Many real estate investors are keen to step up to the next level and get involved in property development.
They think “I’ll buy a block of land or old house, pull it down and build a number of townhouses, units or apartments. And then maybe I’ll sell some, keep some and move onto the next project.”
In fact one of the most read blogs on this site is How to Get Started in Property Development.
It all sounds so simple.
But there is a lot more to the development process than what you see happening on site, so today I would like to outline them.
In fact most of the success of any property development is underwritten long before you commence construction.
You see…property developers follow a sequence of steps from the moment they first conceive a project to the time they complete the physical construction and begin ongoing asset management.
While the sequence may vary slightly, usually the development is broken up into the following elements:
- coming up with the idea
- refining it
- testing its feasibility
- negotiating contracts
- making a formal commitment
- constructing the project
- completing the project and finally
- managing the new project
When I first became involved in property development in the early 1980’s, I didn’t really understand this process.
I made a heap of mistakes in my early developments, including leaving out some essential steps, but somehow I still managed to come out with the profit.
I thought I was clever but in reality I was trading in a strong property boom that covered up my blunders.
If I made similar mistakes in today’s property market I probably would not have survived my first development.
While the development process varies from project to project, as project managers our team at Metropole Property Strategists has broken the development process down to 9 steps.
Today I’d like to offer you an overview of these stages and in future articles I’ll explore each step in more detail:
1. Why?
The first step is to understand WHY you are getting involved in property development.
Do you plan to sell the property for a quick profit? Or are you planning to develop your property, manufacture capital growth and rentals returns and then keep your high performing property (my preferred strategy)?
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2. Pre Purchase stage
This is when you start looking for a block of land with potential for development.
But before you even start looking there’s a few things you need to do first:
Understand in which entity you will purchase your property. Will it be in your own name, in a company, a trust or maybe you’ll be involved in a joint venture? Obviously you’ll need your accountant’s input to help you decide.- You should also have a finance pre approval in place so that you understand your limits, as well as having the reassurance that you can complete the project and retain some or all of the units on completion.
- You should also have a team of consultants organised who can advise you as to the project’s viability. If you hire a development manager they will coordinate the whole process or you’ll need to engage a solicitor, an architect, a surveyor, a town planner, an engineer and an estate agent to advise honestly on end values and marketability.
3. Concept stage
Once you find a potential site, you must now come up with a concept for its development.
What can you put on property? How many units? How big? What restrictions are there? Are there any overlays, easements or covenants on the title which will restrict it’s development potential?
To find out what can be built on the block you’ll need to assess the local council’s policy towards development and see how many new dwellings can be put on the block.
This differs from council to council and even within different locations in the same municipality.
You will also need to assess what the market wants in that particular area – in other words – what type of property would sell or lease well.
You see…it’s important to design and build a project that is marketable – the right size and the right type of dwelling for the demographic that wants to buy or lease in that locality.
By the way, you can’t usually build any style of dwelling.
You’ll find councils have strict guidelines about the style of development you can build so at Metropole we undertake a detailed analysis of the neighbourhood, as an important consideration of town planning is keeping the neighbourhood character.
Finally we put pen to paper and do some sketches allowing for setbacks, driveways and private open space (as required by council and the planning scheme).
We next place garages and parking spaces on the plan and leave sufficient room for turning circles to drive out in a forward motion as required by many councils.
The land that is left over after all of this is accounted for will determine how many units and of what size can fit on the block.
Next comes some number crunching in a feasibility program
We include time scales, all costs including consultants and construction costs, as well as the likely end sale values and the profit margin we require.
And the we add a bit extra for contingencies, because unexpected costs crop up in every project.
We plug all these numbers into a feasibility software program which enables us to calculate the residual land value – the most we could afford to pay for the land to make it a viable development project.
If the project is viable, in other words financially feasible, we then consider making an offer to purchase the land on favourable terms.
3. Purchase
At this stage we buy the land at a price that allows our clients to make a commercial profit.
4. Town planning / Development Approval
Now our architect draws up plans that fit in with the planning regulations and accords with the local council’s development guidelines.
Due to the increasing complexity of the development process, a surveyor and town planner are often involved at this stage.
5. Working Drawing and documentation
Once the Development Approval (DA) has been achieved our architect and engineer document the working drawings to allow us to obtain a building permit (called a Construction Certificate (CC) in some states.) This stage can take 2 to 3 months.
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6. Pre Construction
We now obtain quotes from a number of builders and organise finance for the construction phase of the project based on the builder’s fixed price contract.
7. Construction
This is the stage when we finally get on site to build our client’s project, paying the builder progressively at the completion of each stage.
The construction stage can take between 7 to 12 months depending on the size of the project.
As you can now tell, while many people consider that construction is property development, it is really just one of the stages of the development process.
Construction is what a builder does; remember most developers are not builders so they never really get their hands dirty.
They are a bit like the producer of a movie.
They come up with the concept and then orchestrate the entire project.
8. Completion
Once the construction is finished, a plan of subdivision is completed and the project is refinanced and leased and held in the long term (my preferred option) or sold.
While this is the last stage of the development process, we always advise our clients to begin with the end in mind – have an exit strategy right at the beginning of the project.
In conclusion:
While property development can be very lucrative, many beginning property developers get themselves into trouble because they don’t know what they don’t know.
They step into a potential minefield without doing sufficient homework, so in future articles I will go through each of these stages in much more detail.
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