Property development is a business fraught with risks, and the bigger the project, the greater the risk. However, there are a number of ways to minimise the risks in property development. Rebekah Blake of SMSF Property Capital suggests these six strategies to minimise your risk:
1. No Debt
If there were one way to decrease risk in property development, this would be it. Firstly, you must be exceptionally sure that you want to give away security over your development, and understand every risk you are willing to take.
You must understand that providing FIRST mortgage security to anyone means that your investment is at risk first - it effectively means that if anything goes wrong the cost will come directly from your investment, and you must be prepared to lose ALL of your investment.
Throughout the GFC most developers that had problems were at the mercy of their financier with lending levels v valuations. Investment funds that held debt against asset values were where investors lost most money throughout the GFC. This is because, if the landscape changes, the banks will require immediate repayment of facilities. If we can take one lesson from the GFC, this should be it.
One of the most successful property developers in Australia is Harry Triguboff, who has for years kept his company, Meriton Apartments, debt free, buying development sites with cash.
Knowing what you are buying before you buy gives you greater understanding of the future of your investment, and the costs associated with building.
Not having a development approval increases risk, and there is a price to pay for risk - just make sure that price you pay is not losing your capital.
It is vitally important that you have a very firm grasp on your end user - that is, who will buy your end product?
To get a strong understanding of your market, you should complete demographic research, price point research and research about what else is available in your market. Will your market want more luxury features or less? What else might they want that is not currently offered?
You should obtain valuations as your project is finished - preferably valuations that will be acceptable to a bank for the buyers to lend with.
Yep, it seems obvious, but disputes have long been the bane of the development industry.
What you need to consider is that the time spent having a dispute usually equals time that is not spent on building or creating value from a site. Every second that the builder is not on site and moving forward is costing you money.
Remember to allow your builder to make a margin. Most builders just like to build and, yes, they might make some mistakes - what’s important is to forgive them, remain friends and move on to get to the end.
Fixed price building contracts and agreements are the best way for a developer to ensure that your development continues. Ask the builder to provide a fixed price contract and ensure you are familiar with the state law under which you are signing the contract, and what this means when it comes to any possible dispute.
Property Development involves so many different areas that are, in fact, completely contrasting fields. From bankers to builders, the job of getting so many different personalities to work together at the one time sometimes seems impossible, if not improbable.
Many disputes come from people not understanding each other, so a key skill essential to any developer is negotiation and an ability to understand each party’s desired outcome.
When parties in a development are not aligned, friction occurs. This friction equals waste, and erodes everyone’s profits in a development. Don’t try and make your money from being “tricky” and tricking builders etc into transactions. There is enough money in the manufacturing process with property, just remember that the Development has to “keep moving”.
Communication between parties is also important as friction occurs when one party can’t get an answer back from another party in a timely manner.
When it comes to labour costs, developing a good team internally and externally and sticking with them will minimise waste.