My inspiration to write this article came from one of my clients who has successfully completed several multi-apartment developments with Zegna. Each project has generated a great return and helped them to work less hours, increase their income, improve their health and create the option for early retirement.
This was not always the case.
We first met after I was referred to them by a mutual colleague. They were filled with hesitation after an experience on the east coast with another developer who didn’t have the experience to manage the project effectively, they lost money and felt burnt by the process.
Property development is an exciting and rewarding journey to embark on that is rich in reward when you know what you are doing. There are a lot of people out there who think, “Yes! I can do this myself, no problem!”… only to find out in the process – the complexities and experience required to effectively navigate the steps to achieve the desired return on investment.
To those who have successfully developed on their own, I commend you. To those who are thinking about developing on their own, this article is to educate you on what can go wrong and the reasons why you shouldn’t do this alone. It’s to help you make informed decisions and give you the best chance to make your experience with property development a positive one.
1. The wrong feasibility
Feasibility is working out how much profit you are going to make on your project once all your costs are covered and the expected sale price is achieved. From day 1, if your figures are wrong and you don’t understand the market, you simply cannot maximise your return and most likely not even get the project off the ground.
To get this right, you need to talk to the right builder who understands property development, a sales agent and a financier (bank/broker) that you trust. Generating accurate figures requires years of experience, the success of your project hinges on this being right otherwise you simply won’t get finance. You can talk to 3 different people, but they need to be the right people.
2. You buy the wrong site
Location! Location! The importance of a successful development is to factor in your land and area selection in a way that’s conducive to the end sale price – it has to work in the apartment’s favour.
Often people will buy land in area they know and feel comfortable with, it may be a site that is close to home or that has a low price. This doesn’t necessarily mean that it’s going to be the basis of a successful development. The price may be low because of sloping land or easements, the surrounding buildings might not be conducive to the end value of the development and impact views.
3. Wrong finance and terms
Lenders will finance your project based on risk and in the eyes of a bank, someone developing on their own without experience is a risky prospect. To manage risk, a lender will charge a higher interest rate and/or require a higher deposit. Put simply, you will need to pay more for your money whether it is through a lender or by raising funds privately – the terms can become onerous and your profit will be impacted.
If your project is seen as too ‘high risk’, the lender will walk you to the door and you don’t get the deal through on the land you’ve purchased. Are you aware that the banks don’t fund the gst component of the build? (you need to fund this portion yourself). The point I’m making here is that when you are not working with people who have the experience to guide you, there are plenty of hidden costs and requirements that may not show up until it’s too late.
4. Employ the wrong architect/designer – wrong design
The rules have changed and design requirements for apartment buildings have now come under the authority of Design WA. This is a State Government initiative to ensure good design is at the centre of all development in Western Australia.
If your architect doesn’t design to the right codes and requirements, your local council will not even look at the development application. If it does progress past council, it then needs to be approved by the JDAP (Joint Development Assessment Panel) or even SAT (State Administrative Tribunal). At this stage there are now lawyers and layers of authority who are involved in the approval process.
It’s important to get this right the first time otherwise it can cost you substantially more time and money for your project to be re-designed and re-submitted.
5. You contract the wrong builder
Is your builder strong financially? Does your builder have enough indemnity insurance to do the project? Does your builder pay their sub-contractors on time? Have they got experience in advising you and holding your hand through the design, development, approval and construction process? Do they meet deadlines and provide a high standard of work? There are plenty of great builders in Perth, make sure you are working with one of them.
All of these questions must be answered favourably to ensure a successful project. If your builder isn’t experienced with apartments and they write up the wrong specifications and start charging you variations – it can lead to unnecessary stress, problems, loss of time and money and the build simply may not get completed.
6. You’re not developing to a specific market
You need to understand WHO is buying your completed apartments.
You can’t just build apartments and expect people to buy. There are a lot of projects out there that reach completion and can’t find the right buyers because the project hasn’t been designed and built to a specific market. Mastering the right balance for a successful outcome takes years of experience accompanied with advice from the right people.
7. You over or under capitalise the development
This is a very common mistake made by developers. They can have a tendency to over-capitalise which means getting emotional and becoming attached to the project finishes being based on what they would want to live in, in contrast to the market that it is built for. When you’re developing, you’re not building your dream home, you are building for a specific market. The extra you spend, you won’t get back, the market won’t allow you to charge for that.
Under-capitalising is when you’ve under spent on the product and not built an apartment that justifies its sell price – you’ve run out of money and the finishing is compromised. For the feasibility to work, you bring your construction costs down and end up not building to the market expectations in relation to sale price and desirability. Either way, you end up with apartments that either won’t sell at the price set out in the feasibility or you won’t achieve the desired profit.
8. Project goes over budget
When you project goes over budget, this is called ‘cost over-runs’. An inexperienced developer doesn’t understand all the costs involved at stage one. For example, you might underestimate the headworks by $12,000 or need a power upgrade of $10,000, the list goes on.
You may miss some things as the people you’re employing aren’t overseeing the entire project and all associated costs. The cost over-runs need to be paid for by someone, if the builder is not paid, the job stalls. You need to know who to trust to ensure you remain within your budget and all costs are covered. By the way, some variations are not financed by the banks and you will need to come up with that money yourself.
9. You don’t have an experienced builder-project manager, or it’s you.
A builder-project manager that has development experience brings all the consultants and contractors together and is the person to which they are held accountable to. This is either you, or the person representing you. Without this person in place – who represents your best interests?
There’s a lot of risk to manage in property development. Without an experienced builder-project manager, you jeopardise the job not being completed on time and on budget with ease of sale to generate your return. Zegna is both your builder and project manager.
Taking care of YOU.
Zegna is a property development strategist, project manager and builder, this combination is our specialty and our point of difference. We’ve often have our own projects under construction and as a result, we know how to take care of you. We use our proven experience to help our repeat clients generate equity and profit with ease. Our clients don’t have cost overruns and the banks love that – I understand all the pitfalls a developer can endure and take that stress away.
We love our clients; they allow us to do what we do best – make them money and create more freedom in their lifestyle.
We practice what we preach. We build anything, anywhere at any time.