When done right residential property development can be a lucrative hustle. You can make some serious profit on the right lot.
That is if you build the right type of dwellings on it, sell them the right way and if everything goes according to plan.
Regular people like you are currently making some substantial returns by successfully developing their land. Or, they get the right piece of land for the right price.
There are a few things that can happen which can seriously delay a project.
It’s important to know these and some solutions before you take the plunge.
Is Developing a High-Risk Game?
Some people will say that all development projects are risky. And they are if you don’t put the time and effort into mitigating as many types of risks as possible.
If you do due diligence and a thorough risk assessment, then a residential real estate development carries as much risk as other projects. It’s all about being ahead of the game and knowing the field.
If you are looking to borrow funds for your development check out this article which details some mistakes you need to avoid.
1. Time Blowouts
In property development, every day has a dollar value attached. Often this dollar value isn’t insignificant either. Development projects running overtime is a common occurrence and it can make or break your project.
You need to have solid risk management mechanisms in place for this potential pitfall.
The key to managing this type of risk is to get your builder to commit to a fair liquidated damages clause in the building contract.
Liquidated damages are a mechanism where one party (you) can claim monetary compensation for loss or damage. It has to be through the other party’s (the builder) failure to deliver the work on time, under the contract. Put simply, the builder pays you compensation if work stops due to them.
Here at Little Fish, liquidated damages are non-negotiable in all our build contracts. We don’t do business without them. No matter how big or small the project, or how well we know the builder.
A nice way to work out a figure for liquidated damages is by how much rent you would lose on each dwelling per week. Times that by the number of dwellings and then you have a figure you can put in the contract.
This is a fair amount and big enough to give your builder a reason to finish the project. Otherwise, they lose money.
Now let’s learn more pitfalls of property developers.
2. Cost Overruns
Make no mistake cost overruns can quickly become a problem – experienced townhouse builders, contractors and suppliers can be crafty when it comes to billing and cost variations. This is especially so if you’re new to the game. Variations have the power to break the bank if you’re not careful.
You can mitigate this pitfall by having solid construction documentation and build contracts. A fixed-price contract is all you want to sign. You need to eliminate all “assumptions” from a contract before you commit.
The only assumption you should allow for is for underground earthworks.
Even then you need to be clued into what they’ve allowed. You need to make sure it’s a reasonable allowance.
Builders love “assumptions” and left unchecked would litter the contract with them. This way they haven’t had to commit to a price and they can add all sorts of variations. If you end up in this position, they’ve got you by the shorts. There is nothing holding them to account.
The second thing to do is to include detailed fixtures, fittings and finishes schedules in your contract. You need to ensure nothing is left out. If you want a feature in your build, it needs to be in the contract and supporting documentation.
Never just assume something is included – it needs to be on paper and signed. Otherwise, it’s a variation and boom, more money for you to spend.
One last tip is to have contingency funds for earthworks. This is industry best-practice, if a project doesn’t stack up with some contingency allowance then it may not be the best project to pursue.
3. Builders Going into Liquidation
Another common pitfall is the builder going bust, or into liquidation. This can happen mid-project or even any time after you’ve entered into a contract and exchanged money.
Remember Murphy’s law, if it can happen it will happen so don’t fool yourself and think that it won’t happen to you. You need to do some due diligence on your subdivision builder, no matter how well they present.
Get references from previous customers. They will give you honest feedback. Head out to their active build sites and check their work. Talk to their contractors.
Do anything you can that will give you an idea of their modus operandi.
4. Trusting Third Parties
Another one of the common pitfalls of property developers is having blind faith in all third parties related to your project. This includes architects, designers, conveyancers, etc. At Little Fish, we trust no one for anything.
It’s vital to do your own research. Talk to relevant professionals and gather all the information you need. Put time, effort and resources into your own research. The stakes are too high in this game to put blind faith in any party. Utilise multiple sources, challenge and question everything.
Paying for mistakes later is always costlier than avoiding them in the first place. Prevention over cure is the key!
Trust yourself, and your team. Trust your ability to figure things out by yourself and then make decisions with confidence.
5. Working with Rubbery Numbers
The final most common property developer pitfall you need to be all over is working with rubbery, or moving, numbers. One of the quickest ways to lose serious dough is to work with numbers without solid science or merit.
At the end of the day, we’re in this for profit. It’s beyond critical that you get your numbers right.
A key tip here is to not round figures up or down. Any projections, budgets and feasibilities need to be costed to the cent or as close to practically possible.
High-risk decisions based on rubbery numbers is a one-way ticket to project failure.
Keen to Learn More?
There are of course more factors to consider but these are the top five common pitfalls of property developers.
If you’re looking for dual occ advisors or if you want to learn about more risks and how to mitigate them. Give us a call 1300 799 277 we’d love to hear from you.