When I get clients wanting to see me to discuss how they can become a property developer you know the property market is doing ok! However, what I explain to them is that it is not as simple as just finding a site, then building and selling then finally sitting back and wait for the money! The risks are high and a lot of things can go wrong which may mean you could lose money. So it’s just not that simple.
Let me share with you a model on how a property developer can make profits without having to construct the dwellings and then sell them. Although there is risk throughout, construction is where the majority of the risk lies…during the period it takes to construct property, prices could come down, delays in building due to weather and other building costs could go up, interest rates may go up …. all of which can eat into your profit and potentially turn it into a loss.
6 Steps to profit by not developing
I have a long standing client who follows a property formulae year in and year out through good and bad markets. I know it sounds obvious but to many developers who believe that the profits are made when you sell the end product, it’s not …in fact .it could be the opposite and if you structure the deal correctly the profits are made when you purchase.
My client makes his profits when he buys the site his formulae is not that complicated although it takes experience and know how.
1. He has a reverse agency arrangement with many local Real Estate Agents to incentivise them on referring opportunities before they go to market, similar to a buyers agent agreement where you pay the agent to source the property on your behalf, it’s all about filling the funnel with opportunities and eventually out of the funnel will spit a gem. When the market is strong there are plenty of buyers and you need to get a competitive edge by getting first bite of the cherry.
2. When he assesses the deal its always done on the basis of taking the project right through to completion (construction and sale) even though his aim is to on-sell the site prior to construction.
3.The settlement of the land is always subject to a successful development application, he will always work with options on purchase or offer to pay the vendor more to incentivise him to stay around and share in the success…. the trick here is the way the deal is structured as it reduces the risks of not getting a DA.
4.He is always looking for sites that have a twist…perhaps council are negotiable on how many units can be built on the site, perhaps future transport links are planned, what he is looking is to maximise the potential of the site for the next person in the food chain. He only has a certain sized parcel of land if he can squeeze more units that improves profits for the next person this makes the land more valuable.
5. He invites like minded investors to join his team and invest …and these people can contribute in their own way for example he has an Architect, Builder, Accountant, Real Estate person. All these people bring something to the table. He then corporatises the process to ensure transparency and he has the sounding boards of experience.
6. Finally he generally on-sells the site once the DA is approved and understands that there has to be a margin available for the next person, I have seen him follow this strategy time and time again and although he doesn’t make or take the margins on construction he is quite comfortable to take less return but at the same time less risk. This also gives him the ability to move quickly into the next project. He has lower margin but higher turnover.
The above model has been simplified for this article and there is a lot more detail with each step but it’s just another example of a Property Development system (there are many systems) as with any property development there are still risks associated with this model but it’s an interesting concept to keep in mind, property development at this level requires specific skills and experience. My suggestion is if you are seeking to get into this type of business ensure you have the right people around you to advise and hold your hand through the process and always remember the success of the project is determined on purchase so take your time to ensure you strike and structure the right deal.
Please always seek professional advice on your individual situation before embarking on such ventures.
Founder & Non Executive Chairman – Chan & Naylor Accountants
Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs. Click for more detail regarding this disclaimer.