Ep 277 – What Property Developers Don’t Tell You About Getting Started

Introduction

Hilary: Hello and welcome to the Property Mastermind Podcast, episode 277. Today: what property developers don’t tell you about getting started. We’re going to unpack the real questions that come to us week to week from mentoring students, and talk through the questions we had this week. You’re going to learn a lot about the mistakes that can be made and how to mitigate them. Bob, welcome to episode 277. What’s your tip for the week?

Bob: Don’t buy a cheap umbrella. You know how windy it was yesterday, with the rain coming in sideways. I’d left my good umbrella at home and had the backup, which was pretty cheap, and with all that wind the thing turned inside out and basically tore off. Never worth it.

Hilary: We’ve got the stock standard Bunnings umbrella at the office, about $12, and it held up in that sideways rain. Good value.

A week of real mentoring questions

Hilary: Today I’ve written down the questions that have come in from our mentoring students this week. They vary every week, because we work with each person case by case. Every name I use will be fictional, so if you’re in our mentoring program you’ll know if it’s you. The great thing is we can showcase the mistakes new developers don’t realise they’ll make. People don’t know the questions they need to ask, and they go into things a little blind and very trusting. On the flip side, some don’t take action at all because they’re stuck on something small that could easily be answered. Between you, Aaron and me, we give answers straight away, move them on and show them the road. How many questions do you think you got this week?

Bob: Fifteen or twenty, probably. A lot are quick answers, but some are very long and take conversations, sometimes a couple of conversations or a Zoom session. Aaron would be similar, and he’ll always do a Zoom session of 30 to 60 minutes depending on what the person needs. Sometimes both of us are talking to the same person two or three times in a week.

Hilary: I had about six, sometimes by text, sometimes a chat. I get the most diary bookings of the three of us. Mine are more accountability and the business side: information memorandums, working with investors.

Andy: the wrong broker for development finance

Hilary: Let’s start with someone I’ll call Andy. He came to you this week with a finance problem.

Bob: He’s acquired a site and is working through the approvals, so construction isn’t far away and he has a builder in tow. He’s reached the point where he needs to look at the construction finance and the whole finance package. He’d been using a broker, and he was getting conflicting information, or not much information at all. The broker’s emails said things like, I’m investigating this, I’m investigating lenders for that. If you’re a good commercial broker who knows property development finance, you aren’t investigating. You know how it works.

Hilary: So Andy rang you.

Bob: He did, and I asked who the broker was. I didn’t know him. Andy said he does commercial lending as well as retail, so I had a look at his website. He’s a broker who does every type of finance known to me. If you want to buy a car, he’ll finance a car. Chattels for your business, earthmoving equipment, home loans, he’ll do it.

Hilary: Jack of all trades, master of none.

Bob: Definitely not a master of commercial property finance. Some of the things he was saying were totally wrong, and pretty scary if you believed him, because of what it did to the whole finance package. He didn’t even have a particular financier. He was talking to two or three and getting conflicting answers, because he doesn’t know what he doesn’t know. You have to go to a specialist, because it is specialist finance. A jack of all trades can’t help themselves. They’re trying to make a fee, and they move into areas that are complex and that they’re not credentialed for.

Hilary: And what scared Andy was what the package was going to cost.

Bob: He said it was hundreds of thousands of dollars more than he had in his initial feasibility. I said, something’s wrong there. Interest rates have gone up a little, but a couple of 25 basis point increases don’t make a big difference to development finance. I got him to send me his original finance application from when he bought the site, and the table the broker had put together. Some of the lenders in there I’d never heard of, and I know pretty much all the bank and non-bank commercial lenders, even though there’s a new one every week. It made no sense, and he was getting panicky because it blew his feasibility to bits.

Hilary: The takeaway is that a new developer didn’t know that wasn’t normal broker behaviour. Thank goodness he came to you. Even while you were on the phone, you called over to me and said we’ve got to introduce him to somebody we know who can fix this.

Bob: That’s the answer. I made the introduction and it’s all sweet. He told me the other day how much he’s saving now compared with what the first broker was going to stitch him into.

Hilary: What was the saving?

Bob: About $200,000. That would have been a deal killer. I’ve seen inexperienced people like that kill deals for new developers. They’re trying to get a fee, and the misinformation would have killed it if he hadn’t been able to ring me.

Andy’s draft building contract

Hilary: Same student, same week: he had a build contract he was all set to sign because it looked stock standard, and you said, whoa, back up.

Bob: He had a draft contract, which is what often happens with a builder. Before you sign the real one they send a draft so you can go through it and talk about it, and when everyone’s happy, that’s the one you sign. He’d already chosen a builder he likes, good price, everything sweet. The draft was one of the standard industry contracts, and I know it quite well. There are a lot of little things in it you have to watch out for.

Bob: The issue is this. When you sign a contract with a builder as a developer, it’s legally binding. Every condition, every number, everything in there. But the entity giving you the money to pay the builder is your financier, and you have an arrangement with them too, in the loan documents. What happens when the two don’t sync? When the conditions of your finance approval conflict with parts of the building contract? That is a real problem. I’ve seen people with quarter-built and half-built buildings get into a lot of strife because the financier won’t agree with some of the things in the builder’s contract, and they can withhold money. There’s a person in the middle, typically a quantity surveyor, who works on behalf of the financier even though you pay them, and deals with the builder every time the builder wants a payment. If the two documents don’t match, it’s a real conflict.

Bob: So what you have to do is understand the conditions of your finance, and that’s what you match the builder to, not the other way around. There’s more than one builder out there, but you’ve got the money from this financier. Where it doesn’t match, have the conversations with the builder before you sign, not after. I’ve seen projects derailed because of big conflicts between a developer and a builder, with the finance saying, no, you’re not getting any more money until this is sorted out.

Hilary: And you picked up the bits a new developer would read as standard. He was about to sign.

Bob: Most people would. But I’ve read that contract a thousand times, so I picked out about eight things and emailed him: these are eight things you and I need to talk about so you can take them up with your builder, and we need to sort them out before you sign. There are things in there that can create serious conflicts if they’re not dealt with up front.

Hilary: So that’s two issues with one person alone. He had a good week. A couple of hundred grand on the finance, and probably a lot of heartache saved on the other.

Sophie: a joint venture in conflict

Hilary: Next, someone I’ll call Sophie. She joined the mentoring program already with a few projects underway. She’d considered joining a couple of times before, and she’s kicking herself a bit, because there have been errors along the way that could have been avoided. One of them came down to the joint venture agreement.

Bob: The project is well advanced, but there are a few different parties: a project manager who is being paid as a project manager, an equity partner putting in most of the equity, and the person we know, who’s in there as a serviceability partner with a role for doing certain things. There’s been some conflict within that little triangle. I’ve asked for a copy of the joint venture agreement. It was done by a lawyer I know, one of a number who specialise in that area, so I’m familiar with most of it. We don’t want it to get to a legal point.

Hilary: You could say, I’ll just throw it at a lawyer and start there.

Bob: No. That’s $1,000 a letter. You might finish with a lawyer, but not now. I’ll read the agreement, take into account what I’m hearing, and see if there’s a way of sorting through it in a good businesslike manner to a resolution. There’s also the finance part. It’s coming close to the end, it’s gone a bit slow, and as a result a lot of the capitalised interest has been consumed. So we have to think about how to carry it. There are certain loans you can get to carry completed stock. That whole finance angle, so it runs smoothly at the end.

Hilary: So you’re helping her with the tidy-up at the end, where even people who have developed before have unknowns, and helping her through the JV agreement, having done hundreds of them and knowing the key operators in the legal field. How does she feel?

Bob: She’s feeling pretty comfortable. Good on her, she’s got projects underway. I’d have loved her to join a bit earlier, and that’s what we encourage, because we’ve had people come with the attitude of, I’ll find a deal and then I’ll join. On a number of occasions I’ve had to say, you bought the wrong deal, and I can’t fix it. Had you joined first, I could have helped with your due diligence and we would not have bought that site. In her case it’s not that serious, but she knows she needs help. She’ll also be out looking for another couple of projects, and we’ll do those properly from the very beginning, with the right contacts and the right people.

Hilary: People say, I’ll do one and then come to you for the next. Do the first one right. You’ll learn so much.

Simon and Ben: three builder quotes

Hilary: Next, two students working together, Simon and Ben, comparing three builders’ quotes for a renovation and a build at the back. The three prices weren’t directly comparable.

Bob: This project is a combination. There’s an existing house on the property, so the first part is a subdivision, subdividing the house off, and the land that’s left is a duplex. A two-stage development. The existing house gets renovated and the duplex is a new build. The quote at the moment is for a pretty thorough renovation of the existing house, around $700,000, and the subdivision, but not the whole duplex. So it’s not an apple-to-apple comparison between the three builders.

Bob: If you’re building a duplex, the way we do it is a standard fixtures and fittings list: interior design, colours, brands, tiles, everything. If we were getting three prices, we’d give all three builders exactly that. Even if they say they’ll use their own suppliers, I don’t care which suppliers you use, this is what you’re quoting on. How else can you compare three builders unless they’re all quoting on the same thing? It’s more complex here because it’s a reno. So we’ve got three different numbers from three different builders, and it’s a matter of comparing them. In the past we’ve used a spreadsheet with mentoring students, comparing a whole range of line items across one, two, three or four builders. Now, with AI, we can still use that form, but it can rip their quotes apart much more thoroughly and quickly: inclusions, exclusions, everything, into a really good comparison sheet. So I handed them over to Aaron, who is brilliant at AI. We use a lot of AI in our own developments and we teach our mentoring students how to use it.

Hilary: We did two AI podcasts, and even four weeks after the first one it was outdated. It’s moving so fast. But you still have to know what you’re doing, because you need to know whether you’ve given it the right information and what you’re comparing. You still have to fully understand the requirements of your development, and the right prompts and questions.

Bob: There’s a bit in it, but it certainly helps. I’ll be talking to them in a couple of days to help them decide on the builder.

David: the architect who ignored the brief

Hilary: The next one I’ll call David. He came to you with architect problems.

Bob: This does happen a bit. It’s a four-townhouse project. There are architects and there are building designers. A good building designer is more than capable of a good set of plans for townhouses, and an architect certainly is. Architects go to uni for five or six years and can design a 15 or 20 storey building. Building designers generally go up to three or four storey apartments, and a lot only do townhouses and duplexes. This person has the site, knows what can be done, and it’s a matter of getting the right design to get the development permit. He spent time talking to different designers and architects, chose an architect, and gave him quite a tight brief, because part of our education material is a brief for an architect. You can’t just say, give me four townhouses.

Bob: The brief was pretty good. What came back was quite different. I’d say the firm pretty much ignored the brief. What they came back with was incredible. It looked fantastic. These are very good, high-level architects. They did quite advanced plans, which they called concept plans, but they were almost like working drawings. Normally there are about three stages of plans before you lodge for a development permit, starting with very basic concepts. They’d done a lot of work, which costs money, but it was not the product David had asked for. It might work in a really upmarket suburb. This suburb is decent, a bit above average, but not top end, and this was a top-end design.

Hilary: How did David pick it?

Bob: As soon as he saw it. Beautiful, but this is not what we talked about. I told him, you can’t build that there. You’d need to be in a suburb where values are two to two and a half times that. This is an area where a townhouse might sell for $1.1 million, tops $1.5 million. These were designed for an area where a townhouse would sell for $2.5 million, maybe $3 million. Big and magnificent, but totally wrong for that area. So what we’ve decided is to get the builder involved now. He’s had a look at it and he can use the basic bones and come up with something suitable for that area, without all the planters and hanging gardens and expensive trappings. It’ll take a bit of time, and you’ll probably lose a week or two, but that’s still within the time frames to get it into council before Christmas. The architect got carried away and did too much. We should have had earlier concepts, and this would have been picked up earlier. But once the issue is picked up, we look for an answer, and we believe we can get it right.

Sam: working through a first feasibility

Hilary: Another person, I’ll call him Sam, working through his first feasibility, for a duplex. He needed to talk through the numbers and building costs, and wanted to feel confident to move forward. What sort of conversation is that?

Bob: We took one step back from the feasibility and looked at the due diligence as well. Making sure we can get all the service connections, no trees in the middle of the block you can’t cut down, that sort of thing. It was fairly straightforward: nearly level, connections easy. Then it’s down to a base design for a duplex and working off that. The big numbers are always what you can sell it for, what you pay for the land and what you build it for. I’ve been getting him to go out and look at what other developers are doing in the area. He’s done his reconnaissance and knows what the market wants, so we’ve pulled the initial feasibility together and it’s looking right.

Hilary: How did he go with his numbers?

Bob: Pretty good. It’s probably his second or third feasibility, and it doesn’t take long to get on top of it. One little line item to do with finance that he forgot, but not a big thing. I or Aaron will have another conversation in the coming week about making a move on it, and checking the finance side.

Hilary: That’s how we work. We teach a student how to find a site, understand due diligence and put the feasibility together, they send it in, and we have conversations around it: that’s right, that’s wrong, go do that. Then they’re on their way.

Kelly: weekly calls toward a DA

Hilary: The next one I’ll call Kelly. Plans for three townhouses, and very specific questions about his project.

Bob: It’s almost more of an update, because we talk regularly. He’s advancing toward lodging a development application. He’s in the rhythm where we talk every week. Some weeks not a lot happens, some weeks a bit happens, and I keep him on top of everything coming up. It’s flowing really well.

Hilary: I used to speak to him every Wednesday at 8am on his way to work. What are you up to this week, how close are you, just keeping him accountable. Then he moved over to you for the plans, and Aaron for site finding. He started in the Mastery program, which is group mentoring, and decided to move up, which some people do once they get to know us. It’s great to see people progress toward the thing they want.

James: a low five, then $200,000 cheaper

Hilary: Yesterday was a phone call straight to me, and it was a low five moment. Before you can have a high five, you have a low five. I’ll call him James. He went to contract again on a property he’d been to contract on before. Unfortunately one of his investors couldn’t follow through, so the first contract fell over. The good news is the seller is selling in desperation, a marriage breakup, and has dropped a couple of hundred thousand in less than a month. James has re-signed with a new equity partner. When you think you’ve got a deal together and something happens with an investor you can’t control, you think, I’ve lost that deal. We’d actually driven around that site when he first signed, because we were visiting the area, and took some videos. Then to go through that disappointment and come back to contract at $200,000 less. So good.

Bob: Good for him, and good for the other people. They want to sell and move on.

Hilary: He keeps us up to date on every little move, and we love it. There’s also someone I’ll call Rebecca, the fire lady, who I talked to every week until she went on an overseas trip. If you’re listening, you know who you are. Give me a call, we need to get back to our weekly chats.

Cheryl and Marie: questions from the workshop

Hilary: I also talked to two lovely ladies this morning who came to the workshop and are considering the mentoring program. They asked some really good questions: would Bob tell people to get a buyer’s agent, what do you think about construction costs right now, and one on buying a site now. People believe that because housing prices have gone down, property development won’t make a profit. Can you unpack that?

Bob: Most of the sites we buy are houses anyway, so sites have come down too. Sale prices have come down a bit, but it’s not a blanket thing. You hear about Sydney being six percent off the peak or whatever it is, but the top end of the market gets hit hardest, the bottom part doesn’t really get hit at all, and the middle is somewhere in between. It’s very much suburb by suburb, and some suburbs have gone up while the news talks about prices trickling down. You still have to be selective, and you should start to be able to get sites cheaper. Buyers are quiet at the moment, sitting on the fence, and that’s okay. I don’t see that as a long-term thing. And remember, even a duplex, you’re probably not selling for two years. Markets are dynamic. They occasionally go down a bit, but they go up a lot more, and a lot more often.

Hilary: They also asked whether we help people find sites, and about buyer’s agents. So that’s a small cross-section of what happens in the mentoring program, and it’s person by person. Group mentoring is great for learning, but you want to know about your deal, and somebody else’s numbers won’t cross over to yours. What if Andy couldn’t have talked to you about the finance?

Bob: He could have ended up in a real bind. He’d bought the site. And the building contract would have been far worse.

Hilary: So if you’re thinking about property development, there are so many things new people don’t know, and we offer a mentoring program where we work with you on absolutely anything. We have our free masterclass coming up on Saturday the 21st of November, Sydney time, and there’s a link below. Or come straight to a chat, there’s a link for that too. There are three of us with really different skills. It’s bespoke.

Bob: It’s fun going back over the week.

Hilary: And that was such a small glimpse. I love that we get to help people through their developments. If you’re after help, we can give it to you. Thanks for joining me, Bob, and thanks for the umbrella tip.

Bob: I might be using it today.

Hilary: That’s the end of episode 277. We’ll catch you next week. Bye for now.