How to become a construction developer when you have no money
An option is the right, but not the obligation, to buy or sell property at an agreed price and terms during a certain period of time or on a specific date. It allows you to have access to a property despite not having legal ownership. Most aspiring developers don’t have the cash to get started. If you have a keen eye for value adding, excellent negotiation skills and aren’t afraid of rejection – all you really need is an option to get started.
In addition to the option you will need some cash to pay for the option fee and initial planning costs. I’m certain in your newbie developer days you probably wont even have that. The key is to find someone who does and make them an offer they can’t refuse. Ask them to fund the option fee and initial planning costs for a percentage of the profit which will be realised at the end of the development. While they kick back and relax you do all the hard work, it’s a win/win situation for all.
It’s important that you do your research prior to entering into an option. Jump online, talk to agents and drive around the area. Find out what people want, what’s selling, what’s not selling and your target market (for example families, retirees, younger couples). This will help you determine your price point and conduct a feasibility on the land. Most of your costs are easy to determine but the end sale price will widely differ from area to area. For example a 4 lot townhouse development in Main Beach will sell for more than a development in Varsity Lakes. A feasibility is how you will determine how much you can pay the landowner for their land.
It may take some time to find a landowner who is willing to give you an option. A good way to entice landowners is by explaining that a development approval (DA) will improve the value of their land and will remain with the land even if you don’t buy the property. It’s also highly likely you will have to offer above market value for the land to get the owner on board – remember successful negotiators create a win/win situation for all!
During the option period you can do you’re due diligence and gain a DA on the land. You will then be able to exercise your option to buy the property using the equity you have created via your value adding DA exercise. Once the option is signed complete your comprehensive due diligence. This includes architectural plans in line with Council’s planning scheme. A good way to see if council will support your vision is by driving around and seeing other developments in the area. As part of your initial planning you may also need to address issues such as planning overlays, slopes in the land and flooding.
Once you have the plans and basic reports to address any planning issues on the land book a pre-lodgement meeting with Council. This is a great opportunity to thrash out any objections Council may have with your vision. Once you have Councils feedback you may need to re-negotiate the price of the land with the owner, especially if Council has identified restraints on the land which you were unaware of at the time of negotiating the original terms with the owner. Alternatively if Council give the go-ahead proceed with the DA process.
A DA will typically cost you 10% of the value of the land. Once it’s in place the land will value more and you can settle the land based on the new valuation. The development game is tough but it pays to be persistent!