process and the risks involved you can embark confidently on your own projects.
A well-conceived, comprehensive plan is a key component of a successful development. Planning the project, from initial concept until final operation, should be thoroughly considered, analysed and managed. The planning should cover not only the design of the building but also the various development strategies to be applied. Very few businesses can operate successfully by means of crisis management, but there will always be situations in which the developer must make quick decisions, whether in negotiations or to keep the project on schedule. With proper planning these determinations are in effect not crisis decisions but are the result of the developer's selecting from a number of considered options.
Property developments can take longer than expected so the developer should carry enough cash reserves to navigate any slumps or unforeseen circumstances. It is good practice to allow for a contingency cash amount in your feasibility study. The successful developer keeps an eye on lesser items, such as minor overheads and additional professional advice, that may be required. A good financial package can add to the profitability of the project. The lower the cost of servicing a loan, the more profit will end up in the developer's hands. Good knowledge of finance and how banks operate places the developer in a strong position to negotiate a cost-effective financial package. The structure of the financing will play an important part in the evaluation of risks and how to react if the project fails to perform.
In most developments construction costs and schedules have a nasty habit of not keeping within the projected limits. Careful monitoring of budgets and time schedules is an essential element of a profitable development. Projects can exceed their budget as a result of unforeseen costs such as poor soil or rock conditions or the increasing cost or poor estimation of building materials needed. Each cost element should be thoroughly analysed before construction starts. Wherever possible, fixed prices or fixed rates should be negotiated with the contractor. In addition to budget controls, time and program schedules should be strictly adhered to. The longer the construction takes the less profit the developer will make because of the delay in leasing or selling the project. The extra time will also cost additional interest on money borrowed. At the time of negotiating the contract with the building contractor, the developer should ensure that there are strict penalties for any delays. Conversely, the contractor can be financially rewarded for completion ahead of schedule.
Developing property is undoubtedly one of the most complex businesses around. The key to a successful development is effective and responsible management – more specifically, management of the people involved. Every day the developer must deal with a diverse range of people, from professionals to government bureaucrats to contractors to building materials suppliers. Experienced developers understand that it is virtually impossible for one person to handle all of these people at the same time, so among the good management and leadership skills they learn is the art of delegation.
Successful property developers work on the basis that the real profit is made when a site or parcel of land is first purchased. Paying too much for the land would means reducing building costs at the expense of quality in order to make a profit. Only by having extensive knowledge of the area and market, together with the skills to negotiate a realistic deal, will the developer be able build a quality project. Negotiations can be complex, difficult and acrimonious, but there are various helpful negotiating tactics that experienced developers keep in mind throughout the process.
The building industry is riddled with stories of bad workmanship and poor service. We often hear of developers selling inferior products. Remember the old adage: you can fool some of the people some of the time, but not all of the people all of the time. It is very easy to spend a great deal of money in marketing your development, but if you do not deliver the goods as promised, people will eventually catch on and you may lose more money in the long term. If you want to make money out of property development there are no short cuts. Like any other successful business, superior service and products are of the utmost importance. Deliver these and you will enhance your reputation as a credible and trustworthy developer.
Before launching a new development, successful developers always undertake a thorough due diligence process on the project. This process will identify the potential risks and determine what strategies may need to be adopted in order to mitigate these risks. The successful developer will evaluate the development by preparing a detailed feasibility study to determine if the project has the ability to meet the targeted return. They will perform a sensitivity analysis by testing a number of possible scenarios to determine their impact on the profitability of the project. The developer should also understand other influencing factors, such as local government regulations and restrictions, local tax issues, and planning and environmental issues, and be satisfied they can be effectively managed.
In property development, luck has little or nothing to do with long-term success. Of the developers I know, very few believe that luck plays more than a very minor role in their success. One novice developer I spoke with recognised after reading my two earlier books that even though he had made money on his first project, he would lose money on his next if he followed the same principles. Opportunities present themselves to us all from time to time; some we grasp but others we overlook. Successful developers are no different. They have lucky breaks and disappointments just like everyone else. The difference is that more often than not they are working consistently and conscientiously towards a defined goal. Their ‘lucky breaks' are more likely to be opportunities that they have engineered in one way or another. In climbing the ladder of financial success, all developers have made mistakes and had setbacks along the way, but they keep going. Persistence is one of the key qualities shared by these developers.
The successful developer also has a very good understanding and knowledge of (a) location and (b) timing.
Location
We have all heard it many times: ‘Location, Location, Location' or ‘Position, Position, Position'. Of course, what is a good location for one type of property use may be entirely unsuitable for another. For example, a high traffic area may be ideal for a commercial property that would benefit from the marketing exposure but much less attractive for housing. A good location is part of a cohesive structure that takes into account a combination of amenities and services such as shopping, recreation, quality housing, efficient traffic network, education facilities and efficient council services.
Timing
Another critical factor is ‘Timing, Timing, Timing'. Most failed developments have not been in tune with the economic cycle. The developer has not read the market correctly and has introduced the product when there is an oversupply and demand has waned, creating a drop in prices and resulting in a severe financial loss for the developer. Supply and demand together with price fluctuations affect all investment markets. Poor developers tend to believe that when markets are buoyant and prices are rising, these conditions will go on forever. Unfortunately this is not the case, and many developers come unstuck by failing to understand the property market cycle, explained later in this chapter.
At the start of a new project successful property developers establish their objectives, including both short- and long-term goals. These objectives fall into the two broad categories of financial and social. They consider any significant challenges and related risks they may encounter in pursuing these objectives. Each project type, whether residential or commercial development, has its own set of unique requirements for operational and financial success. For example, developing and managing a shopping centre is different from developing an apartment block.
Financial goals
The successful developer determines how much profit should be
