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Bill O'Neill's tips for small developers

Bill O’Neill is a veteran of a number of small development projects and is hoping to work his way up the chain to become a full-time developer. One of his projects, a duplex development with a studio apartment added into the mix, is featured in API’s January 2008 issue. Here Bill shares his experience by providing his top tips for other small developers.

1. Understand and be aware of the costs

The costs you need to factor in when budgeting for your project include: land purchase; stamp duty; construction contract; architectural plans; variation to plans; floor coverings; other building costs; mortgage repayments during the holding period; possibly lenders mortgage insurance; utilities; body corporate set-up and costs; solicitors’ and accountants’ fees; and sales fees.
This list accounts for nearly all of the expenses. Also, if appropriate, understand and research demolition costs.
If you can factor all of these in when budgeting and have a good idea of the properties’ end valuation you are well on your way to knowing what it will cost you to complete your project. It’s important you do your research here and compare your findings with actual sales data from other developments.
Speak with builders to get a square metre construction cost relevant to your area as this varies considerably from city to city. That will give you an idea of how much the proposed site will cost to build.
Consider associated costs such as stamp duty, architect and council fees and speak to relevant companies and authorities so that you can be confident your estimates are accurate. These must be accounted for in your budgeting. You also need to conduct a good review of inclusions as there are often a number of things that you may think are included but actually are not in the building contract.
Add all your costs to buy, plan, demolish, construct as well as holding costs, not to mention any early mortgage exit fees and sale costs. Now take this total from your end valuation. These basic yet essential costs can often be listed on a single page. Don’t overcomplicate it in these early stages and don't try to force it to work. If it doesn’t look like it will work at this point then you should start looking at a different way of tackling this site or possibly consider another development altogether.

2. Have a basic understanding of the council rules in your area

Get a grasp on council planning rules for your site. For preliminary talks the council is a great source of knowledge to determine what is possible on the site you are looking at. Also use town planners and architects.
I have always used an architect to design my plans rather than going direct to a contract builder. The reason for this is that as the owner of the plans, you have the ability to get multiple quotes from builders and you are safe in the knowledge that you are comparing apples with apples.

3. Find a builder who fits your development type

There are many different types of builders out there who prefer to do particular types of construction, from renovations to luxury homes to small developments etc. Find the type that fits with your plans and then research their background. Ask to see previous buildings and see if they will allow you to call or speak with previous and current clients.
Investigate the time it takes to develop and the holding costs attributed to the entire construction phase. This finance becomes very expensive towards the end, with the final few progress payments and your mortgage at its highest and without any rental or sale returns to offset it.
Your builder will give you an indication of the time to build the project and this will also be reflected on your contract.

4. Know your market and end valuation

Understand who you are targeting and the end valuation of the product you are building.
Knowing what you are building and who you are targeting is often best discussed with your local real estate agent. With the opportunity of a future listing you will find them most accommodating.
Also look at similar products that have recently sold to get an indication of what you will be selling for.
When deciding on extras I always think carefully about whether it will add value or not. Don’t spend good money on unnecessary expenses that don’t have a reasonable chance of getting something back in return. Higher rent or sale value should be the main focus for the development.

5. Respect the bookkeeping involved and time required to complete the development

It’s not all fun with plans and watching the building go up. An understanding of the costs and basic bookkeeping is very important.
In order to receive you must give and in this industry you will need to constantly give of your time.
Be prepared to give up a lot of time, including lunch breaks, afternoons, weekends and dare I say it holidays, to ensure things are running on track.

6. Take action

If everything seems to fit and you are comfortable with the profit margin you are expecting to earn after taking into account the expenses and the ongoing holding costs then start taking action and go for it.