List Categories | List All Articles | List Articles By Title
Real Estate Feasibility Study (Cost Side) - $1.2 Billion Developer Tells You How To Do One
There are two sides to real estate development feasibility study: The Cost Side & The Income Side.
I am going to concentrate in this article on The Cost Side.
Having told you that a feasibility study is vital when applying for finance, it is however, just another cog in the wheel of the property development process.
To help you come to grips with the term, feasibility study, it might help you if I call it a, Financial Analysis, of all the costs and income revenue that tell you if your development will produce a profit.
Where To Start?
When you are at the very beginning of preparing a feasibility study - I mean when you are just thinking about buying the land on which you propose to develop a building, your initial cost figures are liable to be a bit 'rubbery.'
They're general - they are not exact and can't be exact, because all you know at the beginning is the 'asking price of the land.'
Hopefully the land cost will be less than the asking price after you complete the buying negotiation. Can you see that there is going to be a difference in just that first item of the feasibility study - land cost?
OK - if you accept that, you'll also accept that the associated land costs will also vary. Items like conveyance costs, legal charges, stamp duty, adjustment of utility charges and other costs.
That should demonstrate to you that a feasibility study goes through several stages.
The first stage uses figures that are the 'best' figures you have available at the time. The last stage is when all your cost figures are firm and final.
But as you are only at the stage of deciding to buy the land or not, you figures are "general and loaded with safety" - in dollar terms.
Let's be clear about what I mean here. For the land cost you would use the full asking price and all the associated costs, at full calculation for your initial entry in the feasibility study. Then if you negotiated a lower price you are safe.
If you first feasibility study shows a satisfactory profit return for the risk of doing the development, you will proceed and gain legal control of the land.
Well, to gain control, you must have concluded a negotiation on the land sale price - so you have now "firmed up" on one of the cost items. Hopefully it is lower than, or the same as the figure you allowed in the feasibility study.
In the first feasibility study you will allowed a figure for the fees of the design consultants.
People like the architect, the engineer and so on. Well now you have to engage them to create the initial design for you and again this is a negotiation that will either be within your feasibility study allowance or not.
The next major item in your feasibility study will be the constructions cost.
If your development comprises ten town homes, that are aimed at the luxury end of the owner occupier market, your market knowledge may tell you that you should allow $180,000 per to town home or $1.8 million to build all ten.
Your design team will have to design well within those cost parameters and after the initial design is complete in preliminary format, you will need to get a few master builders to give you a price.
If you are well within the $1.8 million, then you may decide to leave the $1.8 million figure in your feasibility study. This would be smart if the buider's figure was say, $1.7 million.
The extra $100,000 acts as a safety buffer as you are only pricing off non-detailed preliminary design plans.
Now. let's say it's your intention to sell all these town homes at a profit, so you have allowed some marketing costs to cover sales commissions, brochure printing etc. in your feasibility study.
At this stage the biggest figure is the sales commission and so you have been out talking to agents and so you have a good idea that your figures are OK.
At this stage we have wrapped up all of the "major" costs except the finance costs or interest on you borrowed development finance.
By now, hopefully you will have bought my e-book, and know how to go about seeking development finance the correct way and not the dumb way.
So you will not only know the best interest rate, but more importantly, have the correct type of loan and on the correct "terms" - you know the small print stuff.
At this stage everyone I teach wants to buy a software program so that they can get all the calculations done "easy like."
Well I have a problem with that - I know, and believe, that for you to get to know your development intimately, you have to go to the trouble of doing the feasibility study figures manually - it is only adding, subtracting and multiplying some figures.
It is not difficult and the benefit is that you get to "know" the importance and interplay of each figure on the end result, being profitability.
So a simple spread sheet broken up into months on an XL is all you need.
In month one you buy the land for $286,500 and associated costs of say, $21,700 so you enter a figure of $310 ($308,200 rounded up to $310,000 - you have added a bit of safety in this one item)
Note: never use the full figure allways round up and take off the last three zeros - so $310,000 becomes $310l; $3,500 becomed $3.5 and $800 becomes $8. This makes it easier to read and creates less mistakes.
You then spread the design costs across the page to reflect the negotiated deal you did with the designers.
Then the construction costs - marketing costs and so on. You can divide these individual costs up into a many smaller items as you wish.
But the real thing you are doing is setting out your best estimate of the flow of cash that is required from the Lender and also from your own equity funds - the Cost Cash Flow.
Once you have these figures spread across the page you add then vertically for a total monthly figure - and also horizontally for each item total.
Hopefully the big development cost total in the bottom right hand box is equal to the vertical and horizontal totals.
It is - great; go to the top of the class.
Earlier I mentioned that you will have concluded the terms of your development loan.
Well, let's say that the Lender has agreed to lend you 80% of your costs. This means you have to provide 20% from your own capital resources.
Having got the monthly totals you can now calculate 80% of each figure, because this is the amount on which you will pay interest.
It is these figures that you now calculate interest on each monthly cash flow and arrive at a total cost of the finance for your development.
You now add the total interest figure to the Cost Total and arrive at what we call the Total Capital Cost of your development.
There are a total of about 44 item headings that make up the Cost Side of a Feasibility Study.
Author & $1.2 Billion Developer, Colm Dillon, Has Written The Best Selling 'How-To' E-book, "Residential Development Made Easy," With Readers In All States Of The USA, Canada, Australia, New Zealand, UK, Ireland and 79 Other Countries Of His Independent Web Site, http://www.realestatedevelopmentcoach.com/ez
From Foreclosure to Forbearance - The Art of Negotiation
As an active real estate investor you probably already know that the most important phase of your investment is when you buy the property. Most of us are getting the bargains in the foreclosure market.
How to Negotiate a Successful Short Sale
Anyone who has ever profited from doing a short sale has also without a doubt had one or two rejected at some point. Guess what? It is just the nature of the beast?As with all types of sales; you're playing a numbers game.
Probate & Obituary Marketing
I start my marketing with obituaries followed with probate filings and find it just another effective way to acquire property.Short of courthouse research you can go to your local library and go to the reference department and research using what is called a Polk City directory that will list if the deceased party owns real estate.
Ten Steps for Becoming a Successful Real Estate Investor
The secret to success in real estate investment is finding bargain properties that you can "flip" quickly for a profit. Here are a few ideas for becoming a successful investor:1) Obtain sound advice from investors who are already successful.
Five Ps of Selling Houses
1. Planning:Know Your Target BuyersThink about your neighborhood and the buyers purchasing homes near your property.
Golf and Waterfront Living: Live, Play, Relax
With today's planned lifestyle communities, golf and boating enthusiasts have an opportunity to purchase the home of their dreams just a chip shot away from the green or stone's throw from the marina. In addition to an ideal home setting, golf and waterfront community residents enjoy an active and diversified lifestyle experience complete with first-class golf courses, marinas, beaches, spas, clubhouses, recreation areas, fine dining and countless other amenities.
How Can I Stop Foreclosure on My House?
We understand the being in foreclosure is a scary thing. You are probably wondering how can I stop foreclosure on my house.
Ten Big Mistakes That Will Lose That Property Sale
If you are serious about selling your home, you probably go to a huge amount of effort when you show potential buyers around your property. You clean the bathroom until it sparkles; vacuum the carpet; brew coffee or bake bread; maybe you even banish the kids to their grandparents, but did you make one of these Ten Big Mistakes that can lose the sale - but are so easy to avoid.
How to Make the Real Estate Market Work For You and Get The Most Money
How to make the Real Estate market work for you and get the most money. Dad always said that Real estate is a good investment because they don't make it anymore.
Commercial Income Property Financing: Part 1 of 3
Welcome to this first portion of a three-part series about income property. In this first segment we will be discussing financing options for commercial income properties as well as the upside (and downside) of owning this type of property.
5 Things to Look for in a Property Appraiser
Homeowners who are seeking a property appraiser often ask "How should I choose which real estate appraiser to use?" When selecting a property appraiser, keep the following in mind:Always make sure a property appraiser is licensed or certified by the state to perform real estate appraisals. While state licensing and/or certification isn't always an indication of quality, it ensures that an individual is has met certain standards and been authorized to perform property appraisals.
Property Investing Secrets 7
Property Investing Secrets:How Buying Real Estate Is Like Planning a Trip to the Greek IslandsOne you start property investing, one important tip is to press the flesh with the real estate agents in the areas where you plan to buy. Because property investing is a bit like buying a holiday package, you must separate yourself from the rest of the investors by giving the real estate agents the information they are looking for in your first face to face meeting.
Escalation Clauses - A Home Buyers Secret Weapon
Today we discuss escalation clauses because much of the country is experiencing an extreme "sellers' market." By that, I mean there are more buyers than there are sellers, and that results in sellers' getting more than one offer to buy their property.
Atlanta Georgia Real Estate - Marietta - East Cobb, Roswell, and Alpharetta
Whether you're a "move up" home buyer, downsizing, or relocating to the metro Atlanta area, you'll find a diverse range of home styles and price ranges just north of downtown in the Marietta - East Cobb, Roswell, Alpharetta corridor. Featuring affordable single family homes, condominiums, townhouses, and luxury real estate, these communities also offer great schools and unbeatable location.
6 REASONS for Investing in Florida Real Estate Investment Property NOW
I invite you to take the next few minutes to learn the truth about the real estate market, how it compares to other methods of building assets and why it is such a lucrative form of investing. Many potential investors will say, 'I need to get into the Florida Investment Property market', especially taking into account current stock market fluctuations and the HOT market for investment properties, but simply don't know the facts about Orlando property investing and how to use sale and leaseback method of property management.
Residential Income Property Financing: Part 2 of 3
Welcome to the second segment of a three-part series about income property. In this second segment we will be discussing financing options for residential income properties as well as the upside (and downside) of owning this type of property.
Find the Right Apartment Quickly and Easily Using an Apartment Locator Service
You've probably seen the ads or heard about apartment locators. But what do they really do and why should you choose an apartment locator to help you find an apartment area?One of the biggest reasons to use an apartment locator is the fact that there are hundreds of apartments to choose from.
How to Sell Your House For Full Price
Many people believe that a real estate broker is needed to sell their house. So they post it with a broker who may or may not sell it and if they do charge exorbitant fees.
Real Estate Investing Contracts on Toilet Paper
Even if your real estate contract has been written on toilet paper, it's valid.Content of your real estate investing contract is what's important.
Dont Sell Your House--Ever!
Keeping your existing house when you buy a new one could be THE most profitable financial decision you could make. Consider the following:1.
home | site map
All articles are copyright to their owners.
Note: this website lists articles, We do not Write Articles !