After all that work you can finally get to the fun part, constructing the property!
Just like the last article which looked at the Development Application, this step in the process is very much personal to you and your development project. I will share insights and learnings though which I picked up in my own developing experience.
Fixed Cost vs Time and Materials
Rewind a few articles to Article 1 where I mentioned the vast estimate difference I received between the two builders I engaged for this particular project. The fixed cost builder quoted me a total all-inclusive cost of $1,100,000, while the time and materials builder quoted me roughly $740,000 for materials and $60,000 for his labour. I decided to go with the cheaper estimate as his materials list seemed in order.
This was a very expensive lesson in both financial costs and in humility. I had an experienced builder who had completed 2 of my previous developments telling me that $1,100,000 was the lowest he could go but I still went with this new builder who came in $300,000 cheaper without me questioning him too much.
Ultimately the development costs ended up coming in at $1,100,000. Which was an incredible $350,000 over budget. There were quite a few costs that I hadn’t been aware of that my builder never took into account.
In hindsight, the apparent $300,000 savings blinded me from digging too deep into his quote. As the saying goes “when it’s too good to be true it probably is”.
This was an expensive lesson but I’m glad I made it early on in career and was still able to end up with an overall profit. More about the final profits later though.
Monitoring the Builders Work
Now, legally the builder has an obligation to execute on everything listed in the contract. This however never stopped me from visiting the development multiple times a week to check in on progress and the quality of his work.
A lot of the times the mistakes I picked up on had just slipped through the cracks so he was grateful that I had picked up on them. The key is to find errors before they can’t be rectified (yes this can happen).
Even if you visiting the site multiple times a week ensures he is constructing as fast as possible it will still be worth it. I ended up renting one of my previous developments for $1,360 a week, so every week the job got delayed, I would have lost $1,360.
The Occupational Certificate
Once you are in the final stages of the development, you will need to obtain an occupational certificate. This certification is what you are legally required to obtain before any potential buyer or renter moves into the property. It ensures the property is safe and has been developed to the standards set out in the development application.
You or your builder will need to engage a professional to complete this for your project.
Subdividing the property
If you are building multiple properties like a duplex, you will need to sub divide the property. This process will take your original piece of land and divide it into two (or more) individual pieces of land. If you don’t do this then you essentially have two houses on the same land which is valued at a much lower price. You also won’t be able to sell the properties individually as they are both on the same piece of land. The process to subdivide the property is as follows:
- Obtain the deposited plan Administration sheet and section 88b forms from your surveyor. This person is generally appointed by your builder.
- Have all relevant parties including council representatives, your bank and the owner of the property sign on the relevant sections within these forms.
- Take these executed forms along with the subdivision plan and submit them to LRS for processing. If there are any issues with your paperwork the LRS will send it back to you to address the issues.
- Your solicitor will then have to liaise with your bank to exchange the new deeds.
Selling the properties
Well after roughly 18 months the property was developed and subdivided. I negotiated a good rate with the best local real estate agent and put the properties up for sale. In total they sold for $2,400,000 which was less than the original estimate due to the state of the market at the time.
As you have probably already calculated most of my profits were eroded by the huge increase in costs which were not captured by the time and materials approach.
Ultimately after all costs I made a measly $50,000. Now I don’t mean to be ungrateful, however on my total outlay, my return on investment was extremely low and would be considered a terrible return for any development project.
Now I could have shared the previous two developments with you which netted me a million dollars and cash flow positive properties but you wouldn’t have learned anywhere near as much as I hope you have by me using this less profitable development.
I truly hope you have learned something throughout this series on how to develop residential property. If you want to reach out to me with any feedback or questions, please subscribe using your email below. After doing this you will receive my email address. Feel free to reach out to me directly through this email.