Why Most First Time Property Developers Fail
Posted by Tristan Angelini on 13 January 2022
These days, everybody wants to become a property developer. With interest rates declining, investors are getting their cash out of the bank and seeking comfort in real estate - Real estate development to be specific.
Here are my thoughts as to why most first-time real estate developers fail badly.
As a Builder, I have met with numerous clients that have purchased a property intending to develop townhouses. My first question to them is 'Have you completed a feasibility study?'. in which most do not have the slightest clue with what it even means.
The few who have completed a 'back of the napkin' feasibility study usually work their projects out like this:
*Buy Property = $600k (because the agent said it was a great buy)
*Build 3 Townhouses = 3x15SQ townhouses @ $10k per square (because volume builder rates were this 5 years ago)
*Sell for $500K EACH with a Profit of $450k (because the same agent said the market is hot and property is flying out!)
My response is...What about town planning? what about developer contributions? What about interest? Stamp Duty? Land surveying? Services? Landscaping?? That's just the beginning. It's tough to see eyes full of fear when all these unforeseen costs have been brought into the picture and their potential investment goes down the drain.
Here are a few tips:
It's not a real estate agent's job to give you investment tips.
Do your market research and get to know an area before you buy or sell in it.
Builders will make a margin on the cost of materials and trades on your project.
If the land slopes, has a lot of steel, complicated roof, and structure then you will be paying A LOT more than what a volume builder can build per square. (That's why they don't build custom houses!)
You should do a proper feasibility study with absolutely every aspect to consider.
You don't know what to do then pay a professional to do one for you.
The most important thing to do before you purchase a potential development site is Due Diligence
Taking the necessary and reasonable steps to fulfill a legal requirement when buying or selling is very important. This will prevent any future problems, plus, it’s the right thing to do.
Another important thing to complete is a cash flow projection.
Most people leave this one out but interest can be the biggest killer of a project. If this seems like too much time and effort then the other solution is to partner with an experienced property developer.
Property Development can be financially rewarding but simple mistakes can also send you to bankruptcy very quickly.