Creating Your Feasibility Study for Land Development – Five Things That You Can’t Forget
Published 2:00 pm 29 Jan 2020
Do you need a property development feasibility study? In this article, DG Institute founder Dominique Grubisa explains the key steps elements you must consider when creating your development feasibility study.
You have to conduct a lot of research before you even consider investing in a property or development. You need to know that the project’s actually viable before you commit any of your money towards it.
That’s where a property development feasibility study report comes in.
Your feasibility study will help you ficrgure out if this project is the right one for you. In this article, we explain what it is and offer some tips for creating yours.
What Is a Feasibility Report and Why Do You Need One?
Your feasibility report is a key part of your land development business plan. Its goal is to help you better understand the opportunity that lies behind the investment.
This means that you’re going to use it to create your budget and forecast your potential profits. The report will help you to figure out if all of the numbers make sense. If they don’t, you know that this is a project that will likely lose you a lot of money.
The report also highlights potential issues, which is especially important for property developers.
It will help you to understand whether your proposed development meets all relevant zoning laws. Plus, it will show you factors that could delay the project, such as local sentiment and land-based problems.
Simply put, your feasibility study shows if your development project will actually work.
It will either boost your confidence ahead of you dedicating your time and resources to the project. Or, it will show you that there are so many issues that you need to drop the project and move onto something else.
Now, you first need to know how to do a feasibility study report. Here are the five things that you can’t forget to include.
Item #1 – Factor in All of the Costs
This may seem like an obvious point for your property development feasibility study. However, it’s also an area where a lot of developers trip up.
You have the obvious costs of a development project, such as buying the land and the costs related to designing the project. And there are fees surrounding your loan application to consider, as well as taxes and stamp duty.
You have to account for the costs of your consultants and contractors. And if you’re intending to build, you also have to factor in the costs of your development application.
But then, there are the less obvious costs that can slip through the net.
For example, you’re likely going to have to take out insurance during the development period. That creates a recurring cost. You also need to market the development to potential buyers, which often involves working with an estate agent.
Then there are holding costs. Property development projects don’t necessarily end when you’ve finished building. You may have to hold the properties for quite a while before you manage to sell them.
This means you’re still repaying a loan, as well as dealing with utilities and potential maintenance bills at the same time.
Consider every possible cost that you’ll face and err on the side of caution when creating your estimate.
Item #2 – Your Contingency
In an article for Property Update, Bryce Yardney highlighted one of the most important aspects of a feasibility study:
“A contingency amount (many inexperienced developers, unfortunately, leave this out.)”
The simple fact is that no property development project goes perfectly. You may have to deal with costs that you missed out or errors during building. Perhaps the project gets delayed, which adds further cost to the project.
You need to have a contingency in place for when the costs exceed your budget. Your contingency also acts as a safety margin against errors in your calculations.
Item #3 – Extensive Market Research
The moment that you start basing decisions on assumptions is the moment that your project fails. You need to become an area expert before you build anything.
That means conducting extensive market research to find out about the location’s demographics. Who lives there and what do they want out of the properties that they buy?
If you can’t answer that question, you may end up building something that the market doesn’t want. That leaves you with an expensive building on your hands and with nobody interested in buying it.
You also have to learn about the local council and the regulations your development needs to meet. Plus, it’s worth finding out about the council’s infrastructural plans.
New infrastructure in a location tends to lead to growth. If there are no plans, that means the location may be on a downward swing.
If you intend to hold the property after building, you also need to consider the local rental market. That means understanding vacancy rates and the amount that tenants pay for properties of your type.
Dedicate as much time as you need to this portion of your real estate development feasibility study. Skipping things at the research stage will usually come back to bite you.
Item #4 – The Site Survey
Your site survey tells you everything that you need to know about the land that you’re going to build on. Most importantly, it highlights the land boundaries.
In some cases, the fencing that may exist on the land isn’t accurate. You may find that somebody’s encroaching on your land or vice versa. Your site survey tells you exactly what you have to work with.
It’s also going to highlight issues, such as protected flora and fauna. For example, you may have a protected tree on the land that you can’t chop down. Doing so may incur a penalty or criminal charges.
Simply put, your survey tells you what’s actually possible for the land. You can then contrast this to your intended development to see if everything fits together.
Item #5 – Profit Estimates
Ultimately, your property development feasibility study has to show you a profit estimate. You’re using this to determine if it’s even worth working on the site. If you can’t see the potential for profit, there’s no point moving forward.
Compile a revenue estimate based on your intended development and your market research. Subtract your estimated costs and see what you’re left with. If the number looks good enough, you’re likely ready to move ahead.
Creating Your Feasibility Study
The key with a feasibility study is that you don’t leave it until the last minute. And you certainly need to create it before you commit to buying the property.
Often, it’s best to create a conditional contract with the vendor. This condition should give you the option to walk away if your feasibility study doesn’t produce the desired result.
Of course, creating a feasibility study is only one part of the property development process. You need to know much more if you’re going to succeed in this arena.
Lawyer, Asset Protection Specialist and Property Educator
Dominique Grubisa is a practising legal practitioner with over 22 years of legal and commercial experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author. You may contact Dominique at email@example.com
This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.