By Carly Crutchfield
You have learned how to find a development site, how to analyse that site and also how to do a quick calculation to find out if it's worth researching further.
Now, it is time to learn
Step 3: how to conduct a full financial feasibility to make sure the site is profitable.
Full financial feasibility allows you to see the potential profit or loss of your development site. It shows you whether a development is financially feasible, if it is gong to be adequately profitable and whether it is worth researching further. Obviously it's not worth developing a site if it isn't going to make you any money.
Professional feasibility software helps work out every single cost in the development process, i.e. construction, GST, borrowing costs, interest to be paid, consultant costs and how much profit in both percentage and dollars. This is the stage where you get down to the nitty gritty costs.
For almost every single cost incurred in property development, that cost is negotiable. Here's an example:
Builders—To confirm how much each dwelling will cost to build (each unit, house etc that is being built).
Architects—To confirm what you can get on the site and to maximise the usage of the land.
Quantity surveyors—To give a rough estimate of costs for building and construction.
Engineers—Responsible for all the internal workings of the dwellings and to ensure that each dwelling complies with safety standards such as fire regulations.
Interest and finance establishment fees—Also negotiable.
Land purchase price—You can only pay for the land what will still leave you with enough profit.
These can all be negotiated, but what most people don't realise is that good negotiating can often be the difference between a development being feasible or not.
Shop around and obtain at least three quotes, bearing in mind that the cheapest is not always the best; ensure that you are not rushing into accepting the first price you find. In fact this should actually be a golden rule of life and is not exclusive to property development.
The main two prices that are negotiable in property development—and make the biggest difference to profits—are construction costs and land purchase price. These can always be negotiated.
You will need to enter details of the development into your feasibility such as:
By entering all costs—right down to interest rate and finance establishment fee—into a feasibility you will be able to see how much profit there is in a development. It is always important to include contingency costs to allow for any unforeseen circumstances because costs will blow out along the way and you need to be prepared to prevent them from cutting into your profits.
The banks will always look for at least a 20% profit margin before they will consider funding, so this must be the minimum profit that you aim for. Also, for the site to be worth your time and effort, this is the least you should aim to achieve from any development you wish to take on. If initially your feasibility only comes out with a 12% to 15% profit, then with some negotiating on costs you may be able to bring this up to 20%. However, we recommend you aim for higher than 20% profit to be safe and cover any hidden and contingency costs.
It is important to be aware of the current situation in the property market. For example, if you are building 20 threebedroom townhouses, you will need to project a figure at which you think you can sell these. It is absolutely essential that this figure is well researched and realistic or else it has the potential to throw your whole development off track.
You do not base this on last year's figures, you do not base it on the current trend, you base it on what similar properties in that area are selling for right now. Obtain actual comparable recent sales of similar properties in the area. If you base it on a rising trend and properties cease to rise in price then your profit figure will be wrong. If you base it on too long ago then again, you're figures will be wrong.
By basing it on today's actual sale prices, you are greatly reducing risk.
Costs will greatly vary per development. If you are going to build, construction costs will be your largest costs by far; these costs can differ from suburb to suburb. Building in an inland suburb is usually cheaper than building on a beachfront suburb, and there are many varying factors such as the soil type or land slope that would result in you getting different quotes. For example, a two-bedroom apartment in Bondi is going to be a lot more expensive to build than a twobedroom apartment in Blacktown.
A larger site will present different costs to build per unit, i.e., if you are building six units then they may be $180k per unit to build, but if you were building 60 units then they may $160k per unit to build.
Larger sites can also work out to be cheaper due to buying power. However due to extra amenities and services needed, the prices may be driven up. Such costs include:
Costs will vary per development. However, they can be similar and you will get to know ballpark figures for certain suburbs and styles.
There are many more costs involved in a raw site than a DA approved site. Developing a raw site means starting from scratch e.g. the cost of a DA can be anywhere from $10,000-$500,000 depending on the size of the site.
Generally the only income that you will receive from a development is the income you will receive from the sales of the dwellings once complete.
Remember: Don't be overly generous in calculating your income. Be realistic and base it on current comparable sales. The only person you will be fooling is yourself.
Once you have completed your feasibility study you need to make it look professional with all the information you have just gathered. The more professional the better, this pack has to show confidence, competence and profitability. It also needs to be realistic. Banks will use this feasibility study as one of the items to base your application for finance on and a few figures on the back on an envelope isn't going to cut it.
Remember you should only proceed with sites that have a margin on development cost of over 20%.
Now you have a profitable site and you're ready to get the development process underway. I will go into more detail on step 4 in the next issue: Financing, where I will be showing you how to go about financing your development and how to get started.
Log onto www.cdevelop.com.au/feasibility to download free feasibility software and to find out more on the courses that we offer on property development. Call 02 9371 4799 or email info@ccorp.com.au for more information.
Carly Crutchfield At the age of 28, Carly Crutchfield is a self made millionaire, the CEO of several national companies, has been involved in developments through-out Australia, New Zealand and America with a value of more than $200 million dollars and is currently undergoing several projects in NSW and QLD.
