Are you keen to step up to the next level and get involved in property development? You’re not the only one. Many real estate investors 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.” It all sounds so simple.
But there is a lot more to the development process than what you see happening on site. 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
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 Property Strategists: –
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)? To learn more about the process of property development read our 19 part Property Development Guide by clicking here.
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: (i) Understand in which entity you will purchase your. 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. (ii) You should also have a finance preapproval in place so that you understand your limits, as well as having the reassurance that you can complete the project and retain someone all of the units on completion. (iii) 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. To learn more about the process of property development read our 19 part Property Development Guide by clicking here. Next comes looking at potential sites to purchase and 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.
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.
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.
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 the 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.
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.
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.
To learn more about the process of property development:
Why not join me at my annual Property Development and Renovation Workshop where our faculty of property experts will explain exactly what type of property to buy and how to go about doing it including all the research, how to buy at auction and how to negotiate like a pro. We will then explain what’s involved in property renovations and developments, including giving you my exclusive property development manual. If you want to learn to become a super successful property investor please click here and find out all about Australia’s leading property training. Then book one of the early bird seats on line or call my assistant Jo Fitt on 03 9591 8888 to discuss the curriculum, the networking opportunities, the bonuses and my personal money back guarantee. This workshop is conducted in a small class room environment and it is nothing like our one day seminars. In it I “spill my guts”. I tell you everything – lots, lots more than is in the books or in one day seminars and stuff that is not on the Internet.