On today’s show we’re talking about a strategy for creating value in expensive markets.

In some of the most expensive cities in North America, cities are increasingly charging development fees or impact fees for new construction. These fees pay for paving new roads, for the cost of expanding water, sewer and public transit infrastructure. The rationale is that urban expansion costs money long before the new properties are completed and contributing to the expanded property tax base. So development charges, levied against the developers makes sure that the cost of these expansions are covered by those who stand to profit the most from the growth. In these expensive markets it can sometime be difficult to make the numbers work for new construction. When you add the cost of the development charges, a new home can be extremely expensive compared with resale homes in the marketplace. This is particularly true for the smaller player who doesn’t have the economies of scale of a larger builder.

The methods to make money in these conditions requires much more creativity than a simple flip project. 

The first strategy is the increase density with accessory dwelling units, sometimes called in-law suites. This might be a basement apartment, or sometimes a carriage house if your local zoning allows for a separate building on the property that takes its utilities from the main house.  

But remember, the development charges only apply to an increase in density. If the property had a single family home on it, and the finished product is still a single family home, then no development charges apply. You haven’t increased the density. 

Some single story ranch bungalows simply don’t have the flexibility to be transformed into a modern home that the market would embrace.

Many investors consider a complete tear-down and rebuild if the existing home is functionally obsolete.

There is a middle ground solution that can save a lot of cost and still deliver a new home. That is the so-called pop-top. This is where you cut off the roof, demolish the interior and utilize the existing foundation and footprint of the home as a basis for a new two-story home. 

You get to re-use the foundation which saves about $40-50k off the cost of construction. By re-using the utilities coming to the home, you save about $20k-30k in utility servicing costs. Compared with new construction, the savings of the foundations and utilities can generate considerable profit for the home builder. 

The ground floor layout will be completely redesigned. You can create large open spaces that are consistent with a new home of today’s vintage. The structural supporting walls, columns and beams for the upper level can be easily incorporated at this time. The second level will house the bedrooms and bathrooms.