For many years the average Australian household has focused on accumulating wealth either through savings or investments. Usually in the residential real estate market.
And while many investors have indeed become wealthy through owning rental properties. The real profit lies in the wholesale end of the real estate market spectrum with the residential property developers.
And it’s the major real estate developers that have refined the process into a fine art.
Did you know that some people who try their hand at DIY development make mistakes and wind up losing money? We don’t say this to scare you away, but more to inform you about the risks.
In this article we’re going to take a look at the eight biggest mistakes made by DIY property developers that major real estate developers don’t make and how you can avoid them.
But, before we hook into the article check out these leading boutique property developers in Melbourne killing the game.
If you’re going to model yourself on anyone these are the guys, they may be considered boutique but make no mistake these are the major real estate developers around town.
Let’s get into the article.
1. Paying Too Much for Property
There’s a reason why some people say you make your money when you buy a lot of land. At the end of the day, you’re focusing on making a good profit margin. So when you’ve overspent on the largest cost, you’re already in the red.
So if you want to make it work you need to know the market and do your research on similar sales in the immediate area within the last 6 months to a year.
Couple this with some solid negotiation skills which are useful when making offers off the market or via a private sale and you’ll come out on top. A hint – it’s proven psychology that the person that makes the first offer in a negotiation has the upper hand.
Side note – here are five super common pitfalls of property developers that you need to know before you undertake your next development project.
2. A Lack of Strategy or Planning
See if similar lots in the suburb have been successfully developed.
3. Failing to do Proper Due Diligence
Like any property purchase, buying land for real estate development needs a correct course of due diligence. You need to consider encumbrances, overlays, caveats, buildability, project finances and a whole host of other site-specific environmental factors.
Failing to get your due-diligence right can have severe consequences to the outcome of your project so be sure to take your time and tick every box that needs to be ticked so you can move forward with confidence.
4. Under-Costing the Build
It can be tempting to look at the end game and your profits – but remember, you need to spend money to make money. It’s extremely common for green developers to under-estimate the costs involved in a successful development project and don’t allow any contingencies.
So, make sure that you cost everything right and have a contingency buffer. One this is for certain when it comes to real estate property developing. Things always take longer and cost more than you think.
So be aware of this and cost your project accordingly from the beginning. It can be a fine line, only as you gain experience will you gain more confidence in your numbers.
It can be too easy to price yourself in or out of a project – the key is to be patient, have discipline, and act without emotion when identifying a site and, in particular, running your feasibilities.
5. Finance Issues
Getting finance approved or borrowing for development is a whole different kettle of fish compared to getting a loan to purchase an investment property.
You need the right loan, from the right lender, with an appropriate borrowing limit and you need a financial buffer in place.
The main tip here is, don’t operate too close to the line, things happen. So you need to be in a position to pivot if needed.
If you’re operating too close to the line pivoting may not be an option which could result in difficulties kicking off your project or getting it completed.
6. Don’t Overthink Timing
Don’t over think the timing of when to get going on your first residential development site. You need to be able to make money in both good and bad markets. Too many people looking to start think they can time the top or bottom of the market – it never happens, because the market is completely unpredictable, even the so called “experts” get it wrong more often than not.
The best time to get in was yesterday, the second-best time is today so don’t outsmart yourself and hold yourself back. Put the time into learning, be patient and disciplined while you figure it out but ultimately pull the trigger and just get going.
7. Overconfidence and Cockiness
Today’s rooster is tomorrow’s feather duster. Sometimes people can pull off one or two builds with success and become overconfident and cocksure and make mistakes due to this arrogance. You need to stay humble and keep your eyes on the prize, and always consider your bottom line.
At the end of the day you’re in this for the bucks, so keep a cool, calm and collected head – never assume anything, ever, period.
8. A Lack of Knowledge
Some people attempt a DIY project with no prior research or knowledge of the real estate development game. This is a dangerous move as there are so many variables, some of which we’ve discussed here and elsewhere.
In the real estate property development game knowledge isn’t only power it’s also profits. Not sure what a property developer is, click here.
If you want to become an ‘armchair’ developer. No worries. But if you are hell-bent on going at it alone then make sure you put the required time and effort into learning everything you can. This will give you the best chance of success – you need to start building your own team of experts.
Little Fish is Here to Help
At Little Fish Property Developments, we specialise in educating would-be property developers about the correct method to successfully developing real estate property.
In fact, check out this trusty resource loaded with killer tips on how to become a successful property developer.
We can either teach you the tricks of the trade and skill you up to become an accomplished DIY developer with the mindset of major real estate developers.
Or as professional property development consultants we’d love the opportunity to shoot the breeze with you over your next development project.
Got questions? Give us a call on 1300 799 277 to learn how we can add value to your next project.