In these changing times, when property investors can no longer count on double digit price growth , many are considering getting started in property development to help them ‘manufacture’ some capital growth.
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.
At the other extreme, many would-be property developers don’t even get started because they don’t know where to start. If you want to get involved in the development of new townhouses or apartments, then a great place to start is understanding the process.
So let’s break down the process of real estate development, because it’s much more than the construction of a number of dwellings on the one parcel of land.
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
Let’s look at these in a little more detail. While the development process varies from project to project, in essence these are the steps we follow at Metropole: -
1. Pre Purchase
Here you look for a block of land with potential for development. At this stage you should already have your finance in place so that you know your limits.
You should also have a team of consultants organised who can advise you as to the project’s viability. These should include a development manager who can coordinate the whole process or individually, a solicitor, an architect, a surveyor, a town planner, an engineer and an estate agent to advise honestly on end values and marketability.
2. Concept stage
Once you find a potential site, you must now come up with a concept for it. What can you put on property? How many units? How big? What restrictions are there? Are there overlays, easements or covenants on the title?
To find out what can be built on the block you 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 the same municipality.
At Metropole we tend to have many of these documents in our office, but they are generally available over the internet, at the local council’s web site or in hard copy from their front desks.
You also need to assess what the market wants in that particular area – what type of property would sell or lease well. It is 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.
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 look for. We then add a bit extra for contingencies, because there are always some unexpected costs.
We use a feasibility software program called Feastudy. This 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 we would then consider making an offer to purchase the land.
While there are always properties for sale that are advertised as potential development sites, currently we find very few make viable developments, as the asking price is too high. If you pay too much at the beginning, by not undertaking an accurate feasibility study, we find you are always chasing your tail trying to make the project work.
At this stage you buy the land at a price that allows you to make a commercial profit. Of course we have already sought advice and decided in which type of entity we would buy the land to enable us to get the best asset protection and tax advantages.
4. Town planning / Development Approval
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. It can take up to 8 months before we get a development approval (DA).
5. Working Drawing and documentation.
Once the DA has been achieved our architect and engineer document the working drawings to allow our clients to obtain a building permit (called a Construction Certificate (CC) in some states.) This stage can take 2 to 3 months.
6. Pre Construction
We now obtain quotes from builders and organise finance for the construction phase of the project.
Now we finally get on site to build our client’s project, paying the builder progressively at the completion of each stage using draw downs from our bank loan. This stage can last 7-12 months depending on the size of the project.
Many people think that construction is property development, but it is really just one of the stages. Construction is what a builder does; most developers are not builders. They are a bit like the producer of a movie. They come up with the concept and then orchestrate the entire project. Most developers never really get their hands dirty.
At this stage the plan of subdivision is completed and the project is refinanced and leased (the preferred option) or sold. While this is the last stage of the development process, we advise clients to begin with the end in mind – have an exit strategy right at the beginning of the project.
The beautiful thing about property development is that once you learn and understand these stages you can pick and choose which steps you want to do and how much involvement you want.
At Metropole we have clients who become what we call “armchair developers” and use our project management services to run the whole project for them – some even live in a different sate or overseas. Others don’t complete the whole process, but on-sell their project with development approval and take their profit and start all over again. Others buy land with a Development Approval in place, fast tracking the whole process.