Property Development 101 – Part 8

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So, you want to be a property developer!

Property development can be a great way to make money, if you know what you are doing. The property development process can be a long and complex one, from finding a site and selecting the builder to financing the deal and building and selling. Property development can lead to significant profits but it can also lead to significant losses so the more you have planned and thought about your project, the more likely you are to succeed. Remember the old saying, “A failure to plan is just a plan to fail”.

This “Property Development 101” series won’t be able to teach you everything there is to know about property development. However, if you read each instalment, you will learn about the fundamentals of property development and it will make you aware of what questions you need to ask so that you can make educated and informed decisions.

In this “Property Development 101” series, I will be outlining the major steps involved in property development. These include:

Setting your goals

Research

How to find development sites

Choosing the best site

Drawings

Feasibility studies

Working with council

Selecting a builder

Finance

Project management

Real estate agent/property manager

Tax

In the first instalment I outlined some strategies in relation to goal setting and research.

In the second instalment I detailed some methods on searching for development sites and then some considerations when selecting the best site to develop.

In the third instalment I provided an insight in to the design and drawings for a development.

In the fourth instalment I looked at one of the most critical components of property development, the feasibility study.

In the fifth instalment, I outlined what to do when working with your local council or shire so as to obtain approval for your development.

In the sixth instalment, I addressed a number of issues you need to consider when selecting a builder for your project.

In the seventh instalment I touched on some of the major considerations in relation to property development finance.

In Part 8 of the Property Development 101 series, I look at project management.

Overview

If you lead a busy life or you are relatively new to property development, I would strongly encourage you consider using a project manager. A good project manager can save you both time and money and you can also learn about the many steps involved in property development.

If you do engage a project manager, get them on board from the very beginning. By doing this, they can coordinate the whole project, from initial discussions with Council, to consulting with the building designer, overseeing the construction and working with the local real estate agent.

Why use a project manager?

I know many “mum and dad” developers are wary of paying for anything they think they can do themselves. The reality is, if you plan to spend $1,000,000 so as to make $200,000 profit, you shouldn’t skimp on paying for expert advice.

I outline fees later in the article but you shouldn’t quibble about paying tens of thousands of dollars for expert advice if you intend to make hundreds of thousands of dollars in profit.

How do you find a good project manager?

If you are going to use a project manager, make sure you choose a good one. A good project manager should:

· Have the right contacts – e.g. building designers, local agents, surveyors, engineers, planning consultants, builders, etc.

· Suit your project. Some project managers specialise in high density developments. Others focus on commercial property. Find a project manager that has experience and success with projects that are similar to yours.

· Conduct a preliminary feasibility. The preliminary feasibility will tell you whether the project is worthwhile or not. If it is worthwhile, the preliminary feasibility should give you an indication as to how much profit you will make. A more detailed feasibility may need to be completed by a valuer.

· Be recommended by others. Don’t just search the internet for potential project managers, ask other developers or check reputable blogs or websites for recommendations.

What will a project manager do for me?

Below are just some of the major tasks involved in property development:

· Finding the right site

· Liaising with Council

· Consulting with town planning professionals

· Talking with local real estate agents about the best options, depending on whether you want to sell or rent the dwellings.

· Market research. This includes determining the optimum sized blocks, optimum sized homes, configuration of homes and internal lay out of dwellings.

· Providing input to building designers

· Gaining necessary planning approvals

· Conducting a preliminary feasibility study

· Selecting a builder

· Liaising with the builder during the construction phase

· Selecting the right agent to sell/rent the dwellings

Project managers can do as little or as many of these tasks as you want them to do.

How much will a property manager cost me?

How long is a piece a string? It is very hard to specify how much a project manager will charge but below are a few guidelines.

· Some project managers will charge a fee based on the percentage of the total project cost. For example, if the whole project including land and construction is worth $1,000,000, they might charge 2% to 3% ($20,000 to $30,000). This does not include finding the project site.

· Some project managers will ask for a percentage of the profits. If we use the above example and the gross profit is $200,000, they may charge 10% to 15% ($20,000 to $30,000). This does not include finding the project site.

· Some will want to be paid on milestones. There will be an upfront commitment fee, a set fee for finding the property, another fee upon gaining planning approvals, the next fee due when building contracts are signed and so on.

· Some charge based on an hourly rate.

My personal preference is for a combination of three methods; a fixed fee to find the property, an hourly rate during the project plus a percentage of the profit. If the project manager is any good, they shouldn’t have a problem with “having some skin in the game” and being paid in part with the profits that they have projected you will make.

Time is money in property development, so less time wasted equals more money in your pocket!

Written by Peter Koulizos – lecturer and author – www.thepropertyprofessor.com.au

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