Home' API Magazine : October 2014 Contents 22 n APIMAGAZINE.COM.AU n OCTOBER 2014
calculated at either one-eleventh of the
sale price or one-eleventh of the difference
between the margin scheme base value (i.e.
usually the site purchase price) and the end
sale price. GST on development costs is
claimed throughout the project regardless of
which approach is used.
Because we’re attempting a basic, early-
stage feasibility, most would agree that GST
claimable on costs and GST payable on your
sales can be left out of the numbers for now.
9Profit (and risk)
This is the amount you’ll pocket from
doing the project. Some developers
look at it as a percentage of the overall costs.
Others will consider the total dollars they’re
going to earn over the project horizon and
make a judgment call on whether it’s enough
to compensate for doing the project.
The acceptable profit will rise and fall
depending on how risky the project is. The
higher the risk, the higher the potential profit
you should expect. In high-risk projects a
developer might like to see 25 per cent of
the costs going into his pocket. For a low
risk splitter, something closer to 15 per cent
would be fine.
Profit and risk will also relate to the project
horizon. If you can turn around a $50,000
profit on a low risk project in just seven
months, this might be enough to keep a
smart developer happy, even if it’s below the
desirable 15 per cent profit mark.
Shane Hiscock’s business involves finding
small development deals, marrying them up
with investors and managing the projects
from start to end. He says you shouldn’t get
bogged down on your initial feasibilities.
Be quick and utilise whatever is available to
help you arrive at a go or no-go decision in
“Once you’ve done enough of them you
know the numbers already. Someone could
say to me, ‘the site will cost this much,’ and
I’ll know what a house is selling for in the
area. I’ll know if it doesn’t work.”
Cam McLellan is an experienced developer.
He says being across your feasibility
process improves the chance you’ll land the
“You’ve just got to know your numbers and
know how to run fast.
“If you see a development site (listed) on
the internet, it means every other developer
has picked through it and they don’t like it.”
McLellan says the professionals can judge
whether something will work with just a
few hours of analysis, so profitable deals get
If you want to be part of this off-
market game, then you need to be across
“A lot of research needs to go into
understanding what the costs are. If you don’t
know or understand those to the degree that
you can turn an offer around within a couple
of hours, then you’re out of the market.”
nCOVER ALL COSTS
Fast doesn’t mean sloppy, according to
McLellan. First-timers often miss items more
experienced developers don’t, so try and
cover every aspect.
“Local council taxes on development need
to be understood prior to delving into the
acquisition stage... below-ground costs are
a big one that need to be considered straight
away, before you start considering
above-ground costs. Cut-and-fill is a big one
and rock allowance.”
He says if construction is part of the
project, get an all-inclusive builder’s
quote with no variations to improve your
nRUN A COUPLE OF SCENARIOS
Feasibilities are your guide on how best to
use a development site. Sometimes splitting
isn’t the only option.
Perhaps you could build and sell two spec
homes or even build townhouses to the rear.
Make sure you run a few scenarios to work
out your highest and best use.
McLellan says, for example, some buyers
might look at a dodgy house on their
development site and immediately factor in
“If I’m purchasing the whole thing for
$500,000, the front house, once it’s tarted
up, I might be able to get $400,000 for it...
You see now how I’ve got a block at the
back, which has cost me $100,000 instead
of knocking the house down and paying
$250,000 for the back block?”
Practice reduces errors. McLellan suggests
those entering the development arena
should do a few dummy runs to hone their
skills with figures – even better if you can
use some real life examples in your
suburb of interest.
“Go and grab a couple of listings that are
on the internet that you know aren’t going to
be good deals. Go through the exercise as if
you’re going to develop it and work out what
your profit margin is.
“Once you’ve gone through and done that
exercise a couple of times for a couple of
developments... you’re then trained-enough
to know the ballpark figure on most things,
so it’s not daunting.”
Experience is a hard tutor. Most small developers stumble
over all sorts of things when tackling their first few projects,
and feasibility calculations are full of potential pitfalls.
Big developers were novices at one stage too, so we’ve
asked a couple of professionals to give their advice for
first-timers looking at feasibilities.
Up until the late 1980s, running multi-
stage cash flows involved very old world
technology – paper and a pencil. Analysts
would roll out a huge sheet of butcher’s
paper, rule up columns for each month of a
project’s life and start working through the
incomes and outgoings to create monthly
cash flows. They then relied on financial
calculators or long form formulas to assess
profit margins, net present values and
internal rates of return. Changing one
figure, like the interest rate, would mean
another few hours of rubbing out numbers
and recalculating the results. Fortunately
the advent of affordable computers and
spreadsheet programs in the 90s put a
stop to this hard labour.
BUTCHER’S PAPER AND PENCIL
HOW TO n Run the numbers
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