Ep 275 – Cheap Decisions, Expensive Consequences: Cutting Corners in Property Development

Introduction

Hilary: Hello and welcome to episode 275. Today we’re talking about cheap decisions, expensive consequences, and cutting corners in property development. Sometimes you might, and sometimes you should not. Today’s episode is really about the cost-saving side of property development. Everyone wants to save money on a development, but there’s a big difference between being smart with your money and being a penny pincher. Sometimes spending less is absolutely the right decision. Other times, trying to save a few thousand dollars can end up costing you hundreds of thousands. So the key question today is where should developers save money, and where should they never, ever cut corners? Before we get into that, welcome Bob. What’s your tip for today?

Bob: The first Bledisloe Cup game is done and dusted. New Zealand won, sadly. But we’ve got the other one coming up this weekend, and I’m going to turn it around. I don’t place bets really, and I didn’t think we’d win one at the graveyard. But this week I’m going to put $5 on the nose for Australia. That’s my tip.

Hilary: A big five. Lashing out. I half watched the last one, to be honest, because we had our workshop. This podcast comes out tomorrow, Friday, so it’s like hot, fresh bread, straight out of the oven. Before we start, we’ve got a book to give away, and this one is going to Vivian Evans. I hope you get a lot out of this episode, Vivian.

Draftsman, building designer or architect?

Hilary: Today we’re talking about when developers should and shouldn’t cut corners. I’m going to start with building designer versus architect. There’s a time and place for both. A straightforward development might not need an architect, but a high-end project could really benefit. So when would you use a building designer rather than an architect? And for the new people listening, a brief description of which is which.

Bob: I’m going to throw in a draftsman as well, with my apologies to the draftspeople out there. The way I see it, you’ve got draftsmen, above that building designers, and above that architects. An architect goes to university for five or six years. Building designers, not so much. If I was doing something simple like a duplex or three townhouses, I’d be happy with a really good building designer, or an architect, and you can pay more. On average you probably pay more for an architect, although I have seen building designers who are just about up there in price. But I’m more interested in their ability. What I wouldn’t do is go to a draftsman for multi-units. For multi-units, it’s a building designer or an architect. I’ve used both, but I wouldn’t try to save a few dollars on the design side, because design is so critical to sales.

Hilary: And design can increase the end value, first of all through the look. But if it’s not designed well, it might look fabulous and still increase the build cost.

Architects who forget the build cost

Bob: That’s why you’ve got to choose the right building designer or architect. Architects are very artistic people generally, and some can get a bit carried away with the design and not look at the construction cost. So you need an architect who ideally has designed a lot for developers and can make something look really good but not be expensive to build. Same with a building designer. Some come out of a construction background, so they really understand buildability. If you can make it look more expensive than it costs, that would be perfect.

Hilary: We had our workshop last weekend, which was fabulous. Thank you so much to everyone who came and made it such a great event. We just love our community. Everyone has a giving mentality. We were talking to some of the attendees who have taken over a property that already had a DA. They tweaked the plans, and just by moving a window, it changed how much it would cost. Same as you’re saying, Bob. That buildability made it so much cheaper, without losing the beauty of the building or the luxe feel. They’ve done enough development to know. After a while developers learn how to make it work.

Non-standard windows: over $100,000 extra

Bob: Talking about windows, I can remember somebody who got an architect to design a very fancy duplex, but he used non-standard size windows, and it was over $100,000 more for the windows. Factories can punch out standard sizes off jigs, but non-standard sizes create so much more work for the window manufacturer. That was an architect trying to get a particular look without giving a hoot about the cost. And the developer didn’t understand it until he went through the development permit and the building permit and got it costed to build. The windows alone were a six-figure amount.

Hilary: Was that $100,000 each?

Bob: That was for the two of them, but almost nothing was a standard size. That’s a simple thing an average person wouldn’t pick up. A good designer will give you a window schedule, particularly at the building approval stage, but you need to pick it up at the DA. So part of the brief to the building designer or architect is standard doors and windows, standard sizes, sliding doors, all the aluminium and glass joinery. Otherwise it’ll go ridiculous.

Ceiling heights and the hidden extras

Hilary: Does that go as far as plasterboard sheets and things like that?

Bob: Ceiling heights, yes. A lot of people have 2.7 metre ceilings these days, which is good. That’s two sheets of plaster up the wall. As soon as you go to three metres, you can’t do it in two sheets, so you’ve got twice as much sheet joining. We just did a three metre ceiling on one of our upmarket duplexes and it was worth doing. But stud sizes can go up, you can need two rows of noggings instead of one, plus the extra brickwork outside. Going from 2.4 to 2.7 doesn’t cost much. Going from 2.7 to three costs more.

Hilary: All those little things might seem small, but when you pile them up they turn into a big cost.

Cantilevers, steel and fire separation

Bob: And the wrong design: cantilevers mean lots of steel, and steel is very expensive. I’m talking about the second floor overhanging the bottom floor over a driveway. It doesn’t sound like much, but it creates all sorts of fire separation issues. That little part of the building becomes a different class of building. That’s back to buildability. It gets back to the right brief to the architect or building designer, and to somebody with a lot of experience designing for developers, not for people building their own home. They should have been educated by developers over time to understand buildability.

Hilary: Since you taught me about cantilevers, every time we drive past a balcony overhanging something, I think, the cost in that would have been huge.

Bob: All those things. A deck upstairs over the living area downstairs, getting the waterproofing and the fall right. Rooftop gardens look nice, but they cost a heap.

Is the cheapest consultant a good idea?

Hilary: Next I want to talk about choosing the cheapest consultants. Town planners, engineers, surveyors, accountants, other professionals. They’re not all created equal. Is the cheapest one a good strategy?

Bob: It’s not your main criterion. Take a town planner. First, I’d want one who has been a town planner on their own for a minimum of five years. Beyond that, I want to know they’re willing to go in and bat against the council when we really need to, and there are times when you do. Not somebody who’s going to roll over. And it doesn’t matter who the consultant is, if I haven’t used them before I want referrals: people they’re dealing with now and people they’ve dealt with in the last 12 months. With a town planner, I’d want to talk to them not so much about the DAs they got through, but about the ones that were knocked back, and what they did about it. That’s the hard question.

Over-engineered structural designs

Hilary: Have you seen an inexperienced, cheaper consultant end up costing far more?

Bob: I’ve seen it with structural engineers who over-engineer everything. They play it extremely safe, to the point where the foundations on a two-storey building could take a five-storey building. That costs a lot more. From a civil point of view it’s not easy to over-engineer, because you’ve got service connections and earthworks. But structural is quite complex, and if you don’t have much experience you won’t know if a set of structural drawings is over-engineered. Talk to an experienced builder, or another engineer. I got caught once with a structural engineer I hadn’t used before. I thought it was over-engineered, I took it to two builders, and they said, oh my God, yes. But he wouldn’t relent. I paid him and then I let him go, and got another engineer. He made the comment that he gets a lot of jobs re-engineering over-engineered plans.

What to look for besides price

Hilary: So what should developers look for in a consultant, besides price?

Bob: I want to know they’ve got at least five years in the marketplace on their own. Price is important, it always is. How long it’s going to take is important too, and that might matter more to you than the price itself. Somebody might be $1,000 more expensive but able to do it four weeks earlier, all other things being equal. And we have to do due diligence on everybody, particularly consultants we’ve never used before, even if they come referred. So price isn’t everything, but it is important. To me, experience, good referrals and timing matter.

Saving on finishes without losing value

Hilary: Construction finishes. Knowing your market matters here. You don’t necessarily need expensive stone benchtops and premium appliances in a basic rental property, but if you’re selling a high-end home, buyers will have different expectations. Can developers save money on finishes without affecting the end value?

Bob: I’m thinking of a four-townhouse project, going back probably 12 years. It had quite a bit of timber work inside, like the balustrading on the stairs, and a particular timber was specified. The builder said, I can save you $5,000 to $7,000 straight away by using this timber instead, and no one will ever know the difference. It was fine. And I’ve sat down with builders about lighting. On one five-storey apartment block, the electrical engineer specified all the lights. The builder costed alternatives, and I think we saved about $12,000 on lighting by choosing lights that performed as well and looked the same. That’s a good saving, because you’re not dropping the standard. It doesn’t affect the sale price. That’s what you’ve got to be careful of when you muck around with the specification. Anyone can drop the spec, but what does it do to the sale price?

Less stonework, same sale price

Hilary: Remember the stonework on the duplex? You had some conversations with the builder about that.

Bob: The original plan had a lot more stonework, and we removed maybe a quarter or a third of it. It wasn’t a huge amount, but it was a big saving and you couldn’t notice the difference. That sort of stonework is at least $220 to $250 a square metre, probably more. And it did nothing to the sale price. The first one sold in about 20 minutes, and nobody said we should have had more stonework. Better that money in your pocket than somebody else’s.

Hilary: What’s interesting is that we often talk in bigger dollars. Oh, it’s only $20,000, it’s only $12,000, because we’re so used to talking about expensive things. We buy sites for over a million, two million, so we forget that $12,000 is a lot of money. It’s so easy to overlook those numbers, but they add up.

Bob: If you put the stonework saving on this table in fifties and twenties, it would be quite a substantial pile of money. And you can save all of it without affecting the sale price. That’s the really important part.

When down-specing hurts the sale price

Bob: But I’ve seen people go the other way to save money, and it affects the sale price. For every dollar you save, you can lose two or three dollars off the sale price on some things.

Hilary: Down-specing too much. That really comes back to knowing your market. About six years ago we went through some open homes in Brisbane with a group of mentoring students, on the north side. Remember those apartments? The paint job was terrible, the finishes were very cheap. Even the wardrobes. You open the wardrobe and the fit was wrong, the plasterboard didn’t go right down to the ground, there were gaps at the top of the door. Silly stuff. It does matter.

Rentals versus owner-occupiers

Hilary: If it’s a rental, you’re not going to put the more expensive features in. Sometimes a feature helps you get a bigger return at the other end, but sometimes it’s unnecessary.

Bob: It gets back to the market. Owner-occupiers buying for their own use tend to want to look at a finished product, walk through it, feel it, get the vibe, and often even measure it up. Investors are more interested in the numbers: the vacancy rate, where’s the transport, where are the shops. And you need harder-wearing items in rental properties that an owner-occupier might not want.

The cheapest builder

Hilary: Strap yourself in. What about the cheapest builder? Builders get a bit of a bad rap.

Bob: They do, because good builders don’t get on the news. On A Current Affair you see a builder running down the road with a cameraman chasing him, but you never see somebody filming a really good build job, because no one would watch it. So you tend to think there are far more bad builders out there than there really are. And I’ve had the discussion with builders about building to a price that’s lower than it really should be. One said, we can probably do it, but I won’t be getting my normal tiler in. I’ll get a different tiler with a lower rate, nowhere near as neat. I remember a builder who had two building companies. One did very high-spec renovations on multi-million dollar houses, and the other did regular everyday townhouses. He used a different set of tradespeople for each. His high-end tiler, he said, was too good for the townhouses. There was nothing wrong with the townhouse tiler, but the prices were different. Same with painters. He had high-end painters who could cut around a sash window blindfolded without a scrap of paint on the glass.

Why variations cost you

Hilary: Another point with builders is variations. Once you start varying, they think, open your chequebook.

Bob: Not all builders, but you’ve got to watch it, because every variation is going to cost you. That’s why you want minimal variations, and minimal opportunities for variations. That comes back to really detailed plans, so nothing is left to guesswork. Which comes back to where we started: the right designer and the right detail in the plans. Then you don’t get those questions, or the opportunity for builders to cut corners or come back with a variation.

Due diligence and consultant fees

Hilary: Let’s move on to due diligence. Upfront costs you might have even if the site or the development doesn’t go ahead. Where is cutting corners an issue there?

Bob: On consultants’ fees, we say be careful of the cheapest. It doesn’t mean you won’t end up using them, because they might be really good, but you can get huge variation in fees. I remember a joint venture of 22 apartments where I had a bit of time, so I got fee proposals from seven architects. They varied by over 100%. The most expensive was almost two and a half times the cheapest, for the same job, with all points in between. I chose the second cheapest, because I knew him better. I knew all seven of them. But you can get that kind of variation just in fees between consultants.

The cheap survey that cost more

Hilary: What about other due diligence, like soil testing?

Bob: Take surveying. To me, the quality of that first detailed survey is the amount of detail in it. I’ve seen people who don’t really know what they’re doing phone around and ask, how much for a survey, without giving a brief. You get all sorts of figures back, and sometimes the cheap survey just doesn’t have much detail. It has the basics, and that’s why it’s cheap. If you briefed them properly they’d probably all be about the same. So one surveyor says $1,700 and another says $2,200, and you probably should take the $2,200 one because it has the full detail. I’ve seen it happen so many times: the survey goes off to the architect, who starts the design, and there’s stuff missing. They go back to the developer, the surveyor has to come back out, you lose at least a week, and then they charge for the extras. You end up paying more than if they’d done a proper survey once. I’ve seen people send a surveyor out a couple of times after the original. He was the cheapest to begin with. It didn’t end up that way.

Marketing and staging

Hilary: Bob, what are your thoughts on cost cutting with marketing and presentation?

Bob: Even on the marketing front there’s something you can add, and that’s staging. I’ve seen people say, why bother. If you’re selling investment stock to investors, it’s probably not such an issue. But you’ve done heaps of renos and developments, Hilary. What do you think?

Hilary: I believe people can’t see unless you show them. Whether it’s a development or even our industrial units, people don’t see the concept you have. If you can show people how something might look beautiful, it’s definitely worth it, because people fall in love with that. It’s an emotional buy. Even with a rental, you can show them how it can look, simply staged. So I’m 100% behind staging. There’s rental staging and there’s high-end staging. Liam, who came through our mentoring program, has just taken a gorgeous high-end house in Melbourne to market, and you can go back and find his interview. It is absolutely beautifully staged, like a high-end home. If that was empty, there’s no way they would get the price they’re after.

Bob: I’m fully behind staging. For those who don’t know, staging means furnishing the property when you put it on the market.

Hilary: Even when I was renovating and selling my own homes in New Zealand, I would stage the house I was living in. I’d put a lot of my stuff in storage and make it look like a show home, even while I was still living there, because it made it worth more.

Running our own Google ads

Hilary: And on the marketing side, we’ve currently got the industrial blocks going to market, and we started marketing quite heavily on Google ourselves. It’s been worth it. We’ve had a few sales through that. We didn’t leave it all to the real estate agents. Is that normal, Bob?

Bob: We’ve got the ability to market, so we support the agents’ marketing. We pass leads through to them that we track. We ran the Google ads through AI and they were tweaked every day, and it’s been fabulous.

Hilary: I don’t know if people realise we’re very heavily into AI in what we do in property development. We teach it in our mentoring programs. It’s the way of the future, and we use it ourselves.

Bob: The truth is the real Bob is out fishing at the moment, and I am Bob Robot.

Hilary: You are not. So, marketing and presentation: definitely worth not skimping on, but getting right. If it’s a rental, show people what’s possible, and if it’s luxe, show it as luxe. And as we said earlier, specifications. Don’t skimp. Get exactly what the market wants.

Doing the work yourself

Hilary: What about doing everything yourself? Some developers want to save money by doing jobs they’re not really qualified for. When does doing something yourself become a financial mistake?

Bob: It reminds me of my good mate Darren. We worked together for quite a few years. When Darren first got involved in property development he just couldn’t help himself. He’d go to site every day at the end of the day, when the tradies had gone, and spend two hours sweeping up cigarette butts, bits of plaster and dust. The road he built on needed traffic management, the so-called lollipop people, so he got qualified and did that himself. Every time a truckload of plaster arrived, the builder would ring Darren and he’d be out there putting out the witch’s hats and guiding traffic. He even dug trenches for the plumber on weekends so the plumber could come in and lay the pipe. Some of it was to save money and some of it was that he couldn’t help getting involved. He did learn after a couple of projects. Getting a wife and some children changed him too.

What is your time worth?

Hilary: How do you put a value on your time as a property developer?

Bob: I’m not sure about an hourly rate, but I prefer to leave things to the people who are trained to do them. Our value as property developers is going out and doing a deal. I’d rather spend our time looking at the next deal, throwing our fair share in the rubbish bin when they don’t stack up, and finding another one. It’s doing the deal that makes the money, not saving the $50 or $80 an hour you’d pay somebody. I’d rather go and make new contacts, have conversations with people who matter, or look for a deal than shortcut somebody I could be paying to do that work.

Hilary: I’m sitting here rolling my eyes because you’re so right. We’re probably heading to New Zealand for a week soon, with a new grandchild coming. The house next door to my daughter is for sale and it would make a great reno, and I’m quite partial to an old reno. I said maybe we should buy it and do a reno while we’re there. And you said my time is better spent as a property developer than over there doing a renovation. You’re right. I’ve put my tools away.

Cutting corners on feasibilities

Hilary: Cutting corners on feasibilities. You can make a deal look profitable on paper when really it’s not. What happens when developers rush their feasibility or rely on rough estimates rather than actuals?

Bob: You’ve got to do your due diligence, and your feasibility comes off the back of that. Missing things in your due diligence is going to affect the numbers. A little example: the water main being on the other side of the street. Say I’m doing three townhouses and demolishing a house. It’s got water, but probably a small line running across from the other side. If the main is on the other side of the road, that’s $10,000 or $12,000. That’s not a deal killer, but make enough mistakes like that and they add up.

Costs new developers leave out

Hilary: What costs do inexperienced developers commonly underestimate or leave out of a feasibility?

Bob: I see people leave out GST. But the big costs are the ones that matter: your sale price, the land and the construction. Land and construction can be 80 to 83% of all your costs. That’s where the savings are, but it’s where the waste is as well. On something like an upmarket duplex, the build cost alone could be 45 to 48% of all your costs. So if your design is expensive and that goes up, it eats into your profit. And some people just make mistakes with a feasibility because they don’t know all the items that have to go in. They leave some out, and that makes it look better than it is. It’s just as bad to go the other way, though. You can kill a good deal by getting overly conservative.

When you cannot let a site go

Hilary: What about when people come to us with a site they’ve already bought, and we work through it and we know it’s not going to work, but they can’t let it go? They either have to sit on it or sell it, because it won’t work as a development no matter what they do. Their feasibility gets massaged and you have to pull them up.

Bob: It’s back to being real. I’ve seen people get so emotional about wanting to buy something. They know it costs $1.5 million to build, but they think, if I go to enough builders I’ll find someone who’s really keen, maybe they’ve just had a contract fall over, and I’ll get it for $1.35 million. So they put that in, and it works. But in reality it doesn’t. That’s just fooling yourself.

Saving money on education

Hilary: The last one is education. There are people who want everything for free, and they think free is going to get them there. It’s not. Trying to piece little bits together will either get you nowhere, or worse.

Bob: It’ll get you nowhere or into trouble.

Hilary: And it will definitely slow your journey. There’s lots you can find out for free, but not the whole process and how it needs to work. Look at what we’ve covered today. And if you listen to the other 274 podcasts, there are gold nuggets in every one, and they all come from a step of the process somewhere. I spoke to someone today who asked if I’d heard of a particular course provider in her state, and I hadn’t. I said, it’s pretty easy to say you’ve done 50, 60 or 70 million in developments. It’s pretty easy to build a website with AI. It’s pretty easy to inflate your numbers.

Bob: Just do some thorough due diligence if you want to learn.

Hilary: But how do you do the due diligence? There are questions you should be asking. Don’t get mesmerised by a fancy website. If you’re not sure what questions to ask, give us a call and we’ll tell you, and then you can try them out on other people. It does pay to know who you’re getting your information from. One, two, three or four developments isn’t really that many, particularly in a solid market. So why do people try to save money on education? Why don’t they see the value of investing in themselves?

Bob: I think their whole life is like that. It’s not just property development education. They try the cheapest of everything every time. They don’t understand value, they only understand price. Two different things.

Hilary: I think it was Warren Buffett who said price is what you pay and value is what you get.

The $10,000 walk-away

Bob: We could finish with one more. Remember the industrial site we nearly bought and walked away from? We’d invested $10,000, and we walked away because the other side’s legal team were just conveyancers and didn’t know what they were doing. You could tell that if we’d gone down that road it would have been an absolute nightmare. That loss of $10,000 was a massive saving in the future. It was a good insurance premium.

Build for profit, not for cheap

Hilary: So the closing message is: the goal isn’t to build the cheapest development, it’s to build the most profitable development. That’s what we’re about as property developers. Profit. Sometimes that means spending less, and sometimes it means spending more. The skill is knowing the difference.

Bob: It is.

Free masterclass on 21 November

Hilary: If you’re looking at development and you’re not sure where you should be spending your money, where you should be saving, or whether the numbers actually stack up, have a conversation with us. There’s always a link below to book a call. We’ve also got our free masterclass coming up on Saturday the 21st of November, on New South Wales and Victoria time. It will be recorded, but it’s definitely worth being on live, because if you’re anything like me, you think you’ll watch it later and you never do. Bob goes through the nine-step process. You can see what property development is all about and whether it could work for you.

Bob: It probably will.

Hilary: That’s the end of episode 275. Thanks for joining us, and we’ll be back next week. Bye for now.