It's number-crunching time. You've secured a site with development potential, and now you need to make sure it's not just developable but also profitable as part of your due diligence. Taking a look at the site and assessing all the likely "hidden" costs involved in getting out of the ground is one part, which we've covered before in our prior Property Pulse article The "Hidden" Costs of Property Development.
Now it's time to think about what it's going to cost to build the dwellings you want to build on the site. This is the point at which being an Area Expert becomes really important. You need to know who is buying in the area, and what type of dwelling they want. This is critical, and far too often property developers don't take this into consideration when doing their feasibility, and either over-capitalise or build a product that's just not right for the market and so can't achieve the required sale prices.
So let's take a look at how to go about doing that, without blowing your budget.
Initial Feasibility
As a starting point, it's good practice to reverse engineer recently completed development projects in the area that sold well or achieved top prices, and work out why that was the case. It's even better if you can get floorplans, or the name of the builder of a project.
While you're not quite at the stage of costing out every single power point in each dwelling, having a reasonable idea of size, level of finish and potential big-ticket items such as basement parking in the project means you will get a quote that's a lot more accurate than just saying "I want to build three 3 bedroom townhouses - what's that going to cost?"
It's also important to check for any covenants or overlays that may affect what you can build. These are quite common in modern estates. It's no good getting a builder to quote on building smaller 2-storey dwellings made from modest materials, only to discover there's a minimum dwelling size required and it has to be finished with hand-hewn stone from a local quarry. Okay, I'm exaggerating about the stone, but the concept still holds!
Design Stage
Assuming your initial feasibility delivered the right level of profit, it's time to get more specific in the design stage. Again, if you want to get the most cost-effective design for the site, give your Architect or Designer the best possible chance to deliver that by being clear about the result you want.
Sure, we've all heard the stories of Architects who want to demonstrate their artistic genius and design amazing, bespoke houses that win lots of awards. But unless your target market is going to buy that type of dwelling, then make it clear that's not what you want. And the easiest way to do that is to be very detailed about exactly what is required.
Initially, that means looking at the overall design of the dwellings. It's generally a lot cheaper to build what is essentially a box. Anything that adds to or removes from the shape of the "box" costs more. If your development site is in a lower socio-economic area, then a "box" design is potentially the best solution to deliver affordable housing in the area. But plonk that same box down in an expensive, leafy suburban street, and it's likely to be regarded as cheap and nasty, with the result that it sits on the market for ages without selling. Or requires a big price drop to shift it.
Here are some examples of bigger design elements that can potentially add some serious dollars to the build cost of your property development, so be very sure your target market demands them if they appear in your design:
That list isn't exhaustive, but it's a good start.
The other thing to look at in the overall design is the type of materials used on the exterior of the home. Going back to the hand-sewn stone example above - obviously, that's going to cost a lot more to build than a more standard concrete render. Make sure the Designer uses materials appropriate for both the area and the budget.
Fittings & Fixtures
Although this is still part of the design stage, a lot of the individual choices about what fixtures and fittings to put in the house follow on after the initial design of the spaces.
Some choices are layout-based, particularly in areas like the kitchen. Do you need to put in overhead cupboards, for example, or can you save some money by leaving them out? The same goes for an island bench. Put on your Area Expert hat and decide what internal elements really are essential for target market appeal, and which are just unwanted costs.
By the time you're preparing a scope of works to give to your prospective builders for quoting, you should also have made decisions around the types of fittings you want to include in the property. You can get a reasonable quote just by choosing a low, medium or high finish, and filling in the blanks later. But to get a quote that's as accurate as possible, give as much detail as you can, down to specific brands and products.
For example, what appliances do you want in the kitchen? Cheap as chips brands, which are essentially no-name brands from somewhere like Bunnings? Or state-of-the-art Gaggenau appliances? Kitchen benchtops are another example - laminate versus real stone?
Here are some fixtures and fittings that can vary enormously in cost depending on the level of finish you're looking for:
Be clear about what you want, to the point of providing photographs, model numbers and even prices as part of your Scope of Works for the development. Make sure you take advantage of the substantial discounts you can access using the Property Developer Network's Annual Membership Discount Supplier Program as you're doing this. All this helps your builder give you a more accurate quote, which means the build is more likely to come in on budget.
Finally, make sure your budget includes the same things you're asking your builder to quote on. Not all builders consider driveways and landscaping to be part of a "turn-key" build, for example. You don't want to blow your budget right at the end when you suddenly discover a bunch of bits and pieces weren't included after all.
And remember - contingencies are meant to be just that. A little extra tucked away for costs that couldn't be foreseen. You should aim to bring in your project on budget, excluding contingency funds, not by using them.
The bottom line is that if your feasibility is accurate, your project should be profitable if you can bring it in reasonably close to budget. So be an Area Expert, understand what the target market wants, and ensure right from the start that you can build what's required without blowing your budget and blowing up the profitability of the project in the process.
Now it's time to think about what it's going to cost to build the dwellings you want to build on the site. This is the point at which being an Area Expert becomes really important. You need to know who is buying in the area, and what type of dwelling they want. This is critical, and far too often property developers don't take this into consideration when doing their feasibility, and either over-capitalise or build a product that's just not right for the market and so can't achieve the required sale prices.
So let's take a look at how to go about doing that, without blowing your budget.
Initial Feasibility
As a starting point, it's good practice to reverse engineer recently completed development projects in the area that sold well or achieved top prices, and work out why that was the case. It's even better if you can get floorplans, or the name of the builder of a project.
While you're not quite at the stage of costing out every single power point in each dwelling, having a reasonable idea of size, level of finish and potential big-ticket items such as basement parking in the project means you will get a quote that's a lot more accurate than just saying "I want to build three 3 bedroom townhouses - what's that going to cost?"
It's also important to check for any covenants or overlays that may affect what you can build. These are quite common in modern estates. It's no good getting a builder to quote on building smaller 2-storey dwellings made from modest materials, only to discover there's a minimum dwelling size required and it has to be finished with hand-hewn stone from a local quarry. Okay, I'm exaggerating about the stone, but the concept still holds!
Design Stage
Assuming your initial feasibility delivered the right level of profit, it's time to get more specific in the design stage. Again, if you want to get the most cost-effective design for the site, give your Architect or Designer the best possible chance to deliver that by being clear about the result you want.
Sure, we've all heard the stories of Architects who want to demonstrate their artistic genius and design amazing, bespoke houses that win lots of awards. But unless your target market is going to buy that type of dwelling, then make it clear that's not what you want. And the easiest way to do that is to be very detailed about exactly what is required.
Initially, that means looking at the overall design of the dwellings. It's generally a lot cheaper to build what is essentially a box. Anything that adds to or removes from the shape of the "box" costs more. If your development site is in a lower socio-economic area, then a "box" design is potentially the best solution to deliver affordable housing in the area. But plonk that same box down in an expensive, leafy suburban street, and it's likely to be regarded as cheap and nasty, with the result that it sits on the market for ages without selling. Or requires a big price drop to shift it.
Here are some examples of bigger design elements that can potentially add some serious dollars to the build cost of your property development, so be very sure your target market demands them if they appear in your design:- anything cantilevered
- suspended floor areas
- higher ceiling height
- wide open spans
- oversize windows and openings
- non-essential rooms eg. Butler's pantry
- larger than normal room sizes
That list isn't exhaustive, but it's a good start.
The other thing to look at in the overall design is the type of materials used on the exterior of the home. Going back to the hand-sewn stone example above - obviously, that's going to cost a lot more to build than a more standard concrete render. Make sure the Designer uses materials appropriate for both the area and the budget.
Fittings & Fixtures
Although this is still part of the design stage, a lot of the individual choices about what fixtures and fittings to put in the house follow on after the initial design of the spaces.
Some choices are layout-based, particularly in areas like the kitchen. Do you need to put in overhead cupboards, for example, or can you save some money by leaving them out? The same goes for an island bench. Put on your Area Expert hat and decide what internal elements really are essential for target market appeal, and which are just unwanted costs.
By the time you're preparing a scope of works to give to your prospective builders for quoting, you should also have made decisions around the types of fittings you want to include in the property. You can get a reasonable quote just by choosing a low, medium or high finish, and filling in the blanks later. But to get a quote that's as accurate as possible, give as much detail as you can, down to specific brands and products.
For example, what appliances do you want in the kitchen? Cheap as chips brands, which are essentially no-name brands from somewhere like Bunnings? Or state-of-the-art Gaggenau appliances? Kitchen benchtops are another example - laminate versus real stone?
Here are some fixtures and fittings that can vary enormously in cost depending on the level of finish you're looking for:
- floor coverings
- benchtops
- doors
- mirrors
- appliances
- fly screens
- tapware
Be clear about what you want, to the point of providing photographs, model numbers and even prices as part of your Scope of Works for the development. Make sure you take advantage of the substantial discounts you can access using the Property Developer Network's Annual Membership Discount Supplier Program as you're doing this. All this helps your builder give you a more accurate quote, which means the build is more likely to come in on budget.
Finally, make sure your budget includes the same things you're asking your builder to quote on. Not all builders consider driveways and landscaping to be part of a "turn-key" build, for example. You don't want to blow your budget right at the end when you suddenly discover a bunch of bits and pieces weren't included after all.
And remember - contingencies are meant to be just that. A little extra tucked away for costs that couldn't be foreseen. You should aim to bring in your project on budget, excluding contingency funds, not by using them.
The bottom line is that if your feasibility is accurate, your project should be profitable if you can bring it in reasonably close to budget. So be an Area Expert, understand what the target market wants, and ensure right from the start that you can build what's required without blowing your budget and blowing up the profitability of the project in the process.
