for a development site!

Rinse and repeat the above exercise until you find a site that is both suitable for development and that you are able to secure within your required price range to ensure the development is profitable.

Now, we’ve mentioned profit a few times in this blog so here’s a bonus one for you:

3 – Why is focusing on profit so important?

A lot can change between acquisition and completion (think of those who purchased development sites in the heat of 2021 only for the market to nosedive, recently introduced Watercare restrictions affecting availability of infrastructure connections, or those who face major development contribution increases) so having a healthy profit margin isn’t a nice-to-have but should be considered a non-negotiable as part of your risk mitigation strategy during the land acquisition stage.

Remember that property development is a risky business and that’s why undertaking thorough due diligence is so important. In this blog we have covered off how to estimate the value of a development site as well as end values, and how these relate to building out a feasibility. However, it’s important to note there are site specific factors that could effect the desired land value such as steep sites that require expensive retaining walls or excavation, overlays such as character overlays which restricts what you are allowed to build, liquefaction or flood zoning that requires engineering solutions for foundations etc and as such these need to be factored into the development cost portion of your site specific feasibility. We will go more in depth in these topics in future blogs as part of this series so keep an eye out on our website.

Found your next development site and are ready kickstart your project? Get in touch.