7 DEADLY MISTAKES PROPERTY DEVELOPERS MUST AVOID
7 DEADLY MISTAKES
PROPERTY DEVELOPERS MUST
AVOID
REPORT N0.1-2014
Jim CastagnetPROPERTY DEVELOPMENT WORKSHOPS4/1/2014
According to the Collins English dictionary property development is:
“thebusiness of buying land and buildings and then making improvements to them so
that their selling price exceeds the price paid for them”.
Sounds simple enough! So why do so many get it so wrong! Read on…..
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7 DEADLY MISTAKES PROPERTY DEVELOPERS MUST AVOID
7 DEADLY
MISTAKES
PROPERTY
DEVELOPERS
MUST AVOID
REPORT N0.1-2014
Property Developers by nature are
entrepreneurs and risk takers. They are
enthusiastic and passionate individuals who are
generally very successful at what they do.
However, those very characteristics that make
them successful can often cause them to make
unnecessary and often very costly mistakes.
During the 16 years I have been teaching and
doing property development, I have found these
to be the 7 most common mistakes that
Property Developers are “guilty” of in their
haste to make things happen.
MISTAKE N0.1 LACK OF DUE
DILIGENCE
A thorough due diligence process is an absolute
must if you are to reduce your risks as a
property developer. This process can be
exhaustive depending on the complexity of your
particular project. Rookie developers will often
do the very bare minimum of what is necessary.
They will often commit to purchase on the word
of a third party. Often an unqualified third party.
I would recommend that if you’re unsure of
what is necessary, to commission a qualified
consultant(s) to do this for you. It will save you
thousands from costly mistakes &/or hidden
pitfalls
MISTAKE N0.2 MASSAGING THE
FINANCIAL FEASIBILITY ANALYSIS
The Feasibility Analysis is the most critical part of
your due diligence. If you get this wrong you will
probably end up overpaying for the land or walking
away from a perfectly viable Project. The Feasibility is
the basis for everything that you do. It will allow you
to determine residual value of land, and therefore
how much you should pay. Ideally this will be below
the residual value.
The problem that I see over and over is that
developers tend to overestimate the sales of their
projects and underestimate the construction costs. It
is too easy to play with the figures to make it look
like what youwish as opposed to the reality. What
often happens then is that the developer goes ahead
and purchases the site, spends loads of money to get
a DA only to find that the Project does not stack up
and therefore not fundable by the Bank. Hence why
there are so many sites on the market that are not
viable.
MISTAKE N0.3 UNDERESTIMATING THE
POWER OF NEIGHBOURS
Neighboursshould be on your list of
stakeholders who are affected by your
development. Very often lots of angst is created
unnecessarily, because the developer has
surprised the neighbour with their proposed
development. The developer has failed to
communicate their intentions to the neighbour
prior to lodging the development approval.
Remember that the less objections you get the
easier it will be to get your DA. Neighbours are
also constituents who vote for their local
Councilors. Therefore they do carry a lot of
weight when Council is considering your
application. They can hold up your application
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7 DEADLY MISTAKES PROPERTY DEVELOPERS MUST AVOID
indefinitely and worse still force you to take the
matter to the Land Environment Court where
there will be even more costly delays and court
costs.
MISTAKE N0.4 SELECTING THE WRONG
BUILDER
There is nothing more heartbreaking than having
the Builder go broke halfway through your
Project. It is very costly to replace a builder and
your budget may not be sufficient to do so
without further injection of funds. Builder
selection is a critical part of the property
development process and too often a builder is
selected on the basis of a recommendation from
a “mate” or on the cheapest price. Depending
on the size of your Project, it is wise to use the
services of a Quantity Surveyor who will be able
to provide the costs estimates for your Project
when assessing the Builder’s tender. They will
also advise on the performance of particular
builders as they are often processing monthly
progress payments on the Bank’s behalf. They
know the builders who perform on time and on
budget.
MISTAKE N0.5 SHODDY LEGAL
DOCUMENTATION
This is an issue that is often overlooked by even
the most experienced developers. Indeed I have
been guilty of getting this wrong myself and it
has been very costly. There are some obvious
reasons why you should ensure that your legals,
i.e. Option Agreements, JV’s, Structures, NonDisclosure Agreements, Building Contracts, PreLease Agreementsand a host of others
depending on your situation, are up to scratch.
These include minimizing your liabilities,
protecting your assets and ensuring that you get
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to keep your profits at the end. You must
engage a qualified property development
Solicitor and Accountant who can advise in this
regard or risk being exposed before, during and
after the completion of your Project.
MISTAKE N0. 6 NOT SELECTING THE
RIGHT CONSULTANTS
You may have heard the term “pay peanuts and
get monkeys”. To succeed in property
development you need to surround yourself
with the right team. I mean Architect, Solicitor,
Accountant, Town Planner, QS etc. Too often
developers go for the cheapest consultants.
Unfortunately, inevitably, this ends up costing
them more in the long run because of mistakes
resulting in variations, an ordinary end product
and at the end of the day not achieving the
highest and best use. This of course results in
much less profit if not a loss.
MISTAKE N0. 7 BUYING THE WRONG
SITE
This the most common mistake that I see
developers do. There are many reasons for this.
Some of them I covered above including lack of
due diligence, incorrect or incomplete (back of
the envelope) feasibilities etc. The reality is that
often it’s a combination of lack of knowledge and
understanding of the property development
process including buildability issues, property
development funding, planning framework and
the target market.The risk with Property
Development is most often not the Project itself
but the Property Developer. Self-education in
property development is a critical part of a
developer’s due diligence.
www.propertydevelopmentworkshops.com.au