Real Estate Investor Magazine South Africa December/ January 2018/2019 | Page 26

ACQUIRING
Buy-to-demolish
Here’s what you need to know to make money
BY BARRIE SWART
M
any first-time or small-time property investors buy
dilapidated homes to fix them up and sell for profit.
If you have the time and the skills, there’s a lot of
money to be made this way. But is the same true for buying a
home and then demolishing it to rebuild from scratch?
Because the primary value of a property lies in the land
itself, theoretically it makes sense to tear down a less-than-
ideal home and rebuild something that is more likely to attract
a great buyer. However, the reality is that buy-to-demolish is
a risky approach and is both expensive and bureaucratic. Your
investment can get tied up with various bodies, failing to earn
an income for an unknown amount of time, and remain at risk
of being turned down. It’s important to have a Plan B in place,
should your project end up being rejected.
In effect buy-to-demolish is a niche strategy demanding
very careful consideration of a multitude of factors.
Demolition itself is pricey and subject to the National
Building Regulations Act. If the local authority finds that your
site is dangerous in any way, you will be required to secure it.
If you fail to do so, they have the right to secure it themselves
and send you the bill.
You will need a property lawyer, surveyor and town planner
involved from the get-go to assess the property and advise on
the specific zoning rights of the area you wish to develop –
even subdivisions are governed by these laws. Be especially
careful about heritage buildings – you may be surprised by
what is officially considered ‘heritage’ and therefore demolition
is either ruled out altogether or subject to extra processes.
Aside from lodging an application with the local authority, the
development will be subject to public participation – and your
neighbors may not be keen to have bulldozers on the street.
Once objections and responses have been dealt with, an
engineer will have to perform a technical assessment, and
only then will the council decide to approve or decline the
application.
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DECEMBER 2018/JANUARY 2019 SA Real Estate Investor Magazine
Once approved, you will need to plan for a number of
other factors. Environmental issues – such as the presence of
asbestos – could complicate the issue. Dumping and hauling
the rubble will also require permits and further costs. Likewise,
water, sewage and electricity cannot simply be switched
off and ripped out. There are many requirements for safely
disconnecting or abandoning utilities that you will have to
adhere to.
Most banks will not allow you to demolish a mortgaged
home because you are destroying the security for the loan. In
which case, you will have to have equity on hand – either your
current home or cash in hand. Talk to your lender about an
investment or construction loan upfront and be sure to study
the fine print of any mortgage agreement you may enter into.
You will have to be able to prove that the home you will be
building will be worth substantially more than the one you
are tearing down. This will require significant amounts of
documentation from a surveyor, the builder, the architect and
other parties.
If you can find a property and a loan that is free of liens and
conditions, and you have the time and resources to go through
the lengthy approval process, you may be able to successfully
buy-to-demolish. One alternative is to go through the process
and then sell off the land at a premium with all approvals in
place to another party to do the building.
In most cases, though, you are much better off salvaging
the existing home than demolishing it entirely. (After all, the
chances of you building a R4-million house for R1-million are
very slim). And if you are able to live on the property as it is
being renovated and to rent out your current home, you can
still earn an income from your investment during the process –
providing that you and your loved ones are able to put up with
the constant noise!
SOURCE Gumtree