When it comes to developing property, there’s a lot more to buying, improving, and selling property than meets the eye. Most successful property developers follow a process with several common steps, from pre-purchase and concept stage all the way through to completion.
Though the order of these steps may vary between developers, the process of developing property is typically broken up into the following elements:1
- The initial idea
- Refining that idea
- Assessing how feasible the idea is
- Contract negotiation
- Contract completion
- Construction begins
- Project completion
- Management of that property
The seven steps in developing property:
1. Start with your why
Begin by unpacking the reasons why you want to develop property. Is it to sell for a tidy profit once-off, or to develop property that will create rental returns and increase your capital growth? It’s important to understand some of the pros and cons of property development before you start. Some of the pros are that you can make a lot of money if you buy right and save on expenses,2 plus you get to express your own creativity on a property.3 However, dips in the market, strict regulations, and unforeseen expenses are risks that need to be taken into consideration.4 Another consideration is how time-intensive onsite property and project management can be.5
2. Before you buy
Before you even start looking for property, consider these things:6
- In which capacity will you purchase your property? Will it be in your personal capacity, in a business, a trust, or a joint venture? It’s advisable to involve your accountant in this decision.
- What is your budget? Secure pre-approval for funding from your bank so that you know what your finances can cover, and can confidently start the project knowing you can complete it.7 As a property developer, it’s also useful to know the following financial terms:
- Equity – This is owned or permanent capital, usually in the form of shares.8
- Debt – This is borrowed capital, usually in the form of loans or bonds.9
- Development finance – This is a short-term loan typically for residential property developments that is based on what the property will be worth after development – or gross development value – and is paid back in stages.10
- Bridging loans – A bridging loan is a short term loan that is backed by property in order to finance you while you wait for a property to sell, or refinance for long-term debt. It can be used between one and 18 months, with monthly interest rates usually included in the loan, and the loan paid in full at the end of the term.11
- Who’s with you? If you’re not hiring a Development Manager to do this for you, you will need a team of consultants to advise you, such as legal counsel, an architect, a surveyor, a town planner, an engineer, and an estate agent to estimate on end values and how ready the market is for this project.
3. Find the right site
The potential success of your property development rises and falls on finding the right development site. Knowing where to look, who to speak to about property sites, and how to find off-market sites are the foundation of property development. Over time you will build up a network of contacts that will ensure new sites are constantly being fed into your site-finding funnel. Spend time here; mastering the right site-finding methods is a skill worth learning if you want to be a successful property developer.12
Here are some things to consider when viewing a potential site:13
- What are the potential risks? Firstly, check what the land has been zoned for. Then check other potential restrictions and limitations that could make this project non-viable, such as vegetation, contours of the land, access to water, sewerage, and electricity, road works and parking. Use critical thinking and seek out reasons to not buy the site so that you can spot any potential red flags. Do as much of the research you can independently , so that you have insightful questions to ask the town planner, your architects, civil engineer, etc.
- What is the potential profit? The best way to know if this site is profitable is to first determine the potential costs of construction. Your town planner, civil engineer and other consultants will give you an indication of this. Then, with your desired selling price in mind, subtract your intended profit, then take off the known costs and sundries. What is left over is the highest price you can afford to pay for the property for it to be a profitable purchase.
- What are the terms? Being smart about the negotiated terms for sale can often turn an unprofitable deal around. If the seller is prepared to let you pay off the property over an extended period, but with early access, then it could be a viable property deal. In fact, any term that reduces holding costs and removes risk should be considered. Rope in your accountant and lawyer to review the terms of sale for any potential hurdles. Discuss the deal with your bank or broker to understand what conditions they might have.
4. Buy well
Now that you understand the risks and potential profit of the site, it’s time to close the deal. If you’re buying the site from an estate agent or auction, then it’s important to understand the conditions of sale they have set, and how to put a professional and credible bid forward to make you competitive.
If you’re the developer and you’re securing the site directly, then you can manage the process, and impact the bottom line significantly, by controlling the deal with skill. Knowing how to structure a deal is vital to a profitable outcome for the project, as each deal will have be tailored to meet the unique project requirements.14
5. Designing, planning and required permissions
The property developer represents the role of the client by coordinating the process of designing, planning, and ensuring that all the permissions are in place.15
- Design – Clever design can optimally utilise every centimetre of the site to achieve maximum profit. Your architect and surveyor will assist here.
- Planning and coordinating – You will coordinate a team with some or all of the following role players, depending on your strategy and the site’s requirements:16
- Town Planner – prepares or assesses development applications.17
- Civil Engineer – designs, builds, and maintains all infrastructure projects.18
- Hydraulic Engineer – deals with large-scale projects related to managing the flow and storage of water.19
- Traffic Engineer – plans changes to roads or traffic signals to better serve motorists and reflect changes in traffic patterns.20
- Mechanical Engineer – designs, builds, installs, and maintains mechanical machinery and its components.21
- Architect – plans and creates the blueprint for the layout of the building
- Landscape Designer – designs functional and attractive outdoor spaces.22
- Quantity Surveyor – manages all costs relating to the building project.23
- Builder – oversees the construction process and coordinates the different types of construction involved.24
- Surveyor – updates boundary lines and prepares sites for construction to prevent potential legal disputes.25
- Permissions – Keep in mind the required approval timelines, depending on the site and build’s permission requirements. Make provision for waiting periods for approval, and factor in their holding costs. Your Town Planner will be best positioned to guide you on the likely timeline for your project.26
6. Start building
In the construction phase, the developer’s aim is to produce the designed building on time, and within budget. This covers the physical construction of the building in its entirety, plus site preparation work, and management of all resources. Since this phase sees the highest spend out of all the others in the property development process, it requires the most attention to variances in construction costs, finances, and project timing in order to successfully manage the project cash flow and bottom line.27
Things to consider during the construction phase:28
- Clarity on the Scope of Works (SoW)
When detailing your Scope of Works (SoW) with your builder, be sure to clarify what they understand by it first (to avoid confusion), as each builder has their own point of reference. Things to include in this discussion could be kitchen and cabinetry inclusions, foundations, fences, quality of fixtures and fittings, and so on.
- Provisional cost (PC) items
Nominate a budget for items outside of the SoW, such as a cost per m2 of tiles, and then request builders to quote on these. Once you have selected your builder, you are free to select the specific type of tile from within their range, or to use your own supplier that falls within that provisional budget.
- Design and Construct (DnC)
DnC contracts are an alternative option where you give all of the responsibility of the engineering-level drawings to the builder. While these are easier to manage, DnC contracts remove visibility into the quality of the overall build.
7. To sell or to rent?
Now that your property is developed, you are left with the choice: do you sell, or do you rent it out? The answer to this is based on how you want to make a profit and is not something that you decide at the end of the project, but is usually specified early on in your business plan.29
- Sell – If you, like traditional property developers, want to develop property to buy, build, then sell again, then you know what to do next. Speak to your marketing agency or property agency and get the property on the market. Consider which stage of your property development you will sell in:30
- Pre-Sales – Pre-Sales are usually the bank’s way of ensuring your loan will be paid back, however, you could also use it as a way to mitigate risk.
- Post Sales – Easier to sell, as buyers can see the finished product, it’s also the peak of your project’s debt, so any delays on sale can increase interest.
- Best of both – Consider covering your construction and purchasing debt with pre-sales, while post sales produce your profit.
- Rent – Renting out the building for a more long-term growth strategy, or selling a site with planning permission secured (planning gain) before you have built anything, is a possible conclusion to your property development. Here are some things to consider when managing rental property:31
- Income from rentals – The benefit of rentals is the monthly income you will enjoy from your tenants.
- Equity growth – Your property may appreciate in value over time. Rent can offset your property investment. Plus, you can claim tax on interest on your mortgage, in addition to other related expenses.
- Tenant risk – Even with strict vetting, there is always a risk your tenant could be a slow payer, high maintenance, or devalue your property.
- Ongoing costs – Taxes, fees, maintenance and repairs – the monthly costs are always for your account, regardless of whether or not your property has a paying tenant.
- Legal risks – The law is always in favour of the consumer, which could mean potential risk of legal ramifications regarding the property and the tenant.
Developing property can be profitable, but it involves many moving parts. It requires skill to navigate as a property developer in order to lower the risks of the project and be profitable. Some of these skills can be learnt on the job, but it’s advisable to invest in learning key functions such as financial management, strategic thinking, negotiation skills, presentation skills and economics to fully understand the bigger picture.
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- 30 Flux, A. (Aug, 2015). ‘5 Stages of Property Development’. Retrieved from Developer Network.
- 31 McCoy, M. (Nd). ‘Pros & Cons of Owning and Managing Rental Properties’. Retrieved from MoneyCrashers.