I get it. Starting out as a property developer can be a scary thing, mostly because you don't know what you don't know. You know?
Seriously, though, it makes sense that if you haven't developed property before, there are lots of things you're going to come up against that you haven't faced before. And when you step out into unknown territory, there's the risk of making a mistake.
So I'm going to make it easier for you, and share the 6 mistakes rookie property developers make. That way you can leapfrog over all the other rookies who don't have a clue, and make sure you don't fall into any of the really basic potholes on the road to property development success.
1. Not Having A Specific Strategy
Here's how my conversations with newbies often go...
"Hi, how are you going with finding a splitter site?"
"Okay, but then last week this agent I know rang me and told me about this amazing Townhouse deal just down the road from me blah blah blah..."
No! Just... No!
The key to success, not just in property development but in almost everything, is to avoid the "jack of all trades, master of none" approach. You need to pick a development strategy, learn every last thing you can about the strategy, then put it into practice. That's it. Scale up to bigger projects once you have some development deals under your belt, but still use the same strategy.
Shiny objectitis distracts the focus, and usually ends with newbies going round and round in circles, stuck in analysis paralysis.
2. Not Sticking to a Single Council
If you think it makes sense for all the councils within your state to stick to the same rules when it comes to property development, you'd be right. But reality is that there are 537 Councils in Australia, and every one of them interprets the rules differently.
Just trying to get an understanding of one council's rules is hard enough, so why would you want to make life harder for yourself by looking at deals in multiple councils?
Good deals often require you to make quick decisions in order to get in before anyone else does, so the more you know about the Council's rules and whether the property is going to be developable under those rules, the better. By the time you get up to speed with a Council you haven't developed in before, chances are the deal will be gone.
An added bonus is that your team of professionals will also be experts in your chosen Council, having done many projects there, so you don't have to keep going out and finding new team members for every new project.
3. Overestimating Gross Realisation Value (GRV)
GRV is quite simple - how much is the finished development going to sell for? So if you have 2 blocks of land, and the average price for blocks of land that size in the area is $500,000, then your GRV is $1,000,000.
The words I don't want to hear you say about GRV are "I think it will sell for..." The GRV should be based on recent comparable sales. That's it. Because too often the words "I think" are really "I hope". You hope it will sell for $500,000, because then your numbers work and you'll make a tidy profit.
Except that when you look at recent sales, they're more in the $400-450,000 range. Don't fall into the trap of thinking that because your finished product won't be ready for 6, 12 or 18 months, that prices will have risen by then. Only use current comparable sales for your GRV, even if it means your numbers look a bit sad and you have to ditch the deal. Fiddling the anticipated GRV is the quickest way to lose money in property developing.
Add in detailed research on the location's demographics, along with supply and demand, and your GRV will be much more accurate than your gut feel.
4. Not Getting an Education
Sir Isaac Newton once said "If I have seen further it is by standing on the shoulders of giants". When it comes to property developing, you're not the first person to have split off a backyard, or built 4 townhouses, or whatever your chosen strategy might be.
So instead of making all the mistakes for yourself (and paying for them!), the simplest solution is to get educated. How that looks for you is your choice, but the primary thing to do is find someone who's successfully implemented your chosen strategy, and listen to them. Particularly when they tell you about the deals with big knobbly bits on them, rather than the easy ones.
If there's one thing I know about property developing, it's that you never stop learning. So do the smart thing and get some learning under your belt before you even begin.
5. Only Listening to Sales Agents
Let's be honest - sales agents are there to sell property. And while the right agent can be a solid gold member of your professionals team, some of them can be pretty average at times. Plus they're not experienced property developers. So while you certainly should listen to what they have to say and get as much information as you can from them - always double check.
They say you could probably put 3 units on a block? Check with a local town planner. They say blocks of land are selling for $500k? Check recent sales history. While agents can be a good starting point and give you some points of reference, they should NEVER be your only source of information. And remember - just because an agent says it's developable (and they might be right) that's not the same thing as it being profitable.
6. Failing to Identify Site Constraints
If there's one thing I know after all my years as a property developer, it's that most sites have something "wrong" with them. And while that doesn't necessarily mean you can't develop them, it's a lot more likely to mean added time and cost to get to the end of the project. So why not leave the sites with constraints to other, hardier souls, and stick to the simpler ones?
Even the simple sites are pretty good at throwing out a few curveballs along the way, so don't make your journey as a property developer harder than it needs to be.
The list of potential constraints is a long one, but here's a few to get you started:
Don't be dazzled by the potential profit of a development deal - put the work in to check out all the potential constraints on the property. Otherwise that potential profit may well become a lot smaller when it turns out you have to shell out a large lump of cash to move the power pole at the front of the property.
So there you have it - the 6 mistakes rookie property developers make. Now do the smart thing and be sure to avoid making these mistakes yourself!
Seriously, though, it makes sense that if you haven't developed property before, there are lots of things you're going to come up against that you haven't faced before. And when you step out into unknown territory, there's the risk of making a mistake.
So I'm going to make it easier for you, and share the 6 mistakes rookie property developers make. That way you can leapfrog over all the other rookies who don't have a clue, and make sure you don't fall into any of the really basic potholes on the road to property development success.
1. Not Having A Specific Strategy
Here's how my conversations with newbies often go...
"Hi, how are you going with finding a splitter site?"
"Okay, but then last week this agent I know rang me and told me about this amazing Townhouse deal just down the road from me blah blah blah..."
No! Just... No!
The key to success, not just in property development but in almost everything, is to avoid the "jack of all trades, master of none" approach. You need to pick a development strategy, learn every last thing you can about the strategy, then put it into practice. That's it. Scale up to bigger projects once you have some development deals under your belt, but still use the same strategy.
Shiny objectitis distracts the focus, and usually ends with newbies going round and round in circles, stuck in analysis paralysis.
2. Not Sticking to a Single Council
If you think it makes sense for all the councils within your state to stick to the same rules when it comes to property development, you'd be right. But reality is that there are 537 Councils in Australia, and every one of them interprets the rules differently.
Just trying to get an understanding of one council's rules is hard enough, so why would you want to make life harder for yourself by looking at deals in multiple councils?
Good deals often require you to make quick decisions in order to get in before anyone else does, so the more you know about the Council's rules and whether the property is going to be developable under those rules, the better. By the time you get up to speed with a Council you haven't developed in before, chances are the deal will be gone.
An added bonus is that your team of professionals will also be experts in your chosen Council, having done many projects there, so you don't have to keep going out and finding new team members for every new project.
3. Overestimating Gross Realisation Value (GRV)
GRV is quite simple - how much is the finished development going to sell for? So if you have 2 blocks of land, and the average price for blocks of land that size in the area is $500,000, then your GRV is $1,000,000.
The words I don't want to hear you say about GRV are "I think it will sell for..." The GRV should be based on recent comparable sales. That's it. Because too often the words "I think" are really "I hope". You hope it will sell for $500,000, because then your numbers work and you'll make a tidy profit.
Except that when you look at recent sales, they're more in the $400-450,000 range. Don't fall into the trap of thinking that because your finished product won't be ready for 6, 12 or 18 months, that prices will have risen by then. Only use current comparable sales for your GRV, even if it means your numbers look a bit sad and you have to ditch the deal. Fiddling the anticipated GRV is the quickest way to lose money in property developing.
Add in detailed research on the location's demographics, along with supply and demand, and your GRV will be much more accurate than your gut feel.
4. Not Getting an Education
Sir Isaac Newton once said "If I have seen further it is by standing on the shoulders of giants". When it comes to property developing, you're not the first person to have split off a backyard, or built 4 townhouses, or whatever your chosen strategy might be.
So instead of making all the mistakes for yourself (and paying for them!), the simplest solution is to get educated. How that looks for you is your choice, but the primary thing to do is find someone who's successfully implemented your chosen strategy, and listen to them. Particularly when they tell you about the deals with big knobbly bits on them, rather than the easy ones.
If there's one thing I know about property developing, it's that you never stop learning. So do the smart thing and get some learning under your belt before you even begin.
5. Only Listening to Sales Agents
Let's be honest - sales agents are there to sell property. And while the right agent can be a solid gold member of your professionals team, some of them can be pretty average at times. Plus they're not experienced property developers. So while you certainly should listen to what they have to say and get as much information as you can from them - always double check.
They say you could probably put 3 units on a block? Check with a local town planner. They say blocks of land are selling for $500k? Check recent sales history. While agents can be a good starting point and give you some points of reference, they should NEVER be your only source of information. And remember - just because an agent says it's developable (and they might be right) that's not the same thing as it being profitable.
6. Failing to Identify Site Constraints
If there's one thing I know after all my years as a property developer, it's that most sites have something "wrong" with them. And while that doesn't necessarily mean you can't develop them, it's a lot more likely to mean added time and cost to get to the end of the project. So why not leave the sites with constraints to other, hardier souls, and stick to the simpler ones?
Even the simple sites are pretty good at throwing out a few curveballs along the way, so don't make your journey as a property developer harder than it needs to be.
The list of potential constraints is a long one, but here's a few to get you started:
- zoning
- overlays
- contours
- trees
- easements
- location of sewer
- nearby power poles
- neighbours
- and the list goes on...
Don't be dazzled by the potential profit of a development deal - put the work in to check out all the potential constraints on the property. Otherwise that potential profit may well become a lot smaller when it turns out you have to shell out a large lump of cash to move the power pole at the front of the property.
So there you have it - the 6 mistakes rookie property developers make. Now do the smart thing and be sure to avoid making these mistakes yourself!
