This scenario is straight out of "Property Development Fears 101" - you get to the end of the development process and the properties aren't selling. What can you do?
Panic.
End of article.
Oh, you want to do something more constructive than panic? In some ways my answer is that if you've done all the steps thoroughly throughout the development process, you shouldn't be in this position in the first place. And I'll certainly go through those steps further into the article.
But if you ARE in this situation, whether through making mistakes or because "stuff" happened, it's too late to take those steps. So buckle up for some tough love.
Stop Panicking
Okay, so I was joking earlier when I said panic. In fact, that's the worst thing you can do. Making decisions when your brain is full of fear and panic is a really bad idea. So take a deep breath and focus. Solving problems is what Property Developers do.
Talk to the Agent / Marketer
First up, gather information about why your properties aren't selling from the agent or marketer. Now, I'd suggest you keep an eye out for a situation where the agent is conditioning you to lower your price. After all, their drop in commission if the price drops $50,000 doesn't hurt anywhere near as much as your bottom line will.
Having said that, try and work out if the problem is something that can be fixed in a way other than having a fire sale of the properties. For example, for pre-sales, could you spend a few thousand on getting some better marketing materials put together?
If you've already built the properties, are they styled? If not, then look into getting at least one property styled. Many developers with multiple properties style one, and use that as the display property. If it sells, then they move the styling on to the next one.
Often a small tweak is enough to get the properties moving.
What's the Market Doing?
Property development can take a while, which means you might be selling into a market that's not in the same place it was when you first started. Sometimes that works in your favour, with prices going up, but sometimes it doesn't.
So get real about what's happening. Don't just cling to the price you wanted to flatter your ego. This is particularly important if the market is dropping.
Pull out your numbers, update everything to where you're at now in the project, then calculate what's the minimum you can sell the properties for and still breakeven. If cutting prices to meet the market still gives you a profit, that's likely to be your best option in the face of a market that's tanking.
Also try getting a little creative with the situation. Can you sell a few properties at a loss, pay down a lot of the debt, and hold the remainder as rentals with positive cashflow? If you're trying for presales, can you sell the project now as a site with a Development Approval, and get out around breakeven?
In other words, don't cling relentlessly to Plan A. Investigate every possible exit strategy you can think of (and preferably network with other Property Developers to come up with more) then crunch the feasibility numbers to find the least painful option. And yes, that might simply mean the option with the smallest loss.
Look, I get it.
Nobody wants to go through 18-24 months of work only to see their profit squeezed or even disappear. But guess what - hanging on might make that loss even bigger. Sometimes it's better to take a cut in profit, reduce your risk by selling out, learn your lessons and move on.
Make Sure It Doesn't Happen Again
I said I'd include some tips that will hopefully prevent you from being in a situation like this in the first place, so here they are.
First up, you should be an Area Expert. That includes a lot of different things which I've covered in other articles, but there are three bits that are especially important here.
Demand - if people are keen to come and live in your target area, great. Is there a steady trend of population growth in the area? Are there jobs and infrastructure to attract new residents? If so, there's more likely to be demand for your product when your development is complete.
Demographics - you need to understand who wants to move into your area. If it's mostly young families, then design properties that suit them. If it's senior citizens wanting to downsize, then stick with single-storey properties. Whatever the dominant demographic is, that's your target market. Build what they want, and it will be much easier to sell.
Numbers - understand the price points for sales in your area. Your development feasibility might look very profitable using sales around the $1 million mark, but if that would be a sales record for the market, you're living in crystal ball land. Maybe you'll be lucky and prices will rise while you're doing your property development, but never count on it.
The bottom line here is that if you do all the work and trust the process, you hopefully will never end up in this situation. But I've seen enough Real Deals presented at Monthly Meetups over the years to know that "stuff" happens. And when it does, sometimes it's small and sometimes it's not.
In the long run, as Property Developers we can anticipate and manage risk up to a point, but not completely. The important thing is not to let pride and ego get in the way. After all, it's better to lose a finger than an arm. Do what you have to do to solve the problem, then say NEXT!
Panic.
End of article.
Oh, you want to do something more constructive than panic? In some ways my answer is that if you've done all the steps thoroughly throughout the development process, you shouldn't be in this position in the first place. And I'll certainly go through those steps further into the article.
But if you ARE in this situation, whether through making mistakes or because "stuff" happened, it's too late to take those steps. So buckle up for some tough love.
Stop Panicking
Okay, so I was joking earlier when I said panic. In fact, that's the worst thing you can do. Making decisions when your brain is full of fear and panic is a really bad idea. So take a deep breath and focus. Solving problems is what Property Developers do.
Talk to the Agent / Marketer
First up, gather information about why your properties aren't selling from the agent or marketer. Now, I'd suggest you keep an eye out for a situation where the agent is conditioning you to lower your price. After all, their drop in commission if the price drops $50,000 doesn't hurt anywhere near as much as your bottom line will.
Having said that, try and work out if the problem is something that can be fixed in a way other than having a fire sale of the properties. For example, for pre-sales, could you spend a few thousand on getting some better marketing materials put together?
If you've already built the properties, are they styled? If not, then look into getting at least one property styled. Many developers with multiple properties style one, and use that as the display property. If it sells, then they move the styling on to the next one.
Often a small tweak is enough to get the properties moving.
What's the Market Doing?
Property development can take a while, which means you might be selling into a market that's not in the same place it was when you first started. Sometimes that works in your favour, with prices going up, but sometimes it doesn't.
So get real about what's happening. Don't just cling to the price you wanted to flatter your ego. This is particularly important if the market is dropping.
Pull out your numbers, update everything to where you're at now in the project, then calculate what's the minimum you can sell the properties for and still breakeven. If cutting prices to meet the market still gives you a profit, that's likely to be your best option in the face of a market that's tanking.
Also try getting a little creative with the situation. Can you sell a few properties at a loss, pay down a lot of the debt, and hold the remainder as rentals with positive cashflow? If you're trying for presales, can you sell the project now as a site with a Development Approval, and get out around breakeven?
In other words, don't cling relentlessly to Plan A. Investigate every possible exit strategy you can think of (and preferably network with other Property Developers to come up with more) then crunch the feasibility numbers to find the least painful option. And yes, that might simply mean the option with the smallest loss.
Look, I get it.Nobody wants to go through 18-24 months of work only to see their profit squeezed or even disappear. But guess what - hanging on might make that loss even bigger. Sometimes it's better to take a cut in profit, reduce your risk by selling out, learn your lessons and move on.
Make Sure It Doesn't Happen Again
I said I'd include some tips that will hopefully prevent you from being in a situation like this in the first place, so here they are.
First up, you should be an Area Expert. That includes a lot of different things which I've covered in other articles, but there are three bits that are especially important here.
Demand - if people are keen to come and live in your target area, great. Is there a steady trend of population growth in the area? Are there jobs and infrastructure to attract new residents? If so, there's more likely to be demand for your product when your development is complete.
Demographics - you need to understand who wants to move into your area. If it's mostly young families, then design properties that suit them. If it's senior citizens wanting to downsize, then stick with single-storey properties. Whatever the dominant demographic is, that's your target market. Build what they want, and it will be much easier to sell.
Numbers - understand the price points for sales in your area. Your development feasibility might look very profitable using sales around the $1 million mark, but if that would be a sales record for the market, you're living in crystal ball land. Maybe you'll be lucky and prices will rise while you're doing your property development, but never count on it.
The bottom line here is that if you do all the work and trust the process, you hopefully will never end up in this situation. But I've seen enough Real Deals presented at Monthly Meetups over the years to know that "stuff" happens. And when it does, sometimes it's small and sometimes it's not.
In the long run, as Property Developers we can anticipate and manage risk up to a point, but not completely. The important thing is not to let pride and ego get in the way. After all, it's better to lose a finger than an arm. Do what you have to do to solve the problem, then say NEXT!
