Property development has been described as a high-risk, high reward industry. There are numerous risks attached to this particular business; stories abound about how even the biggest property developers) globally face uncertain circumstances (case in point Chinese giant Evergrande.)
Success in this industry means being able to dig into the research troves and fine print, and talking to and working with the right people. With the right information and approach, you can avoid these eight common mistakes investors make in the industry.
- Developing On a Whim
Some developers may have project financing ready while others use various methods such as off-plan purchases and credit from financial institutions to fund their property development ventures. Financing alone isn’t enough to make one qualified to invest. One should have a steady understanding of the prevailing market, such as what people want, and where they are buying.
- Incorrect Estimations of Time and Building Costs
Whether it is a small residential building or a large commercial development, thorough planning is the key and hallmark of any successful property development venture. This can only be done by carrying out feasibility studies to extract any unprecedented scenarios that may occur, for example, unsuitable site conditions. A feasibility study will enable you to make an informed choice about whether to proceed with the venture or not.
- Not Engaging the Right Team
It is imperative that any developer has the right people surrounding them, be they architects, MEP consultants, structural engineers, contractors, town planners, QSs, etc. Since it is highly unlikely that the developer will have this team in-house, a project manager such as an architect can always provide connections to the rest of the project team which will be well-trained. They will also be able to provide suggestions on cost mitigations, site conditions, how to reduce costs without affecting quality, etc.
- Engaging an Inexperienced Contractor
The builder or contractor is easily the most important part of the project team. Hiring an inexperienced builder can lead to massive losses on your part as a developer. There should always be a contingency plan as part of the contract, for example, liquidated damages, that allow you as the client to claim monetary compensation in case the contractor is slack or produces deficient work.
- Failure To Properly Estimate Liquidity Requirements
While ambition is a key part of success, blind ambition can draw a developer into the trenches of debt and insolvency. Before embarking on any project, it is crucial to have enough project financing that can cover paid phases of the project, specific milestones, or even something as crucial as labour and machinery hire. Lack of finances can cost project delays that can chip away at your profits and drive off potential clients.
- Poor Planning and Coordination with Local Authorities
For large commercial and residential developments such as gated communities, it is important to get all the approvals from the local authorities and regulators before embarking on the project. This will not only serve to improve the rapport between the developer and the authorities but may just end up saving the developer from cases of disputes and litigation as well.
- Engaging in too Many Projects Simultaneously
Many developers fall into this trap, by using funds from one development on another venture, or by taking on multiple projects at once that they can’t handle. Real estate is an unpredictable industry and such a move may cost you greatly
- Going “Low” On Everything
An overly cheap design from an architect or engineer, or a builder who prices their services at ridiculously low margins is always a red flag. Likewise, while the developer may want to keep everything cheap so at to achive maximum profits, it is important to remember that some clients are ready to pay more for quality.
Conclusion
Granted, property development is a risky business; however, there are some mistakes that developers can avoid by putting the above tips into practice and carrying out their due diligence.
