Property development [risk management strategies and tips]

Discussion in 'Development' started by Sackie, 3rd Jan, 2020.

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  1. Sackie

    Sackie Well-known cafe bum of the East Premium Member

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    @lixas4 made a post earlier about risk mitigation and developing. I thought It's a great idea for developers/anyone else to post their risk mitigation ideas/strategies when undertaking a development. Maybe we all can pick up a trick or two that would be beneficial to us in the future. Below is @lixas4 post. I will post my own in the next post.

    @lixas4 posted "Great summary of the mindset of a developer. I cant tell you how many sites I get close to and then decide the risk is too great. Summary of my risks are as follows:

    Accounting and legal
    Acquisition and purchasing terms
    Planning
    Design
    Construction
    Finance
    Sales and settlement

    Each risk above I try to minimise by getting great advice, working with great consultants who I pay accordingly (if the advice is free, how good is it going to be, should you rely on it for a multi million dollar project?), or passing onto current landowner (with favorable acquisition terms) or the end purchasers with presales.

    For the type of development which im looking into, which is land subdivisions, its hard to find a workable site that has no risk or even an acceptable amount of risk, there is always something. The joint venture with the landowner is the closest to a derisked site in my opinion, but they are really hard to find, i would know, i have spent almost a year trying to find one. Its funny that the more you learn about development, the riskier it feels. My boss at work has a saying which he picked up from someone else sometime ago, which is 'only dumb people are developers, as smart people wouldn't take the risk.....' "
     
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  2. Charlotte30

    Charlotte30 Well-Known Member

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    Step 1 in risk mitigation.
    Define your end customer and work out what they want, not what you think they want. Compare it to what your competition is doing.
     
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  3. Sackie

    Sackie Well-known cafe bum of the East Premium Member

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    This is pretty much how I go about it before starting a venture. Some finer parts are left out so this post comes to an end today. More or less in this order. It suits the niche(ish) market I develop for so risk management may differ for different markets.

    Portfolio/net worth risk management
    -
    what is my overall leveraged position of my portfolio as a ratio of my net worth.
    - What financial size development/s am I comfortable with where if it goes pear shaped, its only a small percentage of my total net worth.
    - Ultimately determine a dollar amount I am happy to put into a venture which wouldn't wipe me out if it totally failed .

    Location risk management:
    -
    Choose a state which is stable or warming up
    - Choose an appropriate location to the CBD for the chosen state. It will be different for each state.
    - Choose a strong OO market/suburb in your chosen 'ring distance' from the CBD
    - Keep away from main roads, power poles, cemeteries, etc
    - Make sure the location has demand for the type of development you are planning to do in the location and is catered to the target market. Often a location will have development opportunities but the location has poor demand for them to actually be built. -
    - Look for comparable sales to what you plan to develop, talk to REAs etc to gauge the demand for what you plan to build.

    Site risk management:
    -
    Engage an expert local town planner to assess any development site I am looking at. Assess services locations, overhead issues, zoning issues and any possible relaxations I could get, and determine the best use of the site, eg what are my development options for the land. Once I know this, I can do a comparative feasibility analysis on the options. Most of the time the obvious option is what will generally get built. I actually don't talk to council anymore unless my TP says we should have a pre-lodgment meeting etc.
    - Engage a legal expert to look over the site legals including boundaries, easements, title of deed, covenants etc. I basically want the lawyer to tell me the site is legally kosher.
    - Do a BOE feasibility based on per sqm rates, with some fat added in. See where I potentially stand.


    Build risk management:
    -
    Get recommendations from 3 good builders
    - Check license history/complaints history etc.
    - Meet with builder to see how we get along. Good communication is very important to me.
    - Make sure the builder has a good history of building what I plan to build.
    - Engage my estimator to work with me (and my architect) on reverse engineering a tender. We will choose all the structural materials, specifications etc. Everything. This way I am able to cost manage the materials from the beginning, make sure my tenders are being compared for apples with apples, know exactly what is going into my development and know when a tender comes back if its fair priced, low or high (after the builder's margin). Reverse engineering the tender from the beginning also lets me know the exact build cost, within a 5% margin.

    Development risk management:
    -
    Do a thorough feasibility (once in the development DD phase of a contract) on all known costs and projected end sale values.
    - Once most of the major costs are known, add in a 10-15% contingency.
    - Allow for a sensitivity analysis to show what profits may be with 3 different scenarios, usually higher and lower end sale values.

    Exit scenarios:
    - Sell with DA
    - Sell with subdivision completed on two titles.
    - Build and sell one rent one, or whatever number dwellings they are.
    - Build and rent both.
    Build/legal risk management:
    - Lawyer to go over all contracts with a fine toothcomb
    - Choose fixed price contract
    - Minimize as many PSs as possible.
    - Include liquidated damages, negotiate it with builder.
    - Provide as much detail for the builder as possible to eliminate errors. This includes a detailed tender as well as an interior designer specification document.


    I am sure there are bits I missed out which are important, but this is pretty much most of what I like to look at in the process. Yeah, its so much fun. (insert rolling eyes)
     
    Last edited: 3rd Jan, 2020
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  4. sash

    sash Well-Known Member

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    You forgot the most important part ....timing and time to market....get this wrong as a developer and you make no money..all the below is nice in theory but the basic is timing and time to market.

    I am old school look at the big picture and do it quick! Otherwise the market will pass you by.....

     
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  5. Sackie

    Sackie Well-known cafe bum of the East Premium Member

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    Look at my location risk management. Time is there.
     
  6. Bunbury

    Bunbury Well-Known Member

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    Some great points here.

    As a risk mitigation strategy most people would be well advised to start off small and learn from the experience. There are many risk management strategies but having a substantial cash buffer is important as is market knowledge and an understanding of costs. Having a hunger to succeed and grow your knowledge of the whole process including the finance is also critical.

    Among other areas:

    • Knowledge of taxation - particularly the GST and the margin scheme
    • Knowing what adds value in your particular market and if the extra cost is going to add to your profit
    • Understanding how zoning, setbacks, shadows, etc, and water asset location affect the site.
    • Not paying too much for the site
     
    Last edited: 3rd Jan, 2020
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  7. Sackie

    Sackie Well-known cafe bum of the East Premium Member

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    Agree, this is critical. Get this wrong and no matter what else you do right, it will be hard to make a decent profit.
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney

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    Read the relevant OHS legislation too.
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney

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    How are you fund it.
    Who is the owner entity, who is the developer entity and how will you get money into these.

    What happens if the project fails - lender recourse, who can be liable, what is the effect on those that contributed money, what is the effect of guarantees, what is the effect of being a director.

    What happens if someone on site breaks their neck. How can this be avoided for starters, can subcontractors bring in their own workers, what is the site owners liability in these situations if injured. How can this risk be reduced.

    Insurance - does it cover all who enter the site, do subcontractors need separate cover, do you check they have this cover in place.

    False and misleading advertising. What happens if adverts are exaggerated or something is misleading, can the company be liable, can the director be personally liable? How to reduce this?

    etc
     
  10. sash

    sash Well-Known Member

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    Maybe....but also time to market....
     
  11. sash

    sash Well-Known Member

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    Spot on....first 2 are super important!

    1. Most people have no clue about GST and Margin Scheme of developments. For example...if you bought a place for 700k knock down and put 2 dwelling for say 700k...an sell each for ..the GST without a proper structure could cost as much as 9% of your end value unless you use the margin scheme properly!

    2. Over capitalizing via fittings is a real risk! Make is look expensive without the huge price tag....

     
  12. MTR

    MTR Well-Known Member

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    If you don’t understand the process employ someone who does

    for example a gun townplanner who can perhaps advise how to maximise the block

    Get the right people involved, this can not be underestimated

    For example I had one architect state I could only fit 4 on my block, with the right architect we got 8. Made the difference whether the project was viable. This was a DA which I ended up onselling
     
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  13. Bunbury

    Bunbury Well-Known Member

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    Even if someone understands the process they should engage a town planner or an architect with in-house planners.

    That's worrying.
    I had an architect who told me having dual cross-overs would be impossible anywhere in that council area. A couple of months later a site a few doors down got a DA for a development with dual cross-overs.
     
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  14. MTR

    MTR Well-Known Member

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    I am big on timing, but I am in awe of developers who can make profits in any cycle

    watching my nephew do this in Perth successfully, rinsing and repeating

    key- you only buy product at the right price where the numbers stack up

    Target market - fhb and downsizers

    Close to good infrastructure and cbd

    Build at cost..... only do this if you understand how it works and you can manage this
     
  15. MTR

    MTR Well-Known Member

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    wow
    It takes time and effort to find good people on the ground. I reside in Perth was doing this project in Melb

    i use draftees now much cheaper, just got to find the ones that know what they are doing
     
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  16. Sackie

    Sackie Well-known cafe bum of the East Premium Member

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    How about this, council told me " 95% land and property won't approve the easement". This was early advice when doing DD on Whether to buy or not. My legal advice was they will have to.

    It was approved. Made 800k on that deal.
     
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  17. Bunbury

    Bunbury Well-Known Member

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    I think some people who overpay foolishly think that developing is easy and huge profits are certain. Based on some of the sales I'm seeing, others must factor in speculation on future capital growth, which is also foolish.
     
  18. Bunbury

    Bunbury Well-Known Member

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    Yeah, I'm looking for a drafter. They seem to push the envelope more.
     
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  19. Sackie

    Sackie Well-known cafe bum of the East Premium Member

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    I'll be very honest, every time I do a development I feel that I'm playing with a roaring lion. A couple of wrong moves and you're devoured. I totally and completely respect risk. The second you get lax on that it's game over.
     
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  20. Bunbury

    Bunbury Well-Known Member

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    Best way to cover your ass.
     
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