When it comes to our beloved homes, size does matter
Size matters in two forms, the land and the assets that sit on the land.
There is every opportunity to over capitalise in some areas. The size of the land will have an impact on the value of your property. This varies per area and will change during stages of growth and demand. The more demand to move to an area, the more the land content will improve in value, however, irrelevant to the demand, the size of the lot will also dictate value.
So, should you buy big or small? That depends on your needs. Are you looking for low maintenance and down-sizing? Or are you planning a family, maybe you’re a first home buyer? Either way every area will have a sweet spot, a size that gives you the best value for the m2 of land.
This is easy to work out if you are buying vacant land, you need to ensure you look at what else in the area has sold, not what’s on the market. Ensure you compare apples with apples. Consider the slope, locality, is it shovel ready, (really), frontage and zoning, also any extras like fencing, landscaping and even estate assets like gyms and clubs that are owned by the estate landowners. All of this will have a price impact, some can be removed as a dollar value to allow you to compare adequately to the other sales in an area. (For example fencing may have cost $5,000.) You will need to ask the agents, or it may be listed in the contracts and covenants.
Once you have established the comparable m2 rate, you will soon be able to see the sweet spot. The sweet spot is where the land price is equal to the average m2 rate. This is your best value buy when you are looking at smaller lots or downsizing, as smaller lots are normally the most expensive per m2. It is interesting to see how this differs for various areas.
So, based on what you want at any given stage of life, you can now see how size does matter.
Once you know the land values it is easy to establish the capital improvements, house, fencing, sheds etc. For a basic calculation you can use tools like a quantity surveyor’s build cost calculator (google it) as a guide. Builders are also a great source of information. Agents will assist with the age. Now you can start to see value, and if something has been over capitalised for an area. Be careful, as size doesn’t always mean value. While using a guide is a good starting point, there is also a sweet spot with age of homes. Well maintained very old homes can be structurally better than some of the younger project homes, so do some further research. Also large homes in an area that has high demand for downsizers will not necessarily hold the same value either, it’s a bit sneaky really. This is where doing your due diligence will make the difference between buying what you can afford and buying what has the best value at a price that works best for your situation.
Let’s say you have established that a block you can buy at the best price per m2 is larger than you want or need, do you walk away, do you over pay for the smaller lot, or do you buy the block? Of course, that depends, if you know what to do, and if it will work on your lot, you would buy the larger lot. A couple of options may be to subdivide into two smaller lots and sell one for a profit, maybe you could build a second dwelling on the back and Airbnb or lease, both subject to demand and council approval. There are a multitude of options once you know what can be done. This knowledge allows you to make very different choices when buying a home or land to build, from location to size and overall use.
This is also a warning for when you build, know the area well enough to factor in your exit with options to suit the future.
You should try this on your own home, work out the real value based on what the current land value is and capital improvements. Do the work and calculate the m2 rates, and build costs, less age. You may be surprised what you find out. Are you making the most of the asset you already have?
Until next time, happy calculating and remember, size does matter.
Melissa