The inexperienced Property Developer

[Mrs Bird]

Hi Everyone,

I have just exhausted myself after literally going through all threads on property development on the forum.

May I highly recommend this exercise for all those interested because some of the posts, particularly by Kristine, Michael Yardney Joanna k ,Sunstone...just to name a few have been invaluable.
I'ii try to supply the links in my next post.

What concerned me however was the common underlying warning for people about to embark on their first development.
Although not discouraging, certainly makes you really decide if it is worth the risk at all.

Michael Yardney wrote

At the end of each cycle, inexperienced investors try to become developers and frequently become broke.

Sobering words but why does it happen?

For example, we have 3 ips, built 2 houses...therefore have some understanding of the investment game and learnt from the mistakes we made.We have been actively involved with gaining diffucult permits through the council, have a substantial amount of equity in all properties, targetting an area that is inner city but still around the 220-270k mark, have an excellent accountant, lawyer, mortage broker(if we dont deal with the bank direct) and prepared to be hands on from everything to finance and building the project prehaps with a reputable property manager.

Otherwords What can go so horribly wrong? We only want to start off a small project, 2 town houses with 3 exit strategies put in place.

Other than the usual reasons why new developers go broke...
Paid too much for the land
Holding costs blew the budget
Overestimated selling price
Builder went bankrupt
Project took toooo long

Why do people fail to become successfull property developers?
Is there an underlying common component for every failed venture?

Mrs Bird

 

[Aceyducey]

Mrs Bird,

In my experience it's like the 'rule' of business:

Every person is promoted to the level of their incompetence....
(of course incompetence is based on the experience level & time of life of the person, they get more competence with experience)

If you're successful doing something, you'll try something else more challenging...and there is a risk that you will over-reach yourself through overconfidence.

So long as you are careful about selecting your opportunities, research thoroughly. manage the risks & seek expert advice where necessary, I think there's limited risk involved.

Cheers,

Aceyducey

(Sorry Mrs Bird - I was reading several threads at the same time & got my responses confused)

 

[Mrs Bird]

Hi Acey,

Its Mrs Bird not Olly but I know she has been asking the same sort of questions in another thread.

Mrs Bird

 

[Kristine..]

Acey

Yes, but human nature is such that we all think we are ultra-competant and that we can achieve anything!

And of course we can.

In my experience, my first development did not fail, but certainly took a heavy whallop due to a number of factors:

I thought I knew a lot about everything and was well prepared, but what I didn't know nobody told me - I had to find out for myself.

This finding out is what cost me lots of money.

For starters, I should have just cleaned and rented the original house for what I could get, or even let it sit empty.

When the subdivision was completed, I would have had the funds to either complete the building of the second house thereby avoiding the dreaded engineering bond, or at least would have still had funds to pay the bond without borrowing further.

Then, I could have renovated the first house.

By renovating while the subdivision was proceeding, I was paying full interest all the way through when that really wasn't necessary.

I also did a five star job when a three star job would have been more appropriate.

However, proceeds from the sale of the land, instead of being used on the second project, is now being used for holding costs of the first and second project.

As a result, the second project is at a standstill. Again, that could have been managed better from the outset.

So my project management skills have been on a sharp learning curve, but the projects are now on hold because of the sequence of works (read: my mis-management).

On a broader note, I think people are under capitalised, everybody thinks it will 'only' cost $100,000 when it will cost $250,000, people think they can 'do it themselves' when it is cheaper to get a couple of quotes then stay out of the way.

So

Under capitalised
Under skilled
Over optimistic
Under estimate time to do things particularly involving statutory bodies / neighbours objections

The other extreme is the 'armchair' developer who buys property then hands the project over to the planner, the architect, the builder etc and yet expect to make a profit as soon as the development is finished.

OK if you can spread the costs over, say, a ten unit subdivision, but a big ask when the project is a dual occ or a single dwelling.

In two - five years they might make a paper profit, but in the same immediate market as the professional spec builder that is expecting a lot.

Mrs Bird, this is not to say that the amateur developer cannot be successful. Everybody has to start somewhere. But I was looking at a small project over the weekend (put in an offer) and in costing it out, the developer (if they accept my offer) would be lucky to make $5,000 for their year's work. The market has settled, this may be the best offer they get for another six months. Would this make their development a failure? No, but dissapointment may make it their first and last development.

If you are looking at doing another project, it is very important not to give away small margins (money and time) throughout the project. Those small margins snowball until they eat you and your anticipated margin alive!

Happy developing

Kristine

 

[astroboy]

I appreciate your thoughts Kristine, I'm currently holding a number of props with small devl. possibilites i.e. 2 lot subs and duplexes can't wait to kick off though.
ab

 

[Sunstone]

Dear Mrs Bird,

Other than the usual reasons why new developers go broke...

Couple more thoughts:

-Did not account for all costs. (Eg. council contributions, GST and so forth).
-Contingency % too small.
-Did not sufficiently take into account the impact of other developments in the area.

Cheers,

Sunstone.

 

[geoffw]

Michael Yardney's latest newsletter (point 12 in the newsletter) details his view of some of the risks in property development.

 

[Olly]

Well, both scary & encouraging words and I take note of them all -a timely post.

But aren't developers usually people who buy land and build on it or buy something, knock it down then build? I didn't think of myself as a developer with what I'm proposing and yet I suppose I would be. Surely though, my situation is slightly different. For a start I'm not some cocky knowall who thinks this is a get rich quick idea and I'm aware that this will be stressful and time consuming and I'm prepared to let others do the job they are good at. I did think that I'd have some input as I can get some things cheaper than a builder can, but in this case I think it will be better if I get out of the way and let them get on with it.

I took note of this by Kristine -
people think they can 'do it themselves' when it is cheaper to get a couple of quotes then stay out of the way.

I also already own the land and already have dual occupancy status so I'm ahead there. I could build something at the back and make it an IP or move into it myself and make my current home an IP. To buy another IP that I could afford ($150K or less), I'd have to look at country NSW and rely on others to look after it for me, and yet for about the same money I can build something here and get a much better rent (about $260.00/week), and keep an eye on it myself (with the help of an RE agent).
I haven't explored the numbers fully yet, but have taken note of Sunstones comments and what they may mean to me -
Did not account for all costs. (Eg. council contributions, GST and so forth).
-Contingency % too small.

It's only because of my daughters urging that I'm exploring the possibility of pushing the envelope and trying for a new PPOR AND a duplex.

While I'll do the leg work, there will no doubt be times when I'll need help and I hope you'll all be there for me. I'm quite conservative and not prepared to gamble what little I have so I value your opinions as you give it straight - not just "Yeah great idea - go for it".

In fact, I already have a couple of questions -
I went and saw some project homes on the weekend and bought home their price guide. It doesn't say the prices include GST. I will be ringing them and asking them of course, but what does the price guide usually mean?
Also, what could I expect site costs to be. I realise you can't be exact, but could you guess between *** and ***?

Anyway, not looking for encouragement, (liar, liar pants on fire ), but hope that I've finally found a strategy that best suits me, my finances and my time frame for 'doing it'.

What do you think? And what else should I watch out for?

TIA
A Nervous Olly

 

[Michael Yardney]

As Geoff W explains above I have outlined some of the things that can go wrong with developments in my latest newsletter, but the most common fault I have seen in the last 6 months is people considerably overpaying for property with development potential because they have not done a thorough pre purchase feasibility.

They don't know what they don't know.

They are often experienced investors who have done a kitchen or bathroom renovation and think they know all about development.

There are just so many little issues that need to worked through. But that doesn't mean that the inexperienced developer shouldn't give it a go. We all started from scratch.

The problem is it may not be the best time of the cycle to start.

I did my first development projects in the 80's and made lots of money or so I thought. Inflation was high and property values rose much faster than they have in the last few years and in retrospect I would have probably made as much money if I had done nothing to the properties and just on sold them a few years later.

Inflation and price escalation covered many of my mistakes. As it has for others over the last few years.

I do not think we will have this luxury in the next few years so proceed with great caution.

 

[archizen]

Hi all,

I've just noticed this thread.

Besides initial land cost and unit sales figures what other elements should be considered in a Pre-Purchase Feasibility Study?

Also what implications does the GST have?

Regards and thanks

ArchiZEN

 

[abcdiamond]

Can anyone give a "very rough" idea of the all up costs to build a block of 4 x 3 bedroomed townhouses?

 

[Sunstone]

Dear ABCD,

Can anyone give a "very rough" idea of the all up costs to build a block of 4 x 3 bedroomed townhouses?

Easy to ask, not so easy to answer.

Some more things to consider:

-SLUG or DLUG (Single or double)
-Ensuite?
-Deck?
-Soil type.
-Quality of fittings.
-Four townhouses in a row (three common walls) or two sets (two common walls.)
-Do you know where the services run on the block and it's slope? (Sewage does not go uphill without putting in a pumping station which is an additional cost.) Do you need to negotiate access through a neighbours yard for drainage? (Recommend you get a drainage plan from your local council for the site.)

Building costs are going up and one builder I know updates their prices monthly at the moment.

Do you currently own the block? If so suggest:

-Get a detailed survey plan completed.
-Find yourself a good Architect/Draftsmen. (Your surveyor may be able to recommend a good one.)
-Get Architect/Draftsmen to do up a draft site development plan with what you can fit onto the block and also the basic ground and first floor plans for the townhouse (Elevations not required at this initial costing stage). (Essential that setbacks, recreation space, parking and possible turning areas are taken into account.)
-Take this information along to a Quantity Surveyor who can give you the ballparks you are looking for. (Separately you need to calculate all your other costs including driveway, landscaping, contributions, application and consultant fees etc etc.)

Something that should help you at the moment is a checklist link I have previously posted:

http://www.somersoft.com/forums/showthread.php?t=13480

Cheers,

Sunstone.

 

[abcdiamond]

Thanks Sunstone, I thought it would be difficult to answer, but it's for a friend, so I said I would ask just in case.

I'll give them a copy of this and see how they get on.

Thanks.