The most common first time property developer mistakes: Not understanding the development process
Each week I receive phone calls from people who have started a property development and then fallen into trouble.
I can't help taking these SOS calls from fellow developers but I've noticed a pattern...there seems to be three different areas in which the issues fall:
- Site selection
- Team selection
- Not understanding the development process
The development process is complex - there is no two ways about it. Even what may seem the most simplest development can turn into a very time consuming project. Although Property Bloom has completed over 80 developments, all of which I have personally overseen, I still find tiny nuances that make each development unique and challenging.
However, if you have some understanding of the steps needed to be taken on your property development journey, then the development process can be simplified.
The development process can be broken down into a number of steps:
- Research or due diligence
Most of your research should have been done by now because choosing the right location for your development cannot be underestimated. Once you've narrowed down the area you're going to work in, you need to research the needs of your target market.
Your target market is either the people you'll be renting to if you hold onto the dwellings you build or the people you'll be selling to. What do they want in a property? You need to balance this with what you can afford to build, always be careful not to overcapitalise by assuming you have to give everything. - Designing your project is the next step in the process.
Use either a builder's design and make some minor changes to suit your needs or use an architect or drafting service to design exactly what you want. In more upmarket areas, you may want to deliver something more unique so spending time and money on coming up with the right design is important. - The planning process is another very important processes.
Ensure you are meeting the requirements of the local council's Development Control Plan and Local Environmental Plan. This is complex and unless you want to spend days studying these enormous documents, engage a planning consultant or architect that understand these local requirements. This should save time so when you lodge your DA there should be little hold up in having to make changes to your plans. - Engineering for storm water management, driveways and slab design is required to obtain the final approval of your Construction Certificate.
Again, engage a good engineer but make sure you have a basic understanding of what they are designing. Don't be afraid to ask questions. I was able to reduce some costs on a three villa project by questioning the number of storm water detention tanks required under the driveway.
I knew each tank meant more costs so just by asking the engineer to check the water volume calculations meant if we could cut two of the eight tanks required in that project. - Once you have all your Planning Consents, then it's important to have a good understanding of the building process which will help you as you review your builder's contract.
You need to understand terms such as 'Provisional Items' and 'Excluded items' as if one of these blows out, so can your development profit. Check the contract and discuss with the builder so that they can explain clauses to you. You can also have your solicitor look over the contract.
Many builders will use a standard Housing Industry Association contract. Check the drawdown schedule as this will impact on your holding costs. - Maximising your finance and getting the best deal is an important step in the process.
Your bank will need a number of documents such as the consents and builder's contract before they can give you unconditional finance approval. Make sure you allocate four to eight weeks in your schedule to get your finance in place. This often draws out depending on how slow your bank is.
The longer they take, the more holding costs you are paying waiting for finance. Your builder cannot start construction without a Letter to Commence from your bank. - Once the builder has this permission to commence work, you move into an exciting but still risky part of the development - the build phase.
The main area for cost variation can be in the site preparations and slab work. Until your site is cut, retained and slabs are piered and then laid you will not really know the true costs of your building works as most Provisional items are loaded into this early stage of building works. - It's exciting to see your project come out of the ground and as the building works draw to a close, the process then moves into the completion stage.
Now you need to maximize your rental and depreciation benefits or sale return. You will need to choose your management or sales agent carefully. Brief your quantity surveyor at this point to start work on your depreciation schedules and make sure you include all consultant fees, including project management if you have used a professional project manager. - You cannot relax just yet. You need to, attend the practical completion and handover inspections with your builder and have a good understanding of their warranty periods.
You need to obtain Occupation Certificates which will not be issued unless everything is complete.
As project managers, our job is to manage all the fine details of the development process. There are many areas that need your undivided attention at the time.
As part of our project management process, we prepare a detailed weekly report for clients including milestones met that week, goals for the following week to achieve and photos showing the progress. Also included is news reports in the local area that may impact on the end result. Our job is to focus entirely on the process so that our clients don't have to. It can be beneficial for inexperienced developers to use a project manager to minimise and help them through the challenges a property development can bring.