Now that you have completed the Due Diligence and selected the potential site for development.
At this point, you have pertinent information uncovered in the due diligence stage that provides significant information about your development: legal, planning and existing conditions.
What we need to do next is to quantify your profit to assess the feasibility of your intended project by using recent, comparable sales data. By this we mean:
- Recent: within the last three months, and
- Comparable: the same type of development, within the immediate vicinity (same street if possible)
You may have to broaden the scope of your data. Just be aware that the further you go for comparable sales data, the less authoritative your data will be.
No matter how optimistic you may be about your project, you must think like a valuer. You need to substantiate and source all figures, and be conservative.
If you can not support your figures with hard data, it is an indicator that you may have difficulty obtaining development finance.
Setup a table of recent comparable sales. Depending on the quality of the data available, this table should provide a good picture of what the likely sales range would be for properties in your development in today’s market. The sum of these figures will be your supportable End Sales Figure (S) for your development.
Next, it is time to estimate Development Costs (D). You estimation should include factors like: Land/site purchase cost (L), holding costs, architecture and design fees, council fees and levels, consultant costs, build costs and construction finance. Also, be sure to factor in GST and a contingency percentage.
Once again, think like a valuer. Substantiate all figures as best you can and be conservative.
Finally, all of these figures should allow you to calculate the Profit (P) of your intended project.
Use the simple formula below:
Profit = End Sales figure – (Land Cost + Development Costs) or,
P= S – (L + D)
Formalize the hard work into one development plan that can be passed on to any project partner – mortgage advisers, investors, architects, and real estate agents etc.