5 Stages to Property Development
If your thinking of engaging in a small scale Property Development then you need to understand the processes, steps and timelines in the process before committing your hard earned cash into any deal.
1 – Site Analysis and Acquisition
Is it Developable?
What will Council allow you to build on the site, are there any restrictions such as a protected house, flooding, vegetation or other restrictions which may make the project a no goer?
You need to engage a Town Planner to determine what is actually possible, the likelihood of success, and to actually submit the application. Before spending your hard earned money on the Town Planner though you should do your own Due Diligence by looking at Council’s Town Plan yourself. The more you know, the better your questions to your Town Planner will be.
Don’t forget to also talk to a Civil Engineer as to if it is possible to get water, sewage and stormwater onto / off the block. A lot of this will be dependent upon the contours of the land and where the services are actually installed relative to your property. Dial Before You Dig is your best friend here.
Your Architect will also have a great deal of input into this early stage, knowing what can be fit onto the block using the set back restrictions and turning circles for car parking that the Council may impose on the site.
Is it Profitable?
Just because the site has development potential does not mean that the project will be profitable. In fact, I would argue that more than 80% of the sites that I analyse are NOT profitable. The only way to know for sure is to use the feedback from the Town Planner, Civil Engineer and other consultants to determine the likely costs to construct.
A previous mentor of mine Nhan Nguyen used to drill this into everyone that he taught “You make your money when you buy, and not when you sell”. Of course he was right, but a better way to think of it is to actually look at the deal backwards. Know what the finished product will sell for, then subtract your intended profit (Robert Kiyosaki says to pay yourself first), then subtract all of your known costs plus a margin for contingency and then what is left over is the MOST that you can afford to pay for the property. If you can then buy at this price then you have indeed made your money already when you bought.
What are the Terms for the sale?
Don’t underestimate the Terms for the sale. I have seen many a deal that looked to be not profitable turned around because specific conditions where negotiated into the purchase. Specifically we all know that “Time is Money”, so if they want a ridiculously high price then can you afford to give it to them if the will allow you the time to settle in say 12 – 24 months with early access?
Don’t limit your thinking to just settlement though, any terms at all the reduce holding costs and remove risk from the table are all great to be considered. Make sure that you talk to your Solicitor & Accountant to see if there are any particular challenges that you need to overcome, also talk to your Bank or Finance Broker to see what they may need as conditions in the deal.
2 – Development Approval (DA)
Well you have your site secured now, this is where the hard work really begins. Depending upon your Development Strategy and the site itself you may need to get expert opinions from any or all of the following:
- Town Planner
- Civil Engineer
- Hydrolic Engineer
- Traffic Engineer
- Acoustics Engineer
- Mechanical Engineer
- Architect / Draftsman
- Landscape Designer
- Quantity Surveyor
Typically it is your role as Development Manager to coordinate all of these people and to feed their input into the Town Planner so that they can lodge the application using the input provided to argue for / against particular Council Zoning bylaws.
The approval timeline can vary significantly depending upon if the application complies to all of the by laws (Code Assessable), of if you need input from the public during a consultation period (Impact Assessable). This could be as low as 2-3 weeks or as much as 12-18 months just waiting for the approval, so make sure that you factor this in as part of your holding costs. Your Town Planner will be best positioned to guide you on the likely timeline for your project.
3 – Building Approval (BA)
The DA says what Council will allow you to build but not HOW to build it. The Building Approval is a finer level of detail that looks at the engineering level to determine what the footings will be built from, how thick is the concrete slab, what strength steel girders should you use, how and where are electrical and light fittings, etc.
Now you need to go back to all of those Engineers and Architects that you used during the DA process and get a higher level of detail in your drawings. Be very careful in cross checking that each layer on the plan is compatible with the next, all too often one drawing will conflict with the next.
4 – Construction
Scope of Works (SoW)
Be very careful here in what is “Specked” in your Scope of Works, as each builder will typically have a different level of inclusions, and so whilst you may think that you are comparing Apples with Apples, one of them may in fact be a Grapefruit.
Typical things to watch out for that could be different between builders include:
- Quality of Fixtures and Fittings
- Kitchen & Cabinetry inclusions
- Carpets, tiling and flooring
- Tapware & Bathroom finishings
Provissional Cost (PC) Items
PC items are a way of taking some of the unknowns out of the SoW so that everyone is on the same level playing field. With this approach you nominate a budget for each PC item (e.g. $25 per m2 tiles) that all of the builders quote on, and then once you have the builder determined you can then pick the specific type of tile from their “Builders range” or alternatively nominate your own supplier within that budget.
Design and Construct (DnC)
DnC contracts can be used to give all of the responsibility of the engineering level drawings done in the BA stage to the builder. Whilst it is simpler for you to manage, DnC contracts don’t give you visibility of the quality of the overall build.
5 – Sales
Your profit is not actually in your pocket until construction is complete, and you have the relevant titles or certificate of occupancy so that you can sell your finished product.
Pre-Sales are used to reduce the risk of the project. Typically this is the bank enforcing this upon you in order to ensure that they can pay back the construction loan, however you may also chose to sell early in order to take risk off the table.
In most instances Pre-Sales will impact your profitability due to a number of individual reasons that when layered upon top of each other can have a significant hit to your hip pocket;
- The purchaser can’t actually see the finished product they are taking a risk that you will actually build what you say you will build
- The finance company supporting the purchaser will engage a valuer who will be conservative on his valuation as he doesn’t have a crystal ball to look into the future
- The sales are harder to achieve as purchasers can’t imagine what they will look like, so you may have to engage specialist Project Marketers who charge higher commission structures than traditional agents
Post Sales are much easier to achieve than Pre-Sales as purchasers can actually see inside the property and imagine their own furniture in there. On the down site, this is when your project is sitting at Peak Debt and so for every day you don’t sell them, the interest on the project is starting to add up.
A perfect balance is to have enough Pre-Sales to pay back the construction and purchasing debt, with the balance of stock (the profit) sold as finished product.
LEARN HOW TO DEVELOP PROPERTY FOR YOURSELF
Our Property Development 101 – Site Analysis course is aimed directly at novice developers wanting to learn small scale property development, showing you the basics of how to analyse a site for development potential and profitability.
Here’s what others are saying about the course:
It was by far and away the most affordable and best value course on Property Development that we could find……the ability to analyse real sites in our own backyard made it more real…..we now have the understanding of knowing what parameters we need to look for in a site, and also have the confidence to know if a site will be profitable or otherwise……..it was excellent and we can really recommend it.Robert & Kathy