Written by Australia’s Billion Dollar Property Developer, Bob Andersen.
What are the steps you need to undertake for a profitable property development?
With property development, proper sequence is important. However, not all property developments follow exactly the same sequence. In some instances, particularly with small sites, you might have to settle the purchase first then obtain a development approval. Also in some cases, the financier might require some presales prior to advancing the construction phase of the loan.
For the sake of this article, we’ll assume that we’re purchasing a small site, say a house which we can demolish and build three townhouses. We will also assume that the financier doesn’t require presales.
Having decided that property development is for you, your first step should be to consult a financial strategist familiar with financing development projects and ascertain your borrowing capacity.
Don’t borrow to your full capacity but leave at least a 20% safety buffer. Knowing your capacity will also help you decide on the scale of project you can undertake.
2. SELECT YOUR BASIC TEAM
Firstly, choose a lawyer and an accountant familiar with property development and not a straight conveyancing lawyer or an accountant who only does tax returns. These two professionals will be able to advise you and form the best structure to suit your personal circumstances.
You will also need to make contact with an architect or building designer and a town planner. These professionals will initially advise you on what can be developed on the site you are investigating.
3. LOCATE THE SITE
I favour choosing a specific location. Perhaps two or three suburbs and becoming an expert in that area. Choose suburbs that have shown consistent capital and rental growth.
Get to know site values, townhouse values, and the active real estate agents in that area. Know a deal when you see it and be prepared to move fast.
4. PURCHASE THE SITE
If you’re purchasing a small site, such as a house to demolish and build three new townhouses, it’s unlikely you could contract the site subject to obtaining a Development Approval.
Get your lawyer to draw up the contract. Have a due diligence period of, say, 21 days and a subject to finance clause starting from the expiry of the due diligence clause.
5. COMPLETE DUE DILIGENCE AND FINANCE
Your architect, town planner and lawyer can help with due diligence.Your lawyer will conduct the relevant searches including title, utilities and infrastructure related matters. The town planner can advise on matters relating to zoning, density, heights, setbacks etc. under the relevant planning scheme.
Your lawyer will conduct the relevant searches including title, utilities and infrastructure related matters.The town planner can advise on matters relating to zoning, density, heights, setbacks etc. under the relevant planning scheme. The architect in consultation with the town planner will advise on building issues: design (1 or 2 level) and mix (1, 2, 3 bedrooms).
The town planner can advise on matters relating to zoning, density, heights, setbacks etc. under the relevant planning scheme. The architect in consultation with the town planner will advise on building issues: design (1 or 2 level) and mix (1, 2, 3 bedrooms).
The architect in consultation with the town planner will advise on building issues: design (1 or 2 level) and mix (1, 2, 3 bedrooms).
A consulting engineer may also be required if the site has particular potential constraints such as flooding, overland flow etc.
Many consultants will give basic advice for free under the understanding that they will be engaged if the project advances.
6. OBTAIN DEVELOPMENT APPROVAL
This is the town planning approval that needs to be obtained from the local authority. For this, you’ll need the town planner, architect, surveyor, and landscape architect. If engineering issues exist, you’ll also need input from a consulting engineer.
In conjunction with the town planner, the architect will develop the design up to DA standard which will include floor plans, elevations and cross sections.
This process can be coordinated by a savvy architect for a small extra fee.
This stage can take anywhere from 3 – 8 months depending on the local authority.
7. OBTAIN BUILDING APPROVAL
After you have obtained a satisfactory Development Approval you’ll need to obtain a Building Approval (Permit) before you can start construction.
The architect will now prepare the detailed drawings. These will be forwarded to the structural engineer for his input then copies sent to the civil/hydraulic engineer and landscape architect for their input.
The Building Approval can usually be approved by a private certifier or building surveyor. This stage can take 2 – 3 months.
8. MANAGE CONSTRUCTION
A builder will need to be appointed and might come from a referral from the architect or others or by tender. A building contract is signed and will need to be approved by the financier prior to construction funding being made available.
The builder will be paid by installments, usually monthly. A three-townhouse project would typically take 5 – 8 months.
9. MARKET YOUR DEVELOPMENT
For larger projects, the financier usually requires a level of presales before advancing the construction finance. On small three townhouse projects, that shouldn’t be required.
Your options are to hold the completed townhouses as investments, sell them for a cash profit or a mix of the two. It’s important to know your intentions upfront as this will have a bearing on the structure you’ll use.
If you’re intent on selling any, you want to start marketing during the construction stage. Investors generally don’t mind buying ‘off the plan’ but owner-occupiers typically like to buy a finished product.
This is where a good working relationship with an active, professional real estate agent is very helpful.
10. COMPLETE OR SETTLE THE PURCHASE
In most cases, you’ll obtain individual titles for each of the townhouses. If you’re keeping some, you can rent them out as soon as you have a ‘certificate of occupancy’.
If you’re selling some you will need to work closely with your agent. Your lawyer will take care of the conveyancing matters.