If you’re new to property development you need to read this. If you’ve been in property development for a little while then you understand what I’m about to say. But if you’ve been in property development for a long time then you have almost certainly experienced one or more of these mistakes.
Starting anything new is very exciting. Just think of when you started your last personal relationship, that was exciting too!
When we are excited we tend to rush into things and make hasty decisions; and this is where things can go badly wrong in property development. Here’s my 3 mistakes that new property developers make.
You see an excellent site and you know it is perfect to develop. There are developments going up either side and across the road. The real estate agents signs on those buildings all say “75% sold” and “sold out”. The land is zoned just right. It’s like a dream come true!
So what’s the mistake? You buy the site!
Site acquisition is where so many new property developers fall over.
Due diligence must be performed on any site that you are contemplating for acquisition. There is so much more than having a site zoned for the development. You must find out everything possible about the site first. Are there easements through the site? Do Koalas live in the trees (don’t laugh, this is serious)? What about contamination? And just because the site is zoned appropriately, can you actually develop the site and obtain the necessary profit margin?
Mistake 1 is poor due diligence.
But even before due diligence there is one very important factor to be considered – demand.
Will there be demand for a particular product when you put your development to the market? If there are many other developments occurring chances are that supply will exceed demand by the time your development is ready to start selling. Maybe not! You decide. This is big!
Mistake 2 is developing something where supply will exceed demand.
You’ve done your market research and you have established that there is demand. You’ve undertaken due diligence and you have managed the associated site risks. Your feasibility looks healthy. You buy the site.
What does “you buy the site” actually mean? To many people who are new to property development this is simply exchanging contracts and settling the transaction 6 weeks later. To a property developer this means gaining control of the site without having to settle (yet) or not having to settle at all!
How you acquire the site is a critical risk management issue for any developer to consider. Why pay for the site if you can do a joint venture and simply share the profits without having to either invest in or borrow money to gain ownership of the land?
And why pay for it now when you could option the site, gain your development approval and then settle the transaction just before you commence construction. But what if you didn’t get your approval? If you have an option you could walk away without having to “buy” the land’ sure you lost some money but you didn’t invest a fortune in a site that wasn’t worth it.
Mistake 3 is not considering alternate methods of acquiring a site.