Tips for undertaking a Development
Undertaking a development can be a daunting task. There are numerous aspects to consider and there is always the need for money. Seeking advice and assistance from professionals is essential to making the right choices and at the right times.
I have personally been involved in my own development. This experience I found gave me an unique insight into all the different parts of the subdivision and development process. Coming from the unique experience of a developer and a professional planner and surveyor I have composed a list of, what I consider, important points any developer should consider.
You can either scroll through my advice or search under the following topics:
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If you are looking for the right piece of land or the right place, be prepared to look at 20 places, make an offer on 10, but only go ahead with 1. Do not rush in to buy every piece of land you look at.
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When you buy a property and you make the offer subject to conditions, at the very least make the purchase subject to due-diligence. Due-diligence means you can look at every aspect and the proposal does or does not stack-up, and you can get out of the contract on that basis. Other conditions, such as Accountants approval are covered by due-diligence. From my experience bombarding a seller (vendor) with lots of conditions just puts them off.
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Get advice from your accountant over the financial side of the development.
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Get advice from the Council.
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Get a LIM report (Land Information Memorandum).
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Speak to a surveyor or a planner.
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Speak to a real estate agent, preferably not the agent or agency involved with the seller. I have been told by the vendors real estate agents in the past "I am paid by the vendor and therefore work in their interest".
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Never speak harshly or make the vendor feel worthless.
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Your stress, costs and time is worth at least a 30% return on any development you partake in. Anything less than 30% you may as well earn interest in the bank, finance company or gamble on the stock exchange. Most big time developers usually look for a return of at least 200%, however this is only possible on large developments, such as 200 lot subdivisions.
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Never take on more debt than you can service. It is better to bring in a partner than to go bankrupt or become severely financially stressed.
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When you buy a property, my advice is to get a mortgage that is interest only. There is no need in worrying about paying extra money during repayments because at the end of the development the mortgage will be repaid.
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You need to choose who owns the development. This can be you, a partnership, a trust or a limited liability company. With both yourself owning it and a partnership, liability for anything that goes wrong comes back to you making you financially liable. With a limited liability company if anything goes wrong, you are not financially liable and therefore the worst case is the company being declared bankrupt. However, limited liability companies have more tax complications. In my opinion it is better to do a subdivision as a limited liability company.
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Expect to be paying and receiving GST, have your accountant arrange this. At least to start with and until you start making sales you will want to have the GST returns and refunds done on a monthly basis, this minimises the amount of money that is required.
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Avoid creative accounting and anything that requires a lot of justification to convince yourself, it probably not legal.
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If there is more than one person doing the development, have one person in charge of dealing with different aspects. For example have one person deal with the surveyor, planner, accountant, etc, this avoids miscommunications and extra costs.
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Something that is rarely considered when doing a subdivision is the staging of the development. For example you can develop the property in segments, where the earlier stages fund the latter stages.
An example of how this could work is if there is a house on a subdivision, houses are generally easier to sell, therefore staging the subdivision so that the house is the first thing sold, which can finance the development of the rest of the property.
The main benefits of staging is that you limit your liability and decrease the borrowing you need to make. I funded a development by staging a subdivision so that the GST return from the purchase of the property paid for the developing of Stage 1, which paid for stage 2 where I also made the profit.
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Make sure the development is looking good. Do not try selling until the subdivision is complete. If you do try selling minimise the number of lots sold. From my experience people can see how good a job you have done and can see what they can do with the property.
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If you are selling an empty house, put some furniture in it so that people can imagine what it will look like. From personal experience, it has increased offers by around 8 - 10 %.
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You can either try selling the properties yourself or alternatively sell with a real estate agent.
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Using a real estate agent is generally the easiest option, and when the property market is flat is the best option. Usually an agent will charge you 4-4.5% of the value of the sale plus GST on that sale, however you should be able to strike a deal between 3.5% and 4% plus GST.
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Expect to sell the first few sections for less than they are valued, but the last few sections sold should be sold at a premium.
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If there is no title when a section is sold, the deposit goes into a solicitors trust account and settlement is not until after the title is gained.
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Have some plans for kitset houses available for people to have some ideas.
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If the purchase going unconditional is dependant on the purchaser selling their house, make a condition whereby if someone offers a cash purchase (no conditions), then the conditional purchaser has 24 hours to go unconditional or you can accept the cash offer.
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Assume you are going to pay tax, therefore put aside the money for tax and do not spend it!
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