How does property development work exactly? Bringing in a case to study, Bob Andersen talks about the property development stages.
Hi, Bob Andersen back again. When I was pondering what I wanted to bring you in this series of videos, I thought, there’s no better way of seeing how a property development works, how to have a look at all the different stages of a property development, than to look at a real life case study. So, that’s what we’re going to do.
INTRODUCTION
Starting today and moving forward, I’m going to talk to you about property development, I’m going to talk to you about the different stages of a property development. But in particular, I’m going to relate it back to a current project that I’m doing at the moment. That particular project is a four-townhouse project that I’m actually doing with my son, Luke as a joint venture. So, it will be a real-life case study. I think you’ll find that interesting and also, you’ll find it quite educational so that’s what we’re going to do from here.
Luke and I kind of decided “Look, let’s do a little project together. A bit of a father and son bonding. Let’s do a project.” And in my development company, I tend to do larger projects than four-townhouses but for this, let’s find a little four-townhouse project, not only to do ourselves to obviously to make money, and as a bit of a father-son bonding, but also something that we can use as a case study. Something that we can use to teach the students about property development. And so, that’s what we decided to do.
THE PROJECT
Now, that project incidentally is just winding out at the moment so as we proceed in this series of videos, we will actually be completing that particular project that we’re doing at the moment. So, the issue is this, we have to find a deal. At the time, the market was fairly hot so when the market is hot, that means it’s great for a lots of reasons but it makes things a little bit harder to find a deal.
So, what we decided to do is to put a few feelers at this. We’re pretty busy ourselves in our own development company so put out some feelers. We spoke to 1 or 2 buyers agents I knew but also spoke to a few students. I’ve got some students and in fact, who tend to find more deals than they can do themselves. And that’s how it actually turned out. So, a couple of the students that I spoke to came up with a deal. It took them maybe about three weeks but they came up with a proposition. A potential four-townhouse project.
Now, when we are looking for deals on the market, generally, we have what we call an ‘on-market’ deals and ‘off-market’. On-market deals are ones that are for sale. That will be on RealEstate.com that will be listed by an agent, that will be on the agent’s window, that will be ‘on’ the market. Off-market deals, which are great, are the ones that aren’t officially for sale. There might be ones that are not listed yet. Perhaps some people have shown interest in selling but they haven’t officially listed it. It could come from other sources like town planners or architects – that sort of thing. They are off-market deals.
THE DEAL
This particular deal, this particular project that I’m going to proceed in the following videos to show you unrolling, came up through an agent. So, particular students of mine had done a couple of projects in this suburb and they built up quite a good little agent network. One of the agents approached them and said, “Look, I’m going to list the property tomorrow for sale with development potential. Are you interested?” So, if you like, it was ready to go on market but at this point, it was just off-market. And it was in a good area, a little bit of above average in terms of the mean price of townhouses. A little bit up market, but not too much, and in a pretty good area – a pretty hot area. The student got straight onto me and said, “Look, this thing is going to be listed tomorrow. Are you interested?”
So, I had a quick look, had a look at where it was, had a look at what was surrounding it. I knew the suburb and I thought ‘that’s the right suburb, I want to be there’ and so I had a look at the price. It wasn’t an auction. It was actually going to come up by a private treaty at a figure of about $750,000. That was going to be the list price. I quickly did some numbers because at the end of the day, nothing matters but the numbers, and I’ll tell you more about the numbers as we move forward in this series but I did what I call my 5-minute feasibility.
I teach this to my students.
It’s a 5-minute quick way of looking at a deal. Is it a deal or no deal? A quick look in five minutes. The first fast look if you like. I did some quick number and it looked okay. It just got over the line profit wise but I knew when good sites are in short supplies and it’s in a hot area, it’s never going to be the deal of the century. What you want it to do is to be profitable enough to get bank, to get finance, and obviously, good area, good market, you going to sell them quickly if that’s what you want to do. So, such was the case here.
TAKING ACTION
I think I paid probably right on the money… certainly I wouldn’t want to pay any more but I knew it was going to stack. I said to the student, “Okay, let’s go. Let’s jump before it actually gets officially listed, I’m going to jump on it.” And that’s exactly what we did in this particular case.
As we move forward, I’m going to talk to you a bit more about how we tied up the property, how we tied it up contractually, the sort of conditions we’ve had and I’m going to take you right through the whole series. I’m going to talk to you about the finance, how we got the approvals, how we got the builder involved, and the demolition, everything happening right through the marketing and out the back end as we proceed.
So, here we are, we got our foot on a little deal, a four-pack and I’ll take you through the due diligence in the next episode. It’s a good little deal and I know you’re going to enjoy it. I look forward to seeing you shortly.
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