Why Your DA Isn’t Worth Anything

So, you bought the property with a vision. You went down the winding road of development financing to buy it. Bashed your head against the wall when no one else could ‘see it’ and paid the myriad of fees to get your Development Approval. Good, so now the property should be worth so much more right?
Once a upon a time in a wonderful land called PRE-GFC, financiers and valuers were happy to see increases in property values due to the approval of a development application. Usually the property value increased by about 30% or so.In the case of some properties such as raw land that had been approved for sub-division, this value increased by up to 100%, particularly where a zoning had been amended from say Rural to Residential.

The zoning changes can still have a great impact on values, but don’t go into this with an expectation that as soon as you get a DA, your property is now worth a lot more.

Lenders would even allow you to draw down on the ‘equity’ you had created on the site to help you continue with your development.

Now, while there is no arguing that a site that has a DA for 10 townhouses is worth more to someone than one with out. The real value increases are seen in DA Feasibility Values. This is when a valuer takes the end result of the project (how much money you forecast to make out of a project) and calculates back how much the land could be worth to someone.

For many people, they see this number as the value of the property today and cannot understand why lenders won’t agree with them.

Heres Why:

A DA is just that, an approval. It’s an approval to build a particular project that you designed and had the council agree too. It does not mean that the project will be built, that its the best project for the site, OR that someone else sees any value in it at all.

To place any value on a DA, a few things have to happen.   You can call this the crystalisation of the DA value.    Along with the DA you probably put together a feasibility study. Within that feaso you put in a number of costs and revenues that made it worthwhile to apply for the Development Approval.

Two of the key items in this feaso are the Construction Costs and the Sales Revenue.

In order for your DA to have real value, you must take actions to turn these forecasts into reality.  So, you should have at least documentation proving that builders are quoting very similar pricing to your construction costs.

In addition to this you are realising your revenue projections by achieving some pre-sales in the market.  Purchasers putting down real deposits and signing contracts to buy your properties at the listed price confirms your forecasts in the feasibility.

These two items go a long way to proving that your property should be afforded a value for obtaining the DA.

You see, if you can’t build what is in the DA for the price you want to, and then sell it as well, then perhaps your DA is not worth pursuing. It may have to be changed completely to something that does work on that site.

Don’t be fooled into thinking that achieving your DA will suddenly provide you with the equity you need to get the project off the ground. Talk to some people in the finance game beforehand to get the latest view from lenders.

 

 

 

 

Pin It on Pinterest