Avoid these mistakes in residential development
Mistake No.1 - Letting personal emotion get in the way
It's important to remember that residential development is a business, and decisions should be made based on sound financial analysis and market research rather than personal preferences. It's easy to get emotionally attached to a project, especially if you've owned the property for a while, or it might had been your family home in the past. But it's important to stay objective and only make decisions based on facts and figures.
Mistake No.2 - Purchasing at the wrong time
Timing is critical in residential development, as the property market goes through cycles of ups, downs, and in-betweens. It's essential to be aware of market trends and avoid buying a development site during a hot market when bidding is fierce and prices are inflated. On the other hand, when the market is slow, auction rates are dropping, and vendors are struggling to sell properties, it may be a good opportunity to secure your next development site. Purchasing at the wrong time can result in overpaying for the site, which can severely impact the feasibility and profitability of the project. It's important to stay informed of market trends and make well-informed decisions about when to purchase a site.
Mistake No.3 - Paying too much
Overpaying for a potential development site is a common mistake that can significantly impact the viability of a project. With skyrocketing construction costs, nationwide labor shortages, and rising interest rates, it is already challenging for developers to make projects financially feasible. Overpaying for a site can compound these challenges, making it nearly impossible to achieve an acceptable return on investment, and the project may never come to fruition. It is critical to carefully consider the site's value and negotiate a fair price to ensure the success of any residential development project.
Mistake No.4 - Lack of due diligence
From purchasing an $800k site to a $20 million site, it's surprising how little efforts people put into their due diligence before signing on the dotted line. Due diligence is a critical task that should not be taken lightly because there are numerous factors that can significantly impact a development's feasibility. Often, this information is not readily available and requires thorough investigation to identify all critical details that can make or break a development project. For example, infrastructure assets like sewer, stormwater, gas, power, and NBN may affect the design, and the presence of power poles or council stormwater pits on the nature strip may pose issues. You must also consider how your proposed design affects neighboring properties, including overshadowing or overlooking issues. The list of potential issues can be extensive, and it's common for developers to assess tens or hundreds of sites before finding one that ticks most of the boxes. Conducting due diligence de-risks the project by identifying potential issues, increasing the chances of delivering a successful project. Therefore, it's crucial to take the necessary time and effort to conduct thorough due diligence before purchasing any development site.
Mistake No.5 - Under-estimating the time for development
Underestimating the time required for a development project can have significant financial consequences for developers. The size and complexity of the project will determine the time frame required. For instance, a small townhouse development in Melbourne may take 12-18 months from concept design to council approval and another 12-18 months for construction. This means that it could take up to three years before generating any income from settlements. During this period, developers must bear various expenses, and thus, it's crucial to factor in cash flow requirements and allow for adequate time to complete the project. Running out of funds before project completion is a significant risk that can be mitigated by accurately estimating the project timeline and cash flow requirements.
Mistake No.7 - Under-estimating the costs of construction
Underestimating the costs of construction is a common mistake made by developers, particularly those without a background in building and construction. During the early stages of feasibility, there may not be actual plans or designs to work off, making it challenging to estimate the actual construction costs accurately. This underscores the importance of experience and knowledge in building and construction to ensure that enough is allowed to cover the construction costs. Without adequate budgeting, it can become difficult to secure financing, and the project may stall midway or fail altogether, resulting in significant financial losses.