Property development

[Snoopy]

Hi - long time reader 1st post.

I have done a couple of developments now - mid sized, 4 to 8 townhouses and was wondering whether it is really worth it for the risks involved. When i do the detailed calculations it looks like a substantial part of the profits are due to the market moving for you rather than due to the development itself.

Most want to be developers don't know the true costs of development and bid the prices of development properties up leaving insufficient margins.

Thoughts/ comments?

 

[Shahin_Afarin]

When you did the original numbers you would have based on a resale value of say "x" but once the development finished you sold it for "y".

Are you able to calculate the profit based on "x" instead of "y"?

 

[Scott No Mates]

Just like a valuer, a developer should use two different feasibility models. If they give similar values, then it flies (or attracts flies).

I use the NPV/DCF model as well as the back of the envelope.

Then I also do a sensitivity analysis as well.

If the only profit that you make is due to the change in the market, then you stood to lose money on the deal if the market didn't move. I would be looking a the way that you do your numbers and I would go to one of the Master Builders Assoc one day development courses to give you some well needed skills before you do your wallet some serious damage.

 

[westminster]

Hi - long time reader 1st post.

I have done a couple of developments now - mid sized, 4 to 8 townhouses and was wondering whether it is really worth it for the risks involved. When i do the detailed calculations it looks like a substantial part of the profits are due to the market moving for you rather than due to the development itself.

Most want to be developers don't know the true costs of development and bid the prices of development properties up leaving insufficient margins.

Thoughts/ comments?

I don't think anyone should go into it unless there is a 20% profit it today's prices plus a contingency of 10%. If prices go up during development that is icing on the cake.

And if sheep developers are bidding up an area or site I want then its a no-go.

 

[oc1]

Hi - long time reader 1st post.

I have done a couple of developments now - mid sized, 4 to 8 townhouses and was wondering whether it is really worth it for the risks involved. When i do the detailed calculations it looks like a substantial part of the profits are due to the market moving for you rather than due to the development itself.

Most want to be developers don't know the true costs of development and bid the prices of development properties up leaving insufficient margins.

Thoughts/ comments?

Yep, that's the downfall of buying development blocks in a clearly rising market. Everyone thinks that it's easy - buy, build 3 units, sell voila! What's so hard about that

You are always chasing your tail if you pay too much. Landbanking solves this issue to an extent.

Oscar

 

[imbi3]

Just like a valuer, a developer should use two different feasibility models. If they give similar values, then it flies (or attracts flies).

I use the NPV/DCF model as well as the back of the envelope.

Then I also do a sensitivity analysis as well.

If the only profit that you make is due to the change in the market, then you stood to lose money on the deal if the market didn't move. I would be looking a the way that you do your numbers and I would go to one of the Master Builders Assoc one day development courses to give you some well needed skills before you do your wallet some serious damage.

Hi Scott

Which development course you were referring to?
I came across a few tafe courses but not sure if they would be useful

 

[MelbGal]

Hi - long time reader 1st post.

I have done a couple of developments now - mid sized, 4 to 8 townhouses and was wondering whether it is really worth it for the risks involved. When i do the detailed calculations it looks like a substantial part of the profits are due to the market moving for you rather than due to the development itself.

Most want to be developers don't know the true costs of development and bid the prices of development properties up leaving insufficient margins.

Thoughts/ comments?

I agree. I went to a few auctions for a PPOR and at two auctions had some young guys clearly looking to develop the sites (one auction was 3 brothers and the other 3 friends).

At the first auction the 3 guys were very arrogant and pushed up the price to a point that was not profitable. It seemed he was more interested in winning the auction rather than whether it was a good buy and was heckling one bidder (a builder) not to bid further which to be honest made more people want him to pay more. He paid $300k over asking range and the place still hasnt been developed 3yrs later. Rent return wouldn't be very good given the house needed a lot of work. Given the holding costs, risk etc they would have been better investing elsewhere.

At the other auction the 3 brothers came in with a very strong bid over reserve and there were no other bidders. I think they could have got it for less. one of the brothers was worried they had overpaid (I agree). This place also is still waiting to be developed but plans have been approved. I don't think they will achieve the sale price they want for each townhouse so they will just hold and wait I guess. In the meantime they are only getting approx 3% gross rent return.

 

[mflying]

It is a same case here in sydney too.

I must have scanned 50+ development sites for feasibility study and none of them made 10% profit.

I think lot of newbie/wanna be developers are calculation numbers with double digit CG in mind. i think it is a Russian roulette at the moment for development sites in western Sydney.

there is plenty stock out there for development sites (duplex, multi dwelling)in Brisbane and regional NSW.
Also, it is a massive different for build cost in NSW/VIC vs Brisbane/WA.

 

[sanj]

Plenty of sites being sold in perth with tiny margins atm too. Girrawheen is a perfect example but I see it nearly every day all over perth

 

[Aaron Sice]

Belmont! so overbid it's not funny. people wanting $100k per apt site and at most can offer $70-$75k.

stay well clear. would suggest someone wanting something in this area to look at a 4x2 townhouse because it will be all apartments in 2 years' time.

 

[sanj]

Agree. As you know around 3 months ago I started telling most agents not to call me with sites unless there was something a little unusual about it or it was bigger etc. Vast majority of Basic duplex/triplex sites are a waste of time and money atm.

 

[Mamaof3]

Definitely risky business even if there is a 20% margin allowed for it. We personally work on higher just to cover our backsides as much as possible and make it a worthwhile thing.

Actual sale prices can change so quickly and easily which obviously directly affects your profit margin. Say you've got 5 houses, if each of them sold for $25,000 less (not unreasonable nor unrealistic) than what you had worked on, times that by 5 and you're down $125K off your margins just like that.

Alot of developers forget about the gst and sales/marketing (if selling) component as well, hear it all the time unfortunately.

The sites advertised on the general market, seen and available to everyone out there is unlikely to make you a good profit if you're building the stock standard stuff....we've found in recent years its gone beyond that and the healthy/decent profits are in stuff that most others arent doing. In a way its slightly riskier but thats a personal thing and only you can determine whether you're comfortable going down that route.

 

[MTR]

Belmont! so overbid it's not funny. people wanting $100k per apt site and at most can offer $70-$75k.

stay well clear. would suggest someone wanting something in this area to look at a 4x2 townhouse because it will be all apartments in 2 years' time.

I was looking at Cloverdale but no money in it and now I am not even looking at Perth anymore will go East, its cheaper with better returns

 

[Snoopy]

Under costed

It is a same case here in sydney too.

I must have scanned 50+ development sites for feasibility study and none of them made 10% profit.

I think lot of newbie/wanna be developers are calculation numbers with double digit CG in mind. i think it is a Russian roulette at the moment for development sites in western Sydney.

there is plenty stock out there for development sites (duplex, multi dwelling)in Brisbane and regional NSW.
Also, it is a massive different for build cost in NSW/VIC vs Brisbane/WA.

I just find most want to be developers are not aware of all the costs involved in doing the development and underestimate costs significantly.... However a rising market over the last 17 years saves them

 

[RPI]

I wouldn't touch under 20%. For a first timer, they need to be all over costs, have contingencies etc. Although some say that they will take less and treat it as a learning experience, 20% can quickly turn into a loss.