‘Manufactured Equity’ is simply the outcome of using an Active investing strategy to (a) improve the value of a property and (b) dispose of the property at a higher price.
Why should you proactively ‘manufacture equity’? Relying on the property market to improve to get gains worked well 5 to 10 years ago… however it doesn’t work like that anymore unless you wish to hold the property for many years and “hope” the market continues to go up.
You need to use a more creative approach to make sure you’re creating instant equity and starting off on the right foot from the very beginning.” That’s where the Active approach comes into play.
The Active Approach
This is where we consciously purchase a property that can be improved in value (equity growth). We are not considering or waiting for the price to passively rise, we are going to make the value increase in our control, NOT the market controlling us. When you can find a property that presents problems and you have the solution, you WILL make money. The active approach can take shape in numerous outcomes and forms, some being:
- Land Subdivisions
- Development Infill
- Development Knockdown rebuild multiple
Clients ask us all the time; how do we find those sites?
Most service providers will retain this information and to keep it all safe guarded. We take a different approach to the information. We want to educate you to help build your confidence and courage allowing you to decide to take control of your financial future and wealth creation activities.
When we are engaged to find sites, the first activity with the client is to create a high level strategy document and plan for buying a site, what the expected outcomes are, the timing involved and documenting a clear understanding of the values and budgets involved. We recommend you buy a property within your budget that can deliver the active outcome when it suits you financially, now or into the future.
Here are the steps to a successful site purchase:
- Determining and arranging the financing structures, the numbers involved dictate the pricing framework you can afford, considerations of equity extraction, separate debt financing requirements and future borrowing capacities. During our client strategy sessions, identify and help you understand with total clarity this important fundamental pillar.
- Planning and confirming your primary strategy ie are we going to search for infill development, duplex, knockdown rebuilds, renovations or land subdivisions. We discuss the different strategies, the pros and cons of all including a discussion pertaining to the relevant risk profiles of each strategy.
- Create the buying brief, ie where are you going to buy, preferred state, city and suburb locations within your affordability range.
- Understanding the zoning range your target property should comprise. Is the zoning General residential 1, 2 or 3, Mixed Use, Commercial etc. Each zoning will present opportunities. For the purposes of this scenario we will use a standard General Residential 1 Zoning.
- Contacting the local agents with the brief is the best way to find sites. If you were to rely solely of your ability to finds sites, you could be there forever. Utilise the agents to find you sites, they are in discussions with listing sellers every day, they know what properties are coming through the listing pipeline. Working with a Selling agent or Buyers Agent will save you an enormous amount of stress. There are other more advanced strategies, ie writing letters to the actual owners directly, going door to door of target sites yourself, it just depends on your level of comfort for that task of talking with potential sellers.
- Vetting the list of properties is easier than some may have thought. Depending on dealing directly with the agent or via a buyer’s agent this process will be made easy or harder. If dealing directly yourself, you will have to filter all the properties the agents offer you, if dealing though a buyer’s agent, their job is to filter all the poor properties from good targets. The process of filtering yourself can be can be completed relatively easily today thanks to the numerous digital platforms and information sources. So, what does vetting include. Vetting has 3 phases
Phase 1 Desktop Vetting
Desktop vetting includes using latest technology and internet searches to provide you with relevant information to quickly and cost effectively determine whether a property progresses to the next phase of the vetting, which is a commercial vetting. Here is a list of locations and their websites to help you:
- Google Maps – type in the address and review the external aspects to highlight immediate concerns that may prevent your project being a success. Ie power poles, asset pits in nature strips, overhead power lines to the rear etc etc. https://www.google.com.au/maps/
- Land checker- Allows you to identify the site locations, overlays general zoning information to determine if the property is suited to your objectives. https://landchecker.com.au/
- Each state will have government mapping sites. For Victoria use Vic Maps online. This allows you to check zoning, overlays, locations, calculates site are, boundary lengths etc. print base line planning and control zoning reports to determine the property suits your goals. http://services.land.vic.gov.au/maps/pmo.jsp
- Dial b4 Dig is a great online source of information. Once you login and create your plan, you can receive valuable asset and infrastructure information pertaining to water, sewerage, gas and electricity information relevant to the site. https://www.1100.com.au/
- At this point you can request a copy of the selling documents to confirm if the property is restricted with any potential caveats or covenants. These items will generally restrict your ability to have maximum returns and use including on selling with the only exception of renovations. Some renovations may not trigger the clauses or covenants and manufactured equity may still be achievable.
Using these free websites, you can garnish enough initial information to determine if the property satisfies the requirement of your objectives allowing you to invest more time and resource to the target property. If it does then progress to Phase 2 the high-level commercial vetting. During phase 1 you would have created a list of additional questions requiring a deeper level of vetting. It is at this point of the property passes you would request a copy of the section 32 (Victoria) , draft offer & acceptance (WA), sellers schedule ( NSW), form 1 disclosure ( SA), buyers elsewhere pretty much Caveat Emptor or “Buyer Beware”.
Phase 2 Commercial vetting
Commercial vetting includes using manual costing calculation via excel or pricing software technology to complete basic commercial due diligence which provides you with relevant information to quickly and cost effectively determine whether the property will deliver on the financial outcomes and are aligned to the financial goals. Email email@example.com and we will send you a free excel basic version of a costing model.
The list of considerations and costing inclusions would not be limited to:
- Purchase price
- Duties and acquisition costs including legal and buyer’s agent fees
- Holding cots (interest) for duration of project
- Depending on your project strategy, project costs may include:
- Demolition costs
- Renovation costs
- Planning costs to council
- Land survey and
- Arborists and environmental consultants
- Building costs fro new sites
- Local authority costs, power, water, gas
- Council contribution fees
If the financial outcome is within your budgeted range then the property passes your criteria and allows you to invest more time into the next phase of vetting, phase 3 the physical inspections. At this juncture you will have finalised the clear majority ot screening items with only the physical vetting required to finalise the process.
Phase 3 Physical Vetting
Physical vetting requires your time on the ground to complete the final elements of the vetting process. Email firstname.lastname@example.org and we will send you a free physical inspection template.
The list of considerations for the phase would be:
- Physical inspection of the site to validate all desktop observations
- Visits to local council and or contractors to validate observations
- Visit local planner of draftsperson to confirm concept strategies
- Engage other external advisors, this may include:
- Legal considerations
- Land surveyor
- Arborists and environmental consultants
- Building and Pest Inspectors
If the financial outcome is within your budgeted range then the property passes your criteria and allows you to consider the purchasing process and considerations of same.
Case studies we have published detail recently completed sites and active sites currently displaying all or some of the strategies listed above. Some sites readily visible via the internet to show before and after results.
Numerous other live sites are at differing stages of the process including acquisition, council planning, demolition in building tendering etc. The active approach does not necessarily require you to improve immediately, you can combine the passive approach but making sure the property you buy will deliver an Active outcome to accelerate the equity growth.
During our free finance strategy sessions, we discuss all of these aspects in detail, because our job is to help you build and use equity in a smart, sustainably affordable manner as quickly as possible, so you can redeploy equity to build wealth over time.