re: First Development Strategy

Hi All,

I am looking to enter into the world of property development and would appreciate any advice regarding mentorship, strategies & approaches for someone entering as a smaller-scale developer (duplexes, townhouses etc).

To tell you a little about my current situation:

Currently located in Sydney, i am a builder by trade having constructed multiple homes, duplexes and townhouses over the years, and now i am looking to take the next leap into my own development & construction projects. The strategy i would be adopting is a Buy, Develop & Sell.

I have enough cashflow to float the entire construction cost, and would be getting a loan to purchase the sites (is this a normal financial position to have?).

The problem i face is conducting the correct feasibility calculations (purchasing the site at the correct price, and making the correct forecast for the eventual sale of the development) - naturally, i know exactly how much it would cost me to build, but the main points of concern is the site acquisition and the associated costs that i have to consider (ie levies, contributions, consultants etc)

Does anyone have any advice regarding site acquisitions, strategies to correctly forecast the re-sale prices of the development, and any other relevant information for someone attempting their first project? Advice such as integral consultants (town planners to advise on what type of development is possible on potential sites, accountants to advise on financing projects & tax-related implications, solicitor to review contract of sales for site acquisitions, architects to assist with the DA application design and compliance etc).

If there is anyone on this forum who is located in Sydney and would be interested in a sit down and chat; perhaps having gone through the same experience and had some advice to offer that would be awesome. Please reach out if you are available!

Thanks
Andrew

 

You're in a better position than most by being in control of construction costs.

 

With feaso, you will need an experienced property development expert or firm with a proven track record. i.e. one that they modelled and the outcome of the development closely resembling their model.
The simple top down hypo is a general guide and largely hinges on P&R and construction costs, basing your millions on this is folly at best. If you engage a qualified expert they should provide to the minimum, an estatemaster or the like detailing expenses at each development stage.
There are a few companies I could name..

As the business operator, despite it is cheaper for you to build, you must account for the P&R, your time, your cream..

I would not look for individual professionals as this would send you in the red, instead find a certifier with in-house designers to tell you what you can build, they can cover the DA process also. Once you have an area and budget, you can acquire a site. You can always place an option on a site which buys you time to DYOR with professionals.

I have not developed anything, thou my work background has exposed me to these situations.
My experience extends only in theory, but am willing to chat and give you some information.

 

I wish I was in Sydney and could have a coffee and give you some contacts but I'm over here in the Wild Wild West.

Head along to one of the property chat meet ups and start your networking to meet people and who they will recommend. It will be worth it's weight in gold.

 

As others have said, go to meet ups and network with others who are doing similar. You might also want to consider Bob Anderson's 3 day boot camp. I think its around 5k for 2 people and its a good outline with some detail of the entire development process of managing people and processes. It goes through site finding to feasibility to building a team, sales and marketing etc. Its not absolutely necessary but I think its a solid place to start, in conjunction with networking with others at meet ups.

 

Are you a builder by trade or by qualification (and exactly what qualification)? The big difference here is are you able to work independently and have the correct license to build the product you are selling.

Building wise you seem set but I would still use prices you would charge the public than cost price

In terms of consultants while I would have a team I would also try to learn as much as possible in relation to town planning, council procedures, architectural (more in terms of using your building knowledge to keep prices efficient) etc

Feel welcome to inbox me and am based in Sydney though I'm nowhere as experienced as the two above me

 

Hey @choey,

I'm a builder/developer in Perth and I'd like to offer a couple of points that might prove helpful.

1) Know and Understand Markets
It's great you have identified your weakness in this regard. I think this is one of the most important aspects of being a developer and requires much more judgement than many people give credit. I did a program called Results Mentoring and I think their program on market research is phenomenal. It's about $10K for 2 people for a year's membership.

2)Finance
Usually, people will purchase the land with cash, then finance the build, which is the opposite of your idea. Most of the time the land is a lower value than the construction (at least in Perth), so it works well this way. Also, lenders are easier to come by after DA's etc are in place.

Having said that, I don't see any reason your strategy won't work in principle. The main thing you will have to be careful of is if you intend to purchase the land, you will need to do it as residential lending and there may be conditions with whether you're allowed to demolish or build on the lot. Be conscious of this when you purchase and select your lender.

3) Structure
We run our developments as stand-alone, special purpose entities and our building company run as a separate company that contracts to our development company. It is absolutely imperative that everything is done squeaky clean, and at arm's length. Definitely get proper advice from your accountant on this one.

4) Do not run either entity at a loss
Although it might seem attractive to load profits into one particular entity or the other, it's a terrible idea long term. It will severely hamstring your ability to get finance and apply for insurance limit increases etc. We charge our building services out at a market rate to our development.

Hope this helps!

Cheers,
Angad

 

Great post Angad. I'm considering similar structure and based in Queensland. Two questions -

1. Re point 3, do you have a separate entity for acquiring the sites, and then a company for development? If so what structure have you found to work here?

2. Re point 4, when you apply for finance with the development company, does the lender know that you control the building company also?

 

Hi @AllyJ,

Thanks for your kind words!

We do not have a seperate companies to develop the site, although I vaguely remember a discussion with my accountant suggesting this. I think the main advantage was that you can wind up the development company post construction and that protects you from any legal claims moving forward. This is what a lot of the larger developers do. For us, we are trying to build a reputation and a brand, and also I felt that for the stuff we do (typically 1-3stories, 500k-2m construction) the risk wasn't really a big deal. Also something about escaping from your professional duty just feels off to me- maybe as the numbers get bigger, my accountant will convince me otherwise.

With regards to the lender being aware we control both companies- yes. In the beginning this actually hurt us, because essentially my personal income, business income, and project income were all entangled. If the builder failed, then so would not personsl income etc. Now we have a stronger financial position, more trading history and a good track record so it's less of an issue. What we did in the beginning was we used to not be listed as share holders/ directors in the development. If you're running into obstacles you could consider securing your interest through a loan structure, where the repayments are principle+ percentage of profit. Obviously speak to an expert about this, as I am absolutely not qualified to give advice in this area

Hope this helps,
Angad

 

Hi Angad, much appreciated!

Totally take your point about the professional advice, I'm actually awaiting some advice from my accountant currently on structuring. I have found that sometimes it is useful to lead them in these matters to a certain degree also. The wind up benefit was one consideration, and also not having the property exposed to any risks bourne by the development company.

The other thing I'm not sure about is acquiring sites under a company, and CGT implications if some are to be held. I have a feeling a unit trust might be preferable here.

That's interesting about the loan structure using a percentage of profit, I haven't encountered that yet. How were you able to borrow whilst not being director of the development company, were you borrowing in personal names and then the development company invoices you?

regards
Ally

 

Always try and borrow the funds when you can and as much as you can - do not pay cash for the land and look for funding later.

By doing this you are giving a lot more control to the lender for funds and its a lot more difficult to get funding.

Duplexes and multi unit developments (say up to 4-5) have small margins so you really need to do a lot of the work yourself.

The consultants you need are:

1. Accountant
2. Town Planner or Architect unless you are buying a DA approved site
3. Finance Broker
4. Solicitor/conveyancer

You need to take over the DD work - definitely helps if you build a network of developers similar to you that can provide you with some advice.

 

Understanding the local market and the demographics are definitely the first step as that sets everything else after it. Through this, you will be able to draft some rough numbers and know where the sweet spot is, and you being a builder will have much more control over this aspect.

Not all areas in Sydney will make money doing a KDR. I have had clients who were happy to pour money into their project but upon conducting the feaso, it became very obvious they were over capitalising. Some projects, the government wanted too much money and along with the duration and risks of the project, it just wasn't worth it.

We certainly find it very important to help clients map out the pre-con process and their associated costs so we can achieve the correct budgeting. Even on a project with very healthy budget, the pre-con costs can take up close to 8-10% of the budget with close to 4-5% all going to the authorities.

Lastly is the correct team. Good drawings and consultants may not be the cheapest when running initial numbers but it sets a good foundation to the build and will save you a heap of time, money and stress. Once you consider the bigger picture it will allow you to take on a lot more projects simultaneously.

Would be great to sit down for a coffee and chat a little more

 

I developed 2 high end townhouses and borrowed 100% of the land and then paid cash for all soft costs and (almost) the entire build. I didn't tell the bank I was demolishing their security, but I did go back to them when the build was nearly finished and asked for more money. This was the challenging part as although my LVR was low, the servicing rules had changed since I had started and I only just scraped the remaining funds together. It was about $390k extra on a valuation of $5.6m but was very hard to extract from the bank.