Have you seen a top-floor apartment that has the potential to add value to the attic space?
A common marketing strategy for agents that sell top-floor apartments is to spruik the potential to use the attic space as the main draw card for the property. This attempts to offset the fact that the owners would need to walk three flights of stairs to reach the apartment.
This is very powerful, as for investors this creates a significant value-add investment opportunity. Where an investor can purchase a property as a two-bedroom apartment, then complete a renovation and then sell it as a three-bedroom apartment. All the comparable sales used to appraise the property will be of three-bedroom apartments. These buyers will be guided by what it is and not by what it was.
This scenario is the holy grail for property flippers. As these days a cheap renovation doesn’t quite give you the capital gain that you would want in a falling market. In a strong market, property flippers could complete a renovation and then sell the property 12 months later for a great capital gain. This leads to the false cause fallacy where investors believe the quality of their renovation was the cause of the capital gain when in reality it was just the market appreciating. Correlation does not always lead to causation.
But I digress, the point is that investors need real value-add scenarios that allow the property to be appraised with characteristics that were not apparent upon purchase. A closer look at strata meeting minutes can help determine if there were plans for these real value-add improvement. These can include adding car spaces to each unit title. Installing large balconies to the façade or; a by-law that allows owners to purchase the attic space from the owner’s corporation to create higher ceilings or even an extra room.
The problem is that major renovations that are structural or manipulate the façade require council approval prior. The agents can sometimes say.
“We’ll Unit 5 has done the same renovation last year, you can use that as a precedent that the owners corporation and council are open to having these renovations.”
Unfortunately, this is where most investors would stop their due diligence and get caught out.
“But the proof is in the pudding, if Unit 5 can do it why can’t I?”
The Floor space ratio (FSR) is the invisible bogeyman to any developer. It is the ratio of the gross floor area of a building or development to the site area which is expressed as a factor of 1. Along with zoning and other planning controls. The FSR controls the impact of a development on surrounding properties in terms of sunlight, privacy, and the overall character of the area.
Now, in the Eastern Suburbs this is a far bigger deal as the region is already built out. There are few (if any) greenfield sites (sites that have not been developed before) that remain. Many of the current residential flat buildings in particular art deco blocks built in the 1930s are occupying land with existing use rights. Existing use rights are the use of a building or land that was lawfully commenced under previous planning instruments but has now been prohibited since. An example would be a shop that was built in the business zone which is now a residential zone. A residential flat building that was legally built with a Floor space ratio of 0.75:1 that has now dropped to 0.5:1. In any case, you would not be able to add any floor space as you will be breaking your existing use rights.
If we go back to our previous example. Unit 5 may have been allowed because there was still flexibility in the current FSR that could allow for the extra floor area. This extra space may have been exhausted by Unit 5 and the block of units is at its FSR capacity. If this investor purchases the property they will be left disappointed as the council rejects their DA with the supporting evidence as to why.
In any purchase, it is so important to dig deeper into the rules and laws that affect your future plans for the property. Leaving huge financial decisions to agent conjecture and precedent will lead you to make huge financial mistakes. This will cost you all the hard work, sacrifice, and money that got you where you are today. Don’t become complacent simply because you have done it before.