Property Development in these changing times, when property investors can’t count on double digit price growth any more, many investors are considering becoming property developers to help them create some capital growth. While property development can be very lucrative, many beginning developers get themselves into trouble because of what they don’t know. They don’t do [...]
Property Development in these changing times, when property investors can’t count on double digit price growth any more, many investors are considering becoming property developers to help them create some capital growth. While property development can be very lucrative, many beginning developers get themselves into trouble because of what they don’t know.
They don’t do sufficient homework stepping into a potential minefield. At the other extreme, many would-be developers don’t even get started because they don’t know where to start. Many big property developers started doing simple residential renovations, which is a great place to start not risking too much. If you want to get involved in the development of new townhouses or apartments, then a good place to start is understanding the process.
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 process varies from project to project, in essence these are the steps we follow;
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 it? 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. You also need to assess what the market wants in that particular area – what 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. 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. ? While there are always properties for sale that are advertised as potential development sites, currently they say very few make viable developments, as the vendor’s 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.
3. Purchase – 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 – You’ll need an architect to draw 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 you’ll get a development approval (DA).
5. Working Drawing and documentation – Once the DA has been achieved get your architect and engineer documents the working drawings to obtain a building permit (called a Construction Certificate (CC) in some states.) This stage can take 2 to 3 months.
6. Pre Construction – This is when you obtain quotes from builders and organise finance for the construction phase of the project.
7. Construction – Now finally you can get on site to build your 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.
8. Completion – 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, you should 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.
Bowen, Queensland, Australia. Bowen is a growing mining town with brilliant opportunities for Queensland Property development.
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