Are you thinking about undertaking a townhouse development but lack confidence in your numbers? Well, stick around because in this article I’m going to share how we at Little Fish run a development feasibility study.
By the end, you’ll hopefully have the confidence you need to make a decision way or the other.
Let’s get into it.
When it comes to undertaking a townhouse feasibility study on a potential development site it’s important to note that it doesn’t matter what spreadsheet or software you may be using the results are only going to be as good as the information or numbers that you input.
If the numbers that you input are rubbery, by default the result will also be rubbery. So, it’s critical there is genuine thought and science behind your numbers.
For the purpose of this video, we are going to use our own internal application called the cruncher which breaks the projects numbers into five main categories.
Purchase, planning, build, holding (bank interest) and sales.
As I just mentioned above, it’s less about the software and more about the numbers that you need to consider and what you input.
The cruncher is what we use internally to run our preliminary feasibilities. This is how we determine if a site is worth investigating further.
It is important to note that if a site stacks up in the cruncher, we’ll then undertake another level of what we call real estate developer due diligence before making a final decision.
The cruncher’s algorithm is no different from other feasibility software available out on the open market.
It has pre-set formulas and calculations behind the numbers which I’ll also detail on the way through.
Let’s start plugging some numbers in and I’ll explain them as we go.
First up is the purchase – here we input the proposed purchase amount.
The cruncher then automatically calculates the stamp duty and inputs a default amount for the adjustments which can be changed if needed.
It then gives us the estimated total purchase price.
Next, we look at the planning costs – this is where we add an estimate of the total planning costs.
Planning costs that you need to consider include all the early and middle development costs.
Obviously, all projects are going to be different but to get you heading in the right direction some costs you’ll need to consider include:
It’s always good practice to add a contingency/miscellaneous amount.
For the purpose of this video, I’m going to input $90,000 for planning.
I’m also going to assume it is a dual occupancy site so the open space contribution wouldn’t be relevant.
We’ll also assume 71,500 in project management fees.
Next up we need to look at the build cost.
In the cruncher, we plug in the estimated dwelling sizes and the budget per square.
For accuracy, we leverage our own internal IP and history.
Next up we need to consider the bank interest holding costs.
We input the interest rate we believe the funds are going to cost us.
And we estimate the term the funds will be drawn down.
Finally, we need to input the estimated sales revenue.
For this, we leverage local comparable sales history data with the cruncher automatically considering the agent’s fees.
I should also point out that the cruncher also uses the margin scheme when considering the GST as part of the final calculations.
Using software like the cruncher allows us to identify the maximum price we should pay for a site to achieve our target.
All done without emotion and avoiding rubbery and inconsistent feasibilities.
After completing a townhouse development feasibility study, it can be saved easily and sent to all relevant parties instantly.
Preliminary Feasibility Report
This is how the feasibilities present.
All the data is taken straight from the cruncher.
We find comparable sales data to come up with pessimistic, realistic and optimistic sales prices.
With our efficiencies and know-how, we are confident we can achieve optimistic outcomes but ultimately if a potential site stacks up at a pessimistic level this is when we will complete further detailed due diligence and look to put our best foot forward to acquire the site.
From our experience as seasoned townhouse developers when it comes to feasibilities if you are working with numbers you trust the numbers don’t lie.
A site either stacks up or it doesn’t.
There are many townhouse feasibility software options out there on the open market.
Most of them offer free trial periods, so when you are just starting out it will be a good idea to play around with as many of them as you can. When you find “the one” you’ll know.
From there it’s all going to be about the numbers that you input. You’ll need to understand how to calculate the future value of your properties.
This is going to change and evolve all the time so it’s about keeping your finger on the pulse to ensure you have some science and ultimately confidence behind your numbers.
The key to feasibilities is to ensure you undertake them without emotion. The numbers will either stack up of they won’t.
Finally, I want to share the designs and prices of four townhouse projects we completed here in Melbourne. These should help you further understand what numbers you need to be considering.