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Real estate

Land Development: A Real Estate Developers Guide for Profitable Property in 2022

Written By Valerie Mhere Community Manager
Last Updated: 2022-05-05 •

Forget taking a course for land development training, and take advantage of this detailed guide. Land development has become a popular topic amongst many experienced real estate professionals. However, this isn’t as easy as flipping a house, and you’ll need a lot of time, resources, and capital for land development. 

The land development industry has reached $11.7 billion by 2022. Over one year, construction for property development skyrocketed by 67%. These statistics prove that many real estate professionals are getting into property development, so you should start too! 

 

What are the Five Stages of Land Development?

 

1. Research for Land Development

Thorough research is the backbone of every property development project. This step helps you understand the market and determine which land would be the best investment. Evaluate neighborhoods, suburbs, and towns. 

But it’s not just about evaluating locations. You must also understand council regulations in that area and political and climate influence. Then you’ll need to draw up a budget and conduct a financial analysis so you know whether your land development project would generate profit in your chosen location. 

Developers must outline their target buyers and know what they want the end product to look like. It’s always best to work back from this information. You don’t want to develop property that doesn’t interest buyers. 

Never skimp out on the details when it comes to your research. The more information you know, the better. Without sufficient research, your project will hit several speed bumps, slowing it down or bringing it to a halt.

How Do I Know Where to Buy Land?
This is where a land development due diligence checklist comes into play. As we’ve explained above, you can’t just buy any land. You need to be strategic about this. These are the factors you should consider:

  • Pick a location with increasing growth: This is quite obvious, as you need to know there is an influx of buyers in the area you’re considering for property development. Speak to the local community and check trends in that area to determine whether the market is increasing or declining. Newly developed areas are also hotspots for property development. Currently, Idaho, Utah, and Colorado are experiencing the most property developments. 
  • Understand the demographics in that location: We spoke about defending an ideal buyer, so the demographics of people in that location must align with this. For example, if your target buyer is a middle-income family, you can't develop property in a poverty-stricken area. You also need to determine if young people, elderly folk, or families populate the area.  
  • Determine the supply and demand of an area: Areas with convenience and amenities often have a high demand. But this doesn’t mean the supply doesn’t meet the demand. Developers should find locations with relative to high demand and a slightly lower supply to avoid tough competition at the sales stage. o
  • Check the zoning regulations: The local council may not allow you to develop the property you want. You have to check the zoning regulations to confirm this. 
  • Check which way the property would face: You can't always avoid this. But steer clear of constructing properties facing traffic or an unattractive view. Properties that have spectacular views can sell for so much more than a similar property that doesn’t. 
  • Evaluate the land for any size, slops, and setbacks: Just a few more meters of land could mean more construction work, so be vigilant of this. Slops and any overlooked land setbacks will cost you a boatload to correct. 

 

 

2. Financial Feasibility

Financial feasibility is pivotal for developers to determine whether their project will be successful. Start by looking at your market research and target budget, then create a business plan. Your business plan must outline your timeline, strategy, financial analysis, milestones, and the approval processes for zoning regulations. 

No land development project can be successful without financial feasibility. Particularly those that require real estate financing. When you’re doing your financial feasibility analysis, you need to know which property development costs to consider. These costs include:

  • The land’s purchasing price - This is the amount you’ll pay to acquire the land.
  • Construction costs - Builders charge this fee to complete the construction for your project.
  • Consultant costs - You have to pay an architect to draw the property's designs, a project management company to manage the entire property, and surveyors to evaluate the land. There may be more professionals to pay.
  • Acquisition costs - The cost of the legal requirements to acquire your land. 
  • Insurance fees - Property development is risky. Bad weather can intervene with construction, or a workplace accident can happen. Ensure you have insurance to cover this. 
  • Finance fees - You’ll need to budget for this for all the paperwork that comes with property development. These fees also include your interest on loans.
  • Council costs - This money goes to rezoning, obtaining a permit, application fees, land subdivision, and so forth.
  • Marketing and sales costs - When you’re ready to sell your property, you’ll have to pay real estate agents, legal fees, and marketing expenses. 
  • VAT - After your project, every developer must pay their VAT contributions. 

After determining these costs and doing a financial feasibility analysis, determine the profitability of your project. It’s best to keep 3%-5% of your income stored away for a rainy day. 

How Much Profit Should I Make From Land Development? 
Your profit margin for a land development project should be between 15% and 25%. You can decide what profit margin works for you, but many lenders require a profit margin in this bracket. 

 

 

3. Pre-construction

Now that you’ve done your research and compiled all the essential elements in a business plan, it’s time to start the real work. Pre-construction is the riskiest stage of land development. Be prepared to pay 1 to 3% of your project's value for pre-construction. This step includes:

  • Land acquisition
  • Preparing your finances
  • Obtaining council permits

Bringing in the professionals for land development services to complete the project

Typical parties you’ll need for a land development project are an architect, a project management company, and a construction company. This step takes a long time to complete because of how many other people you have to rely on for your project. 

Pre-construction is also the riskiest step because you have to choose your land and a professional team. These are impactful steps for land development, as the wrong land can diminish your profits when you’re ready to sell. Additionally, working with the wrong people can set your project back.

But here’s are solutions for each of these problems:

  1. When considering your land development project, work back from which market you’re targeting and what property you want to develop. Doing this and detailed market research will prevent you from buying land buyers don’t want.
  2. Always vet the companies and parties you work with. Check their portfolios, past clients, and seek out credibility. The professionals you choose should also share your vision. 

 

 

4. Construction

If you don’t execute the stages leading up to construction well, your project will be unsuccessful. Construction requires the most cost, and countless factors can intervene your progress. Because of this, your market research, financial feasibility, and pre-construction strategies should be carefully mapped out.

When developers work through the previous stages strategically, they can often handle the risks associated with construction.

What Construction Risks Should I Consider for Property Development?

  • The markets changed: There’s no way you could change this, but you can predict or prepare for it. Always analyze the market conditions in your market research stage. But this isn’t a one-off task. Continue staying ahead of what the market looks like through your entire project. 
  • The building materials cost has increased: Sometimes this happens, and it’s out of your control. Remember that rainy day fund we spoke about? Well, now it may come in handy. If you’ve managed your expenses well, you might not even have to tap into that money yet. 
  • The site conditions have sudden problems: Once you’ve done your preliminary analysis of the construction site, you could find all sorts of issues. These problems range from soil erosion to artifacts. Some developers have to redesign their entire project because of this. 

 

 

5. Marketing and Sales

If you choose to sell your property, you’ll have to deploy marketing and sales tactics. If you don’t know much about marketing and sales for property development, consider hiring a real estate agent. Yet if you choose to go at it alone, here are tips for marketing your property:

  • Based on your defined target audience, leverage social media marketing.
  • Create a website to showcase your property
  • Use video marketing to highlight your property’s best features
  • Go old school and use the open house method 
  • Ask local businesses if you could put brochures in their stores 

If you’ve worked every stage of property development well, selling your end product shouldn’t be too tricky. However, there are also changes you might not predict, so personalize your marketing efforts to communicate with your ideal buyers. You can do this through the suggested marketing and sales techniques above. 

 

 

The Bottom Line

Starting a land development project is a heck of a commitment and takes a lot of work. Be strategic and practical about your ambitions from the start, and detail as much information as you can. For successful property development, you can rely on these steps, and don’t forget, market research is the core component of this process. 

Valerie Mhere Community Manager

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