The ins and outs of simple, small subdivisions: Three of the best of Jo Chivers

Subdivision can make you money, but there is a lot of potential for costly mistakes

I met with Danielle this week for a coffee.   Danielle is a part-time town planner and mum to three kids.  I’d met Danielle when she’d asked me about helping her with a medium-density development.

Then, through some unfortunate circumstances Danielle found herself a single mum.  She couldn’t finance a larger development.  But she used her experience and prowess in understanding the planning process to make herself a cool $70,000 profit from a simple two lot subdivision.

Danielle purchased a large lot in a new release of a big, well-known development in the Hunter region of NSW.  My first reaction was, “You can’t buy a lot in a new release and then subdivide it, as there are restrictions under the 88B Instrument in the contract”.  A Section 88B Instrument is the part of a deposited plan that upon registration can put certain restrictions on the land.

You would assume a large developer would protect the right for someone to come in and then subdivide its lots, especially in a new, upmarket release.  But Danielle went through the massive contract with a fine-tooth comb, and with her ability to read the local environment plan and development control play and understand what the council would allow, and what she was legally permitted to do, she went for it.

There was one hiccup when the town planner managing her development application started to question it.  But as she’d had no opposition from the vendor, the original developer or her neighbours, she was able to talk her way around this.  Once approved, she paid for the necessary works and then soon sold off both smaller lots and made her profit.  Go girl!  So I thought I’d explain to you more detail about subdivision. Because although it worked out well for Danielle, it can be costly and not so rewarding if not managed the right way.

Subdivision is one of the many strategies you can use to develop property.  It involves converting one piece of land or existing dwellings into several.

Raw land subdivision entails legally and physically converting raw, undeveloped land into developed land so that one or more buildings – residential, commercial or industrial – can be constructed.  As you will be changing the land’s usage and appearance, for example perhaps from a rural rezoned paddock into a residential land subdivision, you’ll also be building the infrastructure required such as roads, paths, drainage systems, water, sewerage and perhaps even public utilities such as a park.

You can also subdivide developed land (much more easily) by simply splitting a block in half.

Subdivision of existing buildings is the conversion of a single title to multiple titles. For instance, a block of 10 units on a single title –often referred to as units “in one line” – can be converted into individual titles such a strata title. This is a great way to add value to the properties and allows you to sell them off individually.

Subdivision is a great development strategy for the current market conditions.  It gives you flexibility to play is safe and sell off a newly created piece of land to reduce your loan, or to hold and add value to the property by registering the new lots and holding or further developing them.

The objective here is to have a creative outlook while searching for potential subdivision sites, as it is this creativity that can determine the success of the development.

So when would you subdivide?

An investor might buy a dwelling that is on a large piece of land, where he or she can renovate a house and then subdivide, or perhaps a home owner living on a potential development site where subdivision may be permissible. The site will, however, need to meet council regulations.  The first question you need to ask the council is, “What is the minimum lot size?”  You can find this out from your council’s Development Control Plan for Subdivision and their guidelines.  The minimum lot size will vary from council to council and from different zonings. For instance, the residential minimum lot size will be smaller than the rural zoned land size.  One council I work with has a residential minimum lot size is 450 square metres.  So we can subdivide a 900sqm corner block into two lots. However, if we had a 900-square-metre piece of land that was not on a corner, then we could not subdivide this, as we also need to allow for a driveway to access the back lot and the area needed for the driveway is in addition to the minimum 450 square metres.  So we would need a block of land approximately 1,100 square metres in size to be able to subdivide and allow for our access handle.   Another type of property to look for is land with two street frontages, so if it is 900 square metres in size and the minimum lot size is 450 square metres you can literally cut it in half and each lot will have its own street frontage.

Different types of subdivision

When looking to develop with subdivision, it’s important you understand the different types of subdivisions. Getting professional advice will help you to make the best decision for your site and also which potential purchase will make the process through council the smoothest.

Strata subdivision – Dividing a property into separate units, apartments or villas.  Strata is land title based on the horizontal division of air space and may involve common areas shared by each title holder and usually managed by a strata manager.

Torrens subdivision – Dividing one land lot into two or more separate land titles. This form of subdivision gives the owner complete autonomy with their land as they don’t have to answer to the strata manager or adhere to certain strata rules and regulations.

Community subdivision – A development with common property such as roads may be used by all residents.

The figures

When budgeting for your subdivision you’ll need to start with a realistic target for how much the completed development will be worth, and then subtract costs to calculate profitability. It’s important to run a feasibility analysis on the subdivision (covered in detail in last week’s article) including possible costs for stamp duty, legal fees, surveyor services, council application and developer charges, civil works and service connections such as gas electricity and water.

Make sure you also discuss your subdivision strategy with an accountant and understand the possible tax and GST implications if you are planning to sell.  You will also need to estimate your holding costs such as interest on your loan and rates.  This can be a real drain on finances if the process drags out and you are not getting any income from the land to help offset your holding costs, so time is money in this type of development.  Try negotiating long settlement periods with permission to lodge a DA from the vendor or buy under an option.

Location

Getting the location right can either make or break your development success. Research is important here to ensure you are building a property where people in that area want to live. You have to totally remove yourself from the development, as you won’t be living in it, your target market will be.

Inner cities are limited with the availability of land, so in this case strata division is being created through developments.  Looking up to two hours outside the city allows you to be more creative in your development, plus you can usually create a Torrens subdivision. There may also be more room for growth in the outskirts, especially if there is some infrastructure taking place in that area.

Choosing the right property

• The first item you need to properly assess a potential subdivision site is a survey. It’s amazing how many sales contracts I review that do not have a survey.  So you may need to pay for this before exchanging as you need to be sure of the land size and whether there are any easements affecting it.
• The next item I always ask for is the sewer diagram. You need to know where the sewer is located and if it is actually feasible based on the slope of the land, to cost effectively extend it to service a new lot.
• You need to check the slope of the site for drainage issues.
• Check the aspect of the site and think ahead of where any new dwellings will sit to take advantage of the aspect.
• Research the zoning regulations and read council’s subdivision guidelines.
• Compare market value – is vacant land in demand?
• Check service connections – is there sewer available in the area, is there an electricity source close by?
• Corner blocks are good for your first subdivision
• Structure of property – this is important if you are developing a strata division as the building will need to be structurally sound to handle the requirements such as firewalls between units.
• Have your solicitor check for restrictive covenants or easements. You may find land in a new estate has a covenant over it that does not allow for further subdivision.

 DA approval

Getting a surveyor to manage your subdivision DA can save you a lot of time.  If you’re researching a new area, the first place to start would be the local surveyor. They can give you advice on the subdivision process and cost indications. You need to use a surveyor to prepare your subdivision plan.

Once you have abided by the council’s regulations, it is then the residents you may need to win over. Generally if the land you’re subdividing meets zoning requirements and you comply with the subdivision development control plan then there should be little your neighbours can do about your subdivision, however it is always a nice gesture to talk to them personally about your plans.

I always look at the best way to subdivide as part of our development process, the way that will be most cost effective and not hold up the development process, and we have found in many instances it may not be the most obvious way.  What may look like a simple subdivision can turn into months and months of complicated work.  The service connections, plumbing and civil works alone can really blow out a budget, so it’s important to understand the entire process before you embark on your first subdivision.  I’d recommend you start with a simple two-lot subdivision.

There are many more things to consider when planning a land or building subdivision, so make sure you engage professionals to assist you if you’re a beginner.  A development project manager will be able to work with you on every stage of the process and you’ll be amazed at how much you learn along the way and like Danielle, you could find yourself making a nice profit for your efforts.

Subdivision is one of the many ways you can develop property. It involves converting one piece of land or existing dwellings into several.

Raw land subdivision entails legally and physically converting raw, undeveloped land into developed land so that one or more buildings – residential, commercial or industrial – can be constructed.

As you will be changing the land’s usage and appearance, for example, perhaps from a rural zoned paddock into a residential land subdivision, you’ll also be building the infrastructure required, such as roads, paths, drainage systems, water, sewerage and perhaps even public utilities such as a park.

You can also subdivide developed land – much more easily – by simply splitting a block in half.

Subdivision of existing buildings is the conversion of a single title to multiple titles. For instance, a block of 10 units on a single title – often referred to as units ‘in one line’ – can be converted into individual titles, such a strata title. This is a great way to add value to the properties and allows you to sell them individually.

Subdivision is a great development strategy for current market conditions. It gives you flexibility to play it safe and sell off a newly created piece of land to reduce your loan, or to hold and add value to the property by registering the new lots and holding, or further developing, them.

The objective here is to have a creative outlook while searching for potential subdivision sites as it is this creativity that can determine the success of the development.

When to subdivide?

An investor might buy a dwelling on a large piece of land, where they can renovate a house and then subdivide, or perhaps it is a homeowner living on a potential development site where subdivision may be permissible.

The site will, however, need to adhere to the council regulations. The first thing you need to ask the council is the minimum lot size. You can find this out from your council’s development control plan for subdivision and their guidelines.

The minimum lot size will vary from council to council, and in different zonings. For instance, the residential minimum lot size will be smaller than rural-zoned land. One council I work with has a residential minimum lot size of 450 square metres – so we can subdivide a 900-square-metre corner block into two lots.

However, if we had a 900-square-metre piece of land that was not on a corner, we could not subdivide this, as we need to allow for a driveway to access the back lot and the area needed for the driveway is in addition to the minimum 450 square metres. So we would need a block of about 1100 square metres to be able to subdivide and allow for our access handle.

Another type of property to look for is land with two street frontages, so if it is 900 square metres, you can cut it in half and each lot will have its own street frontage.

Different types of subdivision

When looking to develop with subdivision, it’s important you understand the different types of subdivisions. Getting professional advice will help you to make the best decision for your site and also which potential purchase will make the process through the council the smoothest.

Strata subdivision is dividing a property into separate units, apartments or villas. Strata is land title based on the horizontal division of air space and may involve common areas shared by each title holder and usually managed by a strata manager.

Torrens subdivision is dividing one land lot into two or more land titles. This form of subdivision gives the owner autonomy with their land as they don’t have to answer to the strata manager or adhere to strata rules and regulations.

Community subdivision is a development with common property such as roads may be used by all residents.

The figures

When budgeting for your subdivision, you’ll need to start with a realistic target for how much the completed development will be worth, and then subtract costs, to calculate profitability. It’s important to run a feasibility analysis on the subdivision (covered in last week’s article) including possible costs for stamp duty, legal fees, surveyor services, council application and developer charges, civil works and service connections such as gas electricity and water.

Make sure you discuss your subdivision strategy with an accountant and understand the possible tax and GST implications if you are planning to sell. You will also need to estimate your holding costs, such as interest on your loan and rates. Remember, if it’s a straight land subdivision you won’t have an income from the property to help offset your holding costs, so time is money in this type of development.

Location

Getting the location right can make or break your development success. Research is vital here to ensure you are building a property where people in that area want to live. You have to totally remove yourself from the development as you won’t be living in it – your target market will be.

Inner cities are limited with the availability of land, so in this case strata division is being created through developments. Looking up to two hours outside the city allows you to be more creative in your development, plus you can usually create a Torrens subdivision. There may also be more room for growth in the outskirts especially if there is some infrastructure taking place in that area.

Choosing the right property

• The first thing you need to properly assess a potential subdivision site is a survey. It’s amazing how many sales contracts I review that do not have a survey. So you may need to pay for this before exchanging as you need to be sure of the land size and whether there are any easements affecting it.
• Get sewer diagram. You need to know where the sewer is located and if it is feasible, based on the slope of the land, to cost effectively extend it to service a new lot.
• Check the slope of the site for drainage issues.
• Check the aspect of the site and think ahead about where any new dwellings will sit to take advantage of the aspect.
• Research the zoning regulations and read the council’s subdivision guidelines.
• Compare market value – is vacant land in demand?
• Check service connections – is there sewer available in the area, is there an electricity source close by?
• Corner blocks are good for your first subdivision
• Structure of property – this is important if you are developing a strata division as the building will need to be structurally sound to handle the requirements, such as firewalls, between units.
• Have your solicitor check for restrictive covenants or easements. You may find land in a new estate has a covenant over it that does not allow for further subdivision.

 DA approval

Getting a surveyor to manage your subdivision DA can save you a lot of time. If you’re researching a new area, start with a local surveyor. They can give you advice on the subdivision process and cost indications. You need to use a surveyor to prepare your subdivision plan.

Once you have abided by the council’s regulations, it is the residents you may need to win over. Generally if the land you’re subdividing meets zoning requirements and you comply with the subdivision development control plan, there should be little your neighbours can do about your subdivision, however it is always a nice gesture to talk to them about your plans.

I always look at the best way to subdivide as part of our development process; the way that will be most cost-effective and not hold up the development process. We have found in many instances it is not the most obvious way.

What may look like a simple subdivision can turn into months and months of complicated work. The plumbing and civil works alone can really blow out a budget, so it’s important to understand the entire process before you embark on your first subdivision.

There are many more things to consider when planning a subdivision, so make sure you engage professionals to assist if you’re a beginner. A development project manager will be able to work with you on every stage of the process and you’ll be amazed at how much you learn along the way.

Why a strata subdivision is better than a Torrens title subdivision for some developments

For this project, we are building two free-standing homes. The land is not a corner block, so one home is positioned behind the other and they will share a common driveway.

Our first response was to try and achieve a two lot Torrens Title subdivision because it’s what most people understand when purchasing houses.  Strata subdivision tends to be associated with multi unit developments, rather than house-and-land projects.

But, when you think about it, if you have two houses sharing a common driveway, then there should be some formal arrangement on who is going to pay for the upkeep of the driveway.  A strata subdivision covers this off, while a Torrens subdivision leaves driveway maintenance up in the air or for owners to fight over.

We asked our surveyor to set up the strata plan giving each house its own land on title, minimising common areas to the driveway and the dividing fence between the two houses.  Being a small, two lot strata subdivision; it means that we’d be exempt from the more formal strata management of larger schemes.  As the houses are freestanding and have their own yards, it is quite a simple process.

If our client, on completion of the development decides to hold both houses, they may also decide not to even register their subdivision immediately. We would have the approval in place and this has no shelf life, so they could register the subdivision years down the track when and if they decide to sell.

If they decide to sell one house and keep one, after registering the subdivision, all costs for managing, maintaining, repairing and insuring the common property are shared by the owners in direct proportion to their lot's respective unit entitlements. In this case it is an equal share; each lot has one unit entitlement, so it is very straight forward to manage. Each owner is responsible for 50% of any costs to repair or maintain the driveway/common area.

Small strata schemes (two lots)

The special provisions for two-lot schemes are:

• the two owners automatically form the executive committee, removing the requirement for an election
• a quorum for all meetings is when the 2 owners are present
• Building insurance is not compulsory where the two buildings are detached and there are no additional buildings on common property. However, both owners must decide to forgo insurance cover by unanimous resolution at a meeting. Each owner may then insure the structure on their own lot.
• If the buildings are detached, the owners can decide not to have a sinking fund provided there are no additional buildings on common property. Both owners must decide this by unanimous resolution at a meeting.

With the advent of the compulsory 10-year sinking fund plan legislation, two-lot schemes managed to get special consideration. Essentially, a 2-lot scheme doesn't need to have a sinking fund.

Finally, there are no requirements for two-lot schemes to have any audit of accounts and financial statements. Reference: www.strataman.com.au

Property Bloom found by setting up the strata title subdivision in the right way that it was the better way to subdivide. Not only does a small strata subdivision (two lots) cost a lot less in development costs than a two lot Torrens subdivision, it is also a much quicker process.

The winner is, in our books is a strata subdivision for a dual occupancy where there is a shared driveway.

Jo Chivers is director of Property Bloom, which manages property development.