In today’s property market, undervalued development sites are exceedingly difficult to find. There are more speculators than ever, many are willing to pay above the odds and market corrections are looming on the horizons.
That isn’t to say that finding undervalued sites is impossible – you just need a certain lens on to do so. In the end, you need to ask yourself, how can I find the value that others can’t?
Arbitrage real estate
Arbitrage is the concurrent purchasing and selling of an asset to take advantage of the differences in price; often involving a combination of deals to exploit market imbalance.
There are many ways to profit from real estate arbitrage, but with this there are also many risks. Your objective should always be to understand and find ways of reducing your risks and liabilities.
One way to reduce the risk of these ventures is in being able to see the value that others can’t. This is a lot more difficult to do than it sounds – it takes a widespread level of knowledge and a healthy dose of creativity. Campbell McLeod, and his team at Base Group, are achieving just this.
Mixing up the medicine
As McLeod suggests, it is a good idea to include a mix of blue chip and speculative outer rim property deals to protect against market shifts. Some deals may take unforeseen turns, having the right mix can allow for compensation against potential falls.
As mentioned before, there are many ways to profit from real estate arbitrage. Understanding the combinations of deals that can be executed and selecting the most appropriate for each, will help enhance profitability.
- Add value to the site – are there any quick and cost effective additions, such as development approval, that can assist drawing a higher value?
- Rehabilitation – can you, or someone else, fix the detriment causing the site’s lower-than-potential value? A cracked slab? Cosmetic mess?
- Subdivision – can you, like McLeod, build multiple townhouse on a property in a sought-after area?
- Joint venture – can you join forces with other parties to achieve a bigger deal than you would alone? This also spreads the risk.
McLeod speculates that creativity is the defining factor of success for today’s real estate arbitrage - “the most difficult part is not to find the sites, but to find the value in the sites… We love carparks that other people look at and go, well what can you do there? There’s no infrastructure, there’s nothing. And (we) then produce something great”.
Finding these sites and recognising the opportunities, has become an artform in itself. Relationships with agents help, as do the many available online resources. Tracking down sites that are approved, or can easily gain approval, for development is easier than ever.
With so many resources available, and more speculators than ever before, there is also good reason to seek off-market properties. These are sites that are selling, or have been sold, without any public advertising; tracking them down can be hard work.
Oasis Property chief executive, Gavin McPherson, brokers 65-75% off-market of all their property sales - “We see people who’ve had a history of trying to sell and had bad luck then, and once time has passed, we go to them direct.” Oasis has a member of staff dedicated to researching property databases in an attempt to uncover would be sellers.
Time of year
As well as the internal factors required to identify quality sites, the time of year can also be leveraged. Campbell McLeod has found historically that people are determined to finalise sales before the year ends, suggesting it’s linked to “an emotional thing… the idea of Christmas being the end of the world”.
Many people view spring as an ideal time to sell. They are able to present their property in the best light and get their affairs in order before Christmas. The pressure of not selling in this period and Christmas looming, may enable buyers to acquire greater deals.
Do the work and be clever about it
Sites can retrospectively become ‘undervalued’ if you see the potential that others can’t. If you can be creative with how you find and recognise these opportunities, include the right mix of deals and execute each to their most appropriate way, all whilst leveraging external factors like market shifts and the time of year, there is success to be found.
With every venture though, it starts with research. Make sure you do yours.