Just Because Your Feasibility Stacks Up, Doesn’t Mean That It “Stacks Up”

24/01/2013 9:17 am

The allure of property development to many people seems too attractive. People perceive developers as fat cats with cigars and Ferraris and believe that property development is how you get there. We have seen people buy a property, spend money on some drawings, gain a development approval and then… either no development happens or part of it is built and the owner runs out of money. So why isn’t everyone a property developer. Most people thought they were from 1997 – 2004. People are out there in the property world designing duplexes, villas and units, gaining approvals and rezoning land. “Build it and they will come” they said, well maybe not. Just because you rezone a residential property to commercial or increase the density from a farm to a high rise apartment block does not mean there is always a market for it. Your development does not stack up if there is no demanding market for it. 

Everyday we see feasibilities with crazy assumptions on how quickly a block of units, some villas or even a house knock-down-rebuild will sell. This is by far one of the most critical aspects of your feasibility, the sale rate. By the time that you finish building your subdivision, duplex or units, you are at the greatest financial exposure in the whole development. You have paid for the land, construction, authority fees, consultants and let’s not forget the interest on your borrowed money is now being calculated at peak debt. You need the money in the door ASAP to stop the interest payments and make your return because guess what, you may have started out at 25% profit, but every week you don’t settle on your stock, your profits keep getting eroded and very quickly you have either made nothing or even a loss. Don’t be bullish. If you have 10 units and it takes you 6 months to sell them, include that delay in your feasibility.

Ask yourself, if other subdivisions in the area are selling 1 lot per week and you assume equal or more, why? Will your pre-sales go that well? How many people will cancel their deposits? Are you being pioneering? Are there any examples of similar developments? Why is someone going to give you hundreds of thousands of dollars or millions of dollars for your product? What makes your development so special? Is there a market for your product? And how quickly can you sell it?