For new and inexperienced developers, establishing and learning the correct property development process can be tricky and often confusing. There are many stages involved, lots of people to include and various tasks which must be completed in a linear way. Even for experienced developers, the property development process can cause some issues and it is something that we need to continually learn and master.
With this in mind, I’ve created a fantastic FREE single page PDF download which is the Property Like a Pro’s 8 critical steps to a profitable property development process. Go ahead and enter your email address below and download the FREE document.
The graphic breaks down the entire property development process into 8 simple steps from the very beginning, all the way through to your final exit strategy. Often the property development process can be overly confusing and new developers often struggle to focus on the critical steps which need to be taken and and what point in the process.
The 8 Critical Steps:
So what are the 8 critical steps..?
- Site finding
- Development appraisal
- Detailed due diligence
- The deal
- Design, planning & permissions
- Exit strategy
The property development process is no more complicated than the 8 steps above. If any developer takes the time to learn each stage, master the actions required and complete their tasks in the correct order… then they will be well on their way to a profitable property development business.
Now lets go into some more detail…
The Property Development Process in Detail:
1. Site Finding:
Sourcing your development sites is a key stage and the very beginning of the property development process. A successful developer will have systems in place to manage the site finding process and will build on a network of contacts to ensure sites are continually being fed into their site finding funnel.
Knowing where to look, who to contact and the strategies for finding off-market sites is fundamental to a property developer. The success of the property development process starts here and mastering the site finding methods is a skill we need to spend more time learning.
Once we have found a suitable site which fits into our business plan criteria, then we can move into step 2.
2. Development Appraisal:
The development appraisal forms the backbone of the financial side of property development and is arguable the most important step within the property development process. Learning how to complete a development appraisal is key and is an area all new developers should spend a lot of time looking at.
A good developer will know their appraisals inside out and be able to quickly and efficiently put together an initial site appraisal or full cash flow appraisal depending the stage of the project. Knowing where to get reliable and quality inputs for the gross development value or development costs is a skill developers need, and we need to understand how to measure profit and track the viability of a project.
There are no excuses for not knowing your numbers. Banks will need your financials, investors will demand a certain level of knowledge, and to have any credibility in the industry, having a solid grasp of your development appraisal is a must.
3. Detailed Due Diligence:
We have now found a site and completed an initial development appraisal to establish that the site is worth pursuing. We can now enter the detailed due diligence stage of the property development process and it is here we try to manage the main risks of a project.
Take on good risk and dump bad risk…
During this stage, we must have the mind frame of trying to find reasons for not buying the site. We are trying to find the red flags. This will mean we analysis and assess everything to do with the site which will have a physical, financial, legal or construction impact or constraint on the project. This will include:
- Legal contraints
- Physical constraints
- Planning & statutory considerations
- Utilities and services
- Future ‘buildability’
We will often need the input from our project team at this stage, which could be a planning consultant, architect, solicitor or engineer depending on the site specific conditions. To help the process, I’ve created a 70 point DD checklist which you can also download for free.
Important: Once we have completed the due diligence stage do not forget to go back to step 2 and update the development appraisal(s) will any findings from the due diligence process which is going to affect the financials and ultimately the site value. The development appraisal should be continually updated throughout the property development process to track profit and to alert the developer of any required changes to strategy.
4. The Deal:
We are now armed with a site, a land value and a completed due diligence checklist. Its now time to secure the site and close the deal.
Often the actual form of the deal will be out of your control. This is typical when an agent brings a site to the market and sets the conditions of sale or at property auctions. In these cases it is important that you understand what the conditions are and how to put forward a professional and credible bid to make you competitive.
In other cases, you as the developer, can control the deal and take a lead in securing the site. These are often the scenarios where larger profits can be made and the skill of the developer to manage the process will have a direct result on the bottom line profit.
There are many different ways to structure a deal and its useful for developers to know the various methods to ensure this stage of the property development process can happen. For example, there will be times when a joint venture is a better solution than an option agreement… taking a site unconditionally may make you more competitive… or its the actual relationships you have with agents that seal the deal.
It is rare to find one deal the same as another, so see each site as a learning opportunity and get sites bought well. Buying well has one of the biggest impacts on your profit..!
A development cannot happen or go ahead without funding. Money is one of the 3 pillars of property development and is an area new and inexperienced developers struggle with the most. For each site that you look at, you need to understand how you will fund it and how to structure the financial side.
It goes without saying that even though funding is step 5 of the property development process, you will be thinking about how a project will be funded earlier than this.
Again, each site is different and will require a different set of funding criteria, however, a developer should know, for example, the difference between debt and equity, what development finance is and whether bridging loans are actually useful for developments.
Step 4 on the property development process will often guide how a site will be funded. If you are buying a site unconditionally, then you may initially only need to focus on securing funding for the land price and professional fees. If you are securing an option, then you may not need much funding at all.
A good developer will have access to funding, a good contact with investors and brokers and understand the importance of putting together a deal to make it financially efficient.
6. Design, Planning & Permissions:
One of the other 3 pillars of property development is planning, and the required permissions to actually be able to start and finish a development project. As a property developer, we need to manage the process to ensure all the permissions are in place and that we have a scheme designed that is viable.
Design is critical to the property development process. A skilled developer will know how to squeeze, optimise and maximise every single square foot on a site to achieve the maximum amount of profit the site can yield.
There are many other permissions required, not just planning. For example, building control and party walls. These all need to be managed along the process to ensure that a development can actually go ahead and happen.
Reaching the construction step along the property development process is a major milestone and there will have been some serious work, effort, time and money already invested in the project.
Even though the project will have been significantly de-risked along the way, there is still plenty of places for risk to turn up and we must ensure that we contract with the right builders for the project and have a procurement strategy in place which is suitable.
There are many ways to contract with a builder, and this will also depend on the role you are taking during the construction process. Traditional methods include design & build, two stage tender and contracts such as a JCT. New developers would benefit from employing a project manager and contract administrator to take the lead during this stage. Its something which most of the large developers do and a proven strategy.
We are almost there..! Construction practical completion is approaching and we can move into the final stage of the property development process.
8. Exit Strategy:
This is fairly straight forward. What is our strategy for securing our revenue and ultimately making our required profits?
Traditionally, developers buy, build and then sell, however, there are other exit strategies to consider which include renting out the final project (Build to rent) or selling a site before construction with planning permission secured (planning gain).
You will have set out your primary exit strategy in your business plan and this is not something which is decided at the end of project.
Final Thoughts (and Caveat..!)
There we have it… the 8 critical steps of the property development process. When broken down into steps and presented in a linear way, property development can be simplified and understood.
However, there is one caveat… and this must be understood…
The nature of property development means that no one site, deal or development is the same as another. Therefore, the 8 step process above can change its order. You shouldn’t finish this and think that the development process is a simple as going through the 8 steps in a linear and methodical manner. Sometimes you will, however, most of the times the 8 steps will change order and overlap which each other depending on the development itself.
As you gain more experience and complete more developments, knowing which order and what needs to be completed along the property development process will become second nature.
I trust you have enjoyed this article and will get great benefit from the FREE download. Please leave comments below, and I look forward to hearing from you.
All the best,