Property Development Success
'The Golden Triangle'
It's pushing the memory banks a bit, but some of you may remember an American sit-com called "Married With Children". In the theme song, it talks about love and marriage, and says "you can't have one without the other".

Which got me thinking about Property Development. A lot of the people I talk to view it as a very linear process - you buy a property, you do something to it to make it worth more, then you sell or hold the end result. A line.

But I believe successful property developments occur in the form of a triangle.

In Visual Form...
You see, there are 3 essential elements to successful Property Development - your Development Strategy, your Acquisition Strategy and your Exit Strategy. Each one influences the other to some degree - in essence, you can't have one without the other if you want to be successful.

Let's take a closer look at the 3 points of the triangle.

Development Strategy

In a nutshell, Property Development involves taking one property and turning it into two or more. There are other ways to add value to a property, such as renovation, but they're a separate kettle of fish.
Your end product comes in two forms - new parcels of land, or new dwellings. So as a Property Developer, you need to decide which product you want to develop, and how many. One thing I teach in my program is the wonders of scaling. Essentially, to be a Property Developer you need a set of skills. Then you take those skills and apply them to a small development, perhaps turning 1 property into 2. Next time around, you can turn 1 into 3, and keep growing.

The beauty of this approach is that you don't have to keep going back and reinventing the wheel by learning new skills. You take the same set of skills, add the experience you gain on small projects, and progressively scale up into bigger projects. This is a lot more efficient and effective than learning a bunch of different strategies. In essence, rather than being a jack of all trades, you become an expert at your chosen strategy.

Some things you need to consider when deciding on a development strategy include:

  • liquid cash available
  • time available to run the deal
  • how long can you wait for a payday
  • do you need more skills?
Acquisition Strategy

Your acquisition strategy is very much the tactical side of the triangle. Here, you are working out how best to acquire a property that fits with the development strategy you have in mind.

There are two elements to acquiring a site - the resources you have available, and what the vendor wants. Put them together in the right way, and you have a deal. This also means your acquisition strategy changes from deal to deal. For example, on your first deal, you might have more than enough cash in the bank and serviceability to buy the property outright, and the cash to fund your development strategy for it.
While that deal is in progress, you come across another one. This time the vendor doesn't want to move out for 12 months, and given that the bulk of your money is still tied up in the first deal, you can't just buy the property outright at the start. That's where you need to get a little more resourceful in your acquisition strategy.

Maybe you can talk to the vendor about buying their property with a delayed settlement and early access. The vendor gets to stay on for sometime suiting the needs they have, and by the time settlement is due, you'll have the funds back from your first deal and hopefully by then you can also have all your necessary development approvals in place, all before settlement. And, that’s what I like to call a ‘WIN-WIN’, where it works for everyone!

So your Acquisition Strategy is tactical, and can include things like:

  • standard contract of sale
  • delayed settlement with early access
  • vendor finance
  • joint venture with the landowner
  • joint venture with a 3rd party
  • option contract

Now add in the vendor's point of view, which generally falls into three main categories:

  • the certainty of the sale
  • how long before it settles
  • what price you're willing to pay
  • their appetite for risk may also come into play...
  • Add together your Development Strategy, the resources you have and the vendor's needs, and most times the Acquisition Strategy becomes crystal clear.

Exit Strategy

Your Exit Strategy is essentially what you're going to do with the final product, and is the strategic piece of the triangle.

There are a lot of potential choices you can make once you've acquired a property. Here's some of the more common ones:

  • Pass it on for a Finder's Fee
  • Sell as a site with development approval in place
  • Sell as vacant blocks of land
  • Sell existing house as is
  • Renovate and sell existing house
  • House and Land Packages
  • Sell off the plan
  • Construct and sell as finished product
  • Hold some of the finished product
  • Develop and sell in stages over a number of years if it's a big project

A common mistake is that people think they'll decide their exit strategy when they get to the end, but the reason for it being one point of the triangle is that knowing your exit strategy in advance is crucial to determining the other two strategies. It's key to ensuring profitability.

For example, if your exit strategy is to construct and sell townhouses, then your development strategy needs to take that into account in terms of making sure that outcome is profitable for the property you're looking at acquiring.
Just because a property is developable, doesn't mean it's profitable!

You need to ensure you're in an area and market where that type of development is going to allow you to exit with a healthy profit. Either that, or you need a different development strategy or a different area.

Your exit strategy can also affect how you acquire the property. Maybe you don't have sufficient resources to hold and fund the full construction of the project, so need to look at getting some money partners on board. If you're doing a quick strategy, a short term loan might be better than having a JV Partner in the deal. And the list goes on...

So if you're an aspiring property developer, you need to develop the ability to think about how all 3 strategies fit together on your current deal, and shift your thinking from linear to triangular if you want to maximise your chance of success.
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