10 Common Mistakes Made by New Property Developers
Property development is no small undertaking and requires careful research, planning and strategy. As with any investment, it carries a degree of risk that can be minimized by avoiding mistakes that are commonly made by new property developers.
In this article, we take a closer look at the key pitfalls to be aware of when targeting residential property development or house building.
In this article, we take a closer look at the key pitfalls to be aware of when targeting residential property development or house building.
1. Not having a solid plan or strategy
One of the biggest mistakes new property developers make is not having a clear plan. This can result in rushed decisions, overpaying for land or making poor choices when it comes to choosing the right location. Without a solid plan, it’s easy to get caught up in the excitement of a project and make careless decisions that can end up costing you dearly.
Creating a plan for your development project doesn’t need to be complicated or time-consuming. But it is important to sit down and think through all the different aspects of your project before you get started. Here are a few tips to help you create a clear plan for your next development project.
Define your goals:
Before you can start planning your development project, you need to know what you want to achieve. Are you looking to create a mixed-use development with retail, residential and office space? Or are you planning to build a new residential subdivision? Knowing your goals from the outset will help you make better decisions throughout the planning process.
2. Overlooking the competition
When you’re planning a development, it’s important to be aware of the competition. What are they doing that you’re not? How can you make your development stand out from the crowd? Don’t be afraid to think outside the box and come up with unique selling points that will make your project more attractive to buyers or investors.
3. Failing to do your research or relying on free unqualified opinions
Another mistake that’s often made by new property developers is failing to do their research. This can involve not fully understanding the planning process, not investigating the local market or failing to get professional advice. Not doing your homework can lead to costly errors that could have been easily avoided.
The biggest issue here is not engaging the right professionals at the beginning such as
- Qualified quantity surveyors (QS) for accurate build cost estimates
- Qualified surveyors for accurate land value costs and subsequent end gross development costs
Another problem is not having sufficient and reliable market data.
Research the market:
Once you know what you want to build, you need to research the market to see if there’s a demand for your development. This involves looking at population growth, demographics and other economic indicators. You also need to research the competition to see what else is being built in the area and what type of development is most likely to be successful.
4. Not having enough capital
Another common mistake made by many new property developers underestimate the amount of capital required to get a project off the ground. This can lead to financial problems further down the line, so it’s important to make sure you have a realistic understanding of the costs involved before you commit to anything.
What is particularly surprising is the under-estimation of many upfront costs that the developer has to fund before the development finance lenders, mezzanine finance lenders or professional equity providers will release their cash - the simple rule is that, developers funds always go into any project upfront and recovered from profits last.
Upfront costs (developer skin in the game) include:
- Professional independent reports on project appraisal assumptions or business plan: quantity surveyor, land value survey including estimated gross development end value (GDV) etc
- Solicitors fees for the developer and lending providers
- Arrangement or commitment fees etc
Whilst some of the fees may be recovered/ refunded on successful land purchase etc a common misconception is not appreciating that the developer will have to pay for these upfront. Therefore, the need for working capital to cover such costs.
5. Biting off more than you can chew
Taking on too much too soon is a mistake that’s often made by new property developers. It’s important to start small and gradually build up your portfolio as you gain more experience. Trying to do too much too soon can lead to cash flow problems and put unnecessary strain on your resources.
6. Not having a exit strategy
Another mistake that’s often made by new property developers is failing to plan for the future. This can involve not having a clear exit strategy or not considering what you’ll do with a property once the development process is complete if the initial exit strategy fails due to unforeseen market events or other external factors. Without a plan, it’s easy to get stuck in a project and end up with a property that’s difficult to sell or let. Multiple possible exit options would give all stakeholders better peace of mind.
7. Not being prepared for the unexpected
There’s always a certain amount of risk involved in property development, and it’s important to be prepared for the unexpected. This can include things like unanticipated costs, planning problems or construction delays. By being mindful of the potential risks, you can help to minimise the impact of these issues if they do arise.
8. Failing to build a good team
As with any project, the success of a property development depends heavily on the team you put in place. This includes everything from choosing the right architect and builder to working with a reputable solicitor or mortgage broker. Without a good team, it’s much more difficult to deliver a successful development.
9. Not understanding your target market
Another mistake that’s often made by new property developers is failing to understand their target market. This can involve not research the local area or not having a clear idea of who your target audience is. If you don’t understand your target market, it’s much more difficult to create a development that will appeal to them.
10. Not being realistic
Finally, it’s important to be realistic about what you can achieve. This means being realistic about things like the timeframes involved, the costs involved and the potential returns you can expect. Trying to achieve unrealistic targets is a recipe for disaster and is something that should be avoided at all costs.
Conclusion...
These are just a few of the mistakes that new property developers often make. By being aware of them, you can help to avoid making them yourself. Remember, it’s important to start small, build a good team, understand your target market and be realistic about what you can achieve.
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