3 Reasons Why It’s Better To Sever And Build

As small-scale infill developers, our primary strategy is to buy property with an existing building, sever the lot and build, rather than purchasing raw land to build on. We then seek to improve the condition of the existing property, rather than tear it down and rebuild. This would apply to both residential or commercial properties.

There are 3 main reasons for this approach, and these are items that are very important for most real estate investors who are starting to get into small-scale infill development for the first time.

Let discuss these 3 reasons:

1. Standard Financing - It is much easier to obtain financing for an existing property than it is to obtain financing for raw land. Once you sever the lot, you would need to "partially discharge" the mortgage for lost value in the land. In many cases, you may be able to make up some of this value by improving the condition of the existing property. Financing is also one of the reasons why we don't like to demolish the existing property, as the lender would not typically allow that under their policies. Therefore retaining the existing property for financing is most viable.

2. Sustaining Value - A property's value consists of both the building and the land. In many of the markets where we engage in small-scale infill developments, the land value is only approximately 25% to 40% of the property's value. By demolishing a building, we effectively destroy 60 to 75% of the property's value immediately before any development is completed. For a profitable project, we then need to recover these losses in the development and construction. This is not to say that it never makes sense to tear down a house and rebuild more units. But you will need to justify it typically with higher density, which can be difficult. For those starting out, it makes sense to keep the existing property as a means of sustaining a properties value.

3. Income During Approvals - The approval process for a development can take between 6 months to a year, and possibly even longer. If you are trying to get approvals for a new project, this can significantly eat into your cash flow situation. If you have a house on the property, even if it is moderately producing negative cash flow (ie. higher expenses compared to income), it is much more favourable than if it was only extracting funds and not producing any revenue. This scenario can make things challenging for the investor.

This is not to say that you can never buy raw land or demolish a property. However, for those starting out in infill development, it is a much better strategy to purchase property with an existing house. They should then try to improve its condition, sever the land, and build on the newly severed property.

There are a host of other reasons why keeping the existing house makes a lot sense. These are just 3 that we keep top of mind.

These topics will be discussed in detail in our upcoming training program on May 23/24. If interested, you can sign up at www.InfillDevelopments.com/training.

Our Process For Turning One Lot Into Three Lots

Let us share with you our recent success of being approved by the City of St.Catharines to add 2 additional residential lots to an existing single family lot, with the potential to add 5 additional housing units within walking distance to a GO train station with daily service to Toronto.

Unfortunately the successful outcome of this approval was not a straight line. There were numerous stages to the process, and as a matter of fact, it ended up being perhaps the longest it could have been in a residential infill development application. So let us share with you what our steps were.

We’re going to just summarize it here, but if you’re interested in learning more about this project, and others we have or are currently working on, come to our site tour on Sunday February 23rd at 10am to our newly completed semi-detached homes in Hamilton. To sign up for that, head over to www.InfillDevelopments.com/sitetour and sign up! We’ll be sharing lessons learned from this project and others so that you can take advantage of similar opportunities with the benefit of some of our experience.

BACKGROUND OF THIS PROJECT:

Existing Property: Large single family corner lot sized 70’ x 105’ with an existing 1000 SF bungalow on a crawl space.

Proposed Property: 2 additional lots (3 in total), with semi-detached home with second suite in each (and possibly a second suite on existing house - bringing it from 1 housing unit to possibly 6 in total).

Sometimes you have to be creative for the best design. One of our new lots is an L shape.

You may be aware that doing a severance to a property is not “by-right” (meaning it is not something you can do without special permission from the city). You have to apply for minor variances and consent applications to do a land severance. 

However, we had to first comply with the design requirements of the city’s Design Review Panel, which is a new part of the development process in St.Catharines. 

Unfortunately we failed our first attempt, and had to go back to the drawing board to do a re-design. This came at a cost of both time and money. When we finally redesigned the project to their satisfaction, we were okay to move to the next step, which are the minor variances and consent applications for land severance at the Committee of Adjustments hearing.

At our Committee of Adjustments hearing months later, they ultimately rejected our application 3 votes NO and 2 votes YES. 

That was a BIG blow to us!

After some analysis, we decided to appeal the decision by escalating to the LPAT (Local Planning Appeal Tribunal), because we felt strongly that this was a very positive contribution to the city as well as being potetially a very profitable project. 

After months of waiting, we finally got our appeal hearing, where we had the help of legal council to show clear evidence on the benefits of this project.

Long story short, we’re happy to announce that we were recently notified that we got approval to move forward with the project. 

So now the fun begins! 

We’re currently looking at construction options to determine if it may be worthwhile to use a prefab approach or onsite construction.

We’re currently looking at construction options to determine if it may be worthwhile to use a prefab approach or onsite construction.

These properties are located within a 15 minute walk to the GO Train station, which now provides daily service to Union station in downtown Toronto. This project will definitely help to provide additional affordable housing units in a growing city with convenient transit access to the economic center of Canada as well, and should prove to be another profitable infill development project. 

The lesson here is that any success in infill development, or real estate in general is not a straight line. There are bumps along the way, and you don’t alway succeed. But if you keep pushing, you will win more than you lose, which is what you’re after in the long run.

Additionally there were a number of lessons we learned ourselves here that if we had known, would have done things a bit differently, and want to share that with you in our site four or our In-Depth Infill Development Training Course.

If you’re interested in learning more about this and other infill development, make sure to download our FREE guide at www.InfillDevelopments.com and sign up for our upcoming site tour at www.InfillDevelopments.com/sitetour.

The Triple Bottom Line of Infill Development

Some of you may have heard of the phrase, “Triple Bottom Line”. Here’s Wikipedia’s explanation:

“The triple bottom line (or otherwise noted as TBL or 3BL) is an accounting framework with three parts: social, environmental (or ecological) and financial. Some organizations have adopted the TBL framework to evaluate their performance in a broader perspective to create greater business value. Business writer John Elkington claims to have coined the phrase in 1994.”

We really like this idea, but as with many savvy business concepts, it gets marketed the hell out of and eventually loses its effect and appeal, and then becomes unfashionable.

However, this is one we believe should stick around for any business that’s in it for the long haul. It can’t be just about the bottom line anymore. The TBL has to be the bottom line.

Our mandate with infill developments is to adhere to this principle, and here’s our explanation on how we can achieve TBL.

1. People

The density created from infill developments enhances community building. This encourages local businesses

and services to thrive from the greater population density, allowing people to walk to many daily amenities.

This in turn creates a desirable neighborhood that further encourages walking, better public transit and

ultimately increase social cohesion and better health. People living in these communities have less need to

drive and are generally healthier and happier.

2. Planet

Infill developments take a fraction of the resources needed to build a new home, compared with a new home in

a new subdivision. There are no new and expensive roads, sewer systems and utilities to construct and

maintain indefinitely. Additionally, homeowners will be able to reduce their travel time and transportation

resources for homes that are already in existing neighborhoods, benefiting the environment even more.

3. Profit

Last but not least is profit. Infill developments help local governments generate greater revenue from

development charges, permit fees, and ultimately tax revenues, all while reducing their burden from urban

sprawl. Despite this, you can still profit well. The reason is because with infill developments, you can essentially

take an existing lot, apply strategic analysis, planning, and execute to create a new parcel of land to build on.

This is typically at a lower cost than buying empty lots on the market.

What we’re looking to do is create a winning outcome for all stakeholders, including homeowners, landlords, tenants, community members, and the local municipality. And it’s clear to us that infill development is part of the solution.

We hope you will join us!

The True Cost Of Homebuilding - It's Not What You Think

The question we get asked most often related to our development projects is “How much does it cost to build per square foot”. This is a tough question because if we’re being frank, the answer is $100-$400 per square foot. 

We never actually say this, because:

1. It’s not helpful for anyone

2. We would sound like jerks

The reason most people would like to know the cost per square foot is because it’s always fun to do a “back of the napkin” analysis, where you plug in the cost of a property, the cost to build based on house size and SF price, and boom! There’s your profit. 

Maybe we’re being a wee bit facetious here, but it’s not far off.

The answer we actually give is “it depends.” And boy, does it depend.

So here are a few things that an investor needs to consider before plugging in a square foot build cost.

1. Are you hiring a builder or are YOU the builder? And if you’re the builder, what value are you adding for your time and energy?

2. The size of property. All things being equal, a 3000 SF home will have a lower per/SF cost than a 2000 SF home because of certain fixed cost.

3. How many units are you building? This is similar to point 2. 10 units should have lower per unit costs than 2 units.

4. What’s your relationship with trades and suppliers? 

5. What are labour and material costs in the city you’re building in?

6. What is the quality of the build? There are usually varying degrees of quality depending on who your target market is.

7. What season are you building in? Winter construction will cost more.

8. And are you just concerned about “hard costs” (i.e. cost of materials and labour for construction), or are you considering “soft costs” before construction begins (i.e. planners, surveyors, house designer/architect, application fees, parkland fees, demolition, legal, engineering, development charges, building permits, and additional miscellaneous fees.

To give you an idea of these “soft costs”, here are some rough numbers for our recent Semi detached development in St.Catharines with legal second suites (4 units in total).

• Planner: $10,000 (Typically $5,000-$7,000)

• Surveyor: $6,000

• House Designer - Stage 1: $2,000 (Basic Layout and Elevations)

• Application Fees (Lot severance): $11,000 (Typically $3,000-$5,000)

• Parkland Dedication: $10,000 (5% of New Lot Value)

• Demolition: $5,000

• Legal: $2,000

• Engineer: $5,000

• House Designer - Stage 2: $5,000

• Development Charges: $15,000 (this can vary wildly depending on the city)

• Building Permit Fees: $4,000 (Based on Sq Ft)

The numbers for your potential project will definitely be different.

So there you have it. The right answer to what the SF price is it depends, and it would be best for any serious investor to do an analysis on all the items mentioned above before trying to determine actual costs to build a home.

The purpose is not to scare you away from development, but rather to encourage you to be realistic. 

The opportunities are out there, but you have to budget accordingly, and you can be on your way to being an infill developer and profiting!