When doctors start becoming property developers…
…the market is cooked!
So goes the long-standing joke in the property industry.
Not that there’s necessarily anything wrong with wanting to become a property developer – it can be a great way to make money, and there’s a plethora of information out there to learn from (albeit with varying degrees of quality).
The problem is that people tend to think it’s an EASY way to make big money quickly, with very little work involved.
Too often, an aspiring property developer will work through a project in the following order:
- Buy a property
- Appoint a Town Planner and Architect to work out what is the most number of things likely to be approved by Council
- Get building quotes from not enough or too many builders
- Apply for finance
- Try to sell off the plan, or for smaller projects, build it first then try to sell
Sounds like the logical steps in the right order, right? If that is the order in which the plan is made – and carried out without planning each of the subsequent steps in advance – it’s too easy to end in disaster (and we’ve seen this happen too many times to count).
Some really big things missing from the above steps can include:
(and this is by no means an exhaustive list)
- Due Diligence before buying, or even going unconditional on a contract, to ascertain what can (and should!) be done, and particularly what risks and limitations may be present.
- Working out what the most appropriate type of product is for the location, demographics and the state of the market – right now, but also what might be the case by the time the project has been completed.
- Assessing the realistically achievable sale prices, relative to construction cost, taking into consideration specific design features and engineering requirements (relying solely upon a local agent’s advice doesn’t cut the mustard for this one).
- Identifying which builders will be most appropriate, how the tender will be prepared and issued, type of building contract to be used, when to get them involved.
- Specific requirements that lenders may have, and how this may affect many components of your project strategies and feasibility (or vice-versa – how your decisions and strategies may force you in a certain direction for funding).
Good property developers are professionals at what they do, learnt over many years [and often costly mistakes!] in the industry. They understand their local market, know who their target buyers or users are and what needs or wants they have; they know how to work out the sweet-spot of density, design, planning, costs and demand.
Getting all of these things in sync is a much tougher job than most people realise.
So you still want to be a developer? Great – but just make sure you hire the right professionals that can work as a team to make it happen efficiently and effectively.
Key players in the team need to include…
Firstly, don’t confuse this with a Project Manager (“PM”), who is concerned with delivering an already defined project or construction related outcome. A Development Manager (“DM”) is across every aspect of the project. A good DM understands the entire “system”, having an intimate understanding of what the result is on the whole project for each lever that is pulled.
Your DM is your “go-to” advisor, they’ll nudge you back on the rails, they’ll make sure money is spent on consultants and contractors at the right time and ensures the project develops in a logical order. Leverage your DM’s contacts in industry with the professionals detailed below to de-risk your project.
A good one also costs enough to make a less-experienced developer question whether they should pull that line item out of the budget to make more profit… Although most lenders will want to see a DM fee in the feaso and funding table that is commensurate with the experience and capability of the developer (although I’ll further note that the bigger and more experienced the developer, the bigger the DM fee typically is in the feaso). Don’t have a budget for DM, or set it too low, the financier may just ignore your budgeted 1% and ramp it up anyway (or even question whether you have delivery capability at all).
Think you don’t need a DM or PM because the bank/lender is appointing a Quantity Surveyor and they’ll keep everything under control? NO, FAIL!! There’s too much wrong with that thought and I’m running out of time, so I’ll keep it to one point – that QS is there for the lender, NOT for you!
Ultimately, your DM is well worth their fees. The most successful developers know this and allow for the cost in their feasibility studies, allowing them to concentrate on pipeline works and the business of property development.
Town Planner & Architect
More things (whether that’s land lots or units) does NOT necessarily equal more profit. The good ones understand what the impacts of their decisions are on the costs and timeframes to build a particular design, which can make a huge impact on the project’s feasibility and marketability. Your Architect will draw to a brief, so make sure your brief is considered with the team below before investing in your DA.
Are a boring bunch, aren’t they? Wrong!
Finding an energetic yet experienced engineer (particularly one that has an understanding across the range of various engineering disciplines), who is committed to your project’s success, will add real measurable value to your development.
By liaising with other expert consultants early in a project’s lifecycle, they can identify issues and work out solutions for a variety of matters like flooding constraints, structural design efficiencies, ground conditions and infrastructure servicing requirements (e.g. water & sewer), which ultimately result in more practical and cost-effective construction methodologies.
Project Marketers & Real Estate Agents
Pulling them in five minutes before you want to start selling is NOT ideal.
You need them to really want to sell the product and confidently so. Engage them early to get their advice on what is the right product and price point.
It can also be ideal to engage a valuer at this early stage (rather than waiting to let the bank/lender appoint one), to get their support and advice in relation to market acceptance and price point.
Accountant and Tax Lawyer
Get your structure setup in accordance with your development strategy. Having the right structure in place can result in a massive difference in tax liability, without even considering risk liability. This is particularly important where the land-owner is an individual (particularly if they’ve owned the property for a long time and have made a capital gain), if undertaking a Joint Venture, or if intending to retain any of the completed properties.
You might think any lawyer can look after this, but we have seen at least one project fail – before starting construction but AFTER having paid agents a whole heap of upfront commissions – simply because the pre-sale contracts were completely stuffed up by a lawyer that didn’t have the necessary experience in property development.
Dennis Denuto is NOT cut out for this type of work… The VIBE and Mabo won’t help keep the buyers and project tied together!
(yes, quick shameless plug for STAC Capital…)
Once again, the earlier the involvement the better, to make sure that the many factors – all of which will impact the ability to source an optimal funding deal – are in place and actioned appropriately.
A few simple mistakes, resulting from decisions made long before you need funding, can easily restrict the ability to get the project funded.
“THERE’S NO “I” IN TEAM”
Or in other words…
Nobody wants a star 5/8th in their rugby team who doesn’t pass the ball
With so many professionals involved in a project (and we haven’t even covered them all on this page), combined with the fact that any one team member’s actions can affect one or all others, your whole team should be on the same page, working as a TEAM.
Being the developer doesn’t mean you alone talk to everyone else independently – get your team members talking to each other; heck, even get them sitting around a table together to work through key aspects of the project.
The best developers have slick teams that work together really well… Get that happening and you’re halfway there.