The Recipe to be a Successful Property Developer
By Jacon Parry
What makes a successful property developer? A lot of people seek the answer to this question. And by successful I mean over the longer term, not just someone who landed on their feet as a result of a sudden surge in property prices.
In my years of managing projects I reckon that I have probably come across all types of prospective property developers and one trait that all possess could be described as ‘aspirational’ which is a good thing. Another of course would be ‘entrepreneurial’ – and another – ‘optimistic’. Whilst these are not bad traits they can lead you into trouble if you don’t apply a bit of common sense and caution.
A successful Property Developer needs many talents, one of which is a thorough understanding of the market they are playing in and a sharp vision and intricate understanding of all elements of that marketplace to match it. Successful property development involves bringing a project to market at a cost price that that is below what it will either sell for or value at and that has market appeal – in other words – one that people want to acquire.
I was intrigued to read an article recently by a financier named Dan Holden of Holden Capital who specialises in financing construction projects, wherein he identified seven (7) different ‘types ‘of property developer. They are (according to Dan, laced with some of my own thoughts)
- The ‘back of the ute’ developer: typically a former or current tradesman who has a lot of mates who will help out with the build job. Pricing and feasibility are very flexible and tough to pin down – “she’ll be right mate” is a common catch cry. No guarantee to be a successful property developer here!
- The ‘extended family’ developer: They comprise an extended family with varying levels of experience. Often the kids have inherited their parent’s property and feel they own a gold mine. Potentially this can be a recipe for disaster with emotions and other motivation outweighing pragmatism. Whilst often very experienced, they unfortunately misjudged both the state of the market and their level of exposure to it. Perhaps they got their timing wrong as many did in mis-managing some aspects of their projects. No guarantee to be a successful property developer here!
- The ‘Phoenix’ developer: People, who were successful developer’s pre-GFC, entered into somewhat rapid declines during the GFC due to unfortunate dealings with their creditors but are now rising again Phoenix-like. These guys, now with less equity, are now more conservative with their own limited funds and are looking for equity partners to spread the risk and / or leverage their own position.
- The ‘$1,000 option fee’ developer: These guys are always out there pounding the pavement trying to tie up development sites for a very small option fee over an extended period. Often they have limited equity or knowledge to develop the site themselves, seeking someone else to take it off their hands for a profit. These opportunists don’t really even qualify!
- The ‘2nd generation’ developer: “Dad was a developer, so I’m a developer”. Hopefully dad was a successful property developer and taught them well. If so, their chances of success are pretty good. Property development is a pretty tough business and a sound knowledge of the industry is a key advantage, but just because you’re a second-generation developer doesn’t guarantee success. The smart second generation developer learns from their father’s mistakes, and expands on their successes.
- The ‘know it all’ developer: They know it all can’t be told. They are an eternal optimist and believe that all property developments will work, regardless of the market, location or type of development. They also don’t need to do the proper research or employ specialist consultants who could assist with the development, especially in its formative stages. This type of Developer can also be likened to “The Debut Developer” or “The Genius” and the “Dreamer Developer”. No guarantee to be a successful property developer here!
- The ‘cautious’ developer: The cautious developer is the one who identifies risk up front and finds ways to mitigate these as much as possible. This type of developer believes that the success of each development is based on the success of their risk management plan. They also realise that they don’t know everything, and won’t hesitate to utilise the skills of others, where there is a gap in their knowledge and skills base. In reality, they are the “Smart Developer” and we love working with them because we know they will be doing deals for a long time to come.
In my experience, the ‘Phoenix’ Developer often has similar traits to the ‘know it all ‘developer and also, now with less capital available to them or a disinclination to risk their own capital, they have been actively breeding another new type of developer, the ‘Armchair Developer’, an idea enthusiastically supported by both numbers 1 & 4 described above.
The Armchair Developer is in truth usually just an equity capital provider, sometimes described as an equity partner. The idea being that the Armchair Developer shares in the profit of the development by way of a discounted purchase price of some of the finished project, which is all well and good but like everything else in life, the devil is in the detail. I have seen these schemes work extremely well and also fail spectacularly. Essentially the same rules apply in one form or another to this type of developer as any other.
Doing the proper research and employing specialist consultants in the formative stages is particularly important but so often we see people just charge off and get a DA on a shoestring and quite regularly those DA’s simply don’t work and are often back on the market again.
It’s not altogether unusual for us to make a few changes when we pick up a project that is part way through, and usually these changes were to things that could have been implemented at the outset but weren’t. One that springs to mind straight away was at Clayfield in Brisbane where the owner developer struggled for 17 months to get it off the ground but couldn’t get it to be financially feasible. It wasn’t that big a project but still involved a $1.1M spend, or so he said. We made some quite basic changes and got that spend down to $846K, saving our client some $254,000 and, mercifully, the project is now close to completion in less than 12 months.
So, what type of developer was he? Well he was one of the most common types of developer that Dan Holden didn’t classify. He was a ‘First Time Developer’ although he did come with a healthy sprinkling of both numbers 6 & 7 described above. At least he had a go and will be around to do it all again, unlike some.
In summary, our experience has indicated that the most successful property developers are those who:
- Are experienced and knowledgeable in what they are doing – OR appoint someone who is;
- Have employed the relevant experts (at reasonable prices) to undertake necessary specialist reports;
- Have properly researched the market, price point and location of their product & have a robust risk management plan in place;
- Have put a sound marketing plan in place;
Not only does Jacon bring experience gained over 20 + years to his role as a project manager, he also brings insight gained through successful completion of both his own projects as well as clients’ projects, something which most project managers are unable to claim. His experience spans the whole property development process from site investigation through design, DA & BA Processes to construction, Compliance, Plan sealing & titling and what’s more, unlike many, he is fully licenced by QBCC.