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

---

If Your House Is a Mess, You Dont Have To Sell For Less

Don't be tempted by "We Buy Houses" or "Sell Your... Read More

Commercial Real Estate Industry - Is the Condo Craze Over, or Just Gaining Steam

Over the last two years there has been so much... Read More

Essential Buyer?s Guide for Overseas Real Estate

It's been said many a time that overseas real estate... Read More

Relocation Humor: Why I Bought A House

The Rental Experience in South FloridaReaders: This is based on... Read More

Master Builders Ask, Do You Know What Design/Build or Design/Construct Means? You Should

These real questions are answered by me and US Master... Read More

Make Money With Room Rentals

I don't know why I didn't do it sooner, but... Read More

Apres-Ski

European tax haven Andorra enjoys the same fiscal benefits as... Read More

Reinventing Real Estate, Part 2: Online and Empowered Consumers Are Taking Charge and Paying Less

Demanding consumers"Internet buyers tend to be better informed on market... Read More

Walnut Creek Real Estate

Looking to relocate to a Californian suburb with a low... Read More

Cutting Edge Real Estate, Is the Bubble Ready To Burst?

Of course, this is the big question in real estate... Read More

Much Ado About Mansionization?

Is there a perpetual shadow hovering over your house? Do... Read More

Real Estate Lease Option Danger

Why are real estate investors having so much success offering... Read More

7 Marketing Methods for Real Estate Coaches

You shower, shampoo, dress your best, check to see if... Read More

I Already Have an MLS Listing, Why Do I Need an Internet Ad?

In today's real estate market, astute buyers are also looking... Read More

Donald Trump on Real Estate

I love what Trump says about the business of real... Read More

How To Find Your Dream Home In Belize

Shopping for property in Belize is not as simple an... Read More

Yes But, How Do I Evaluate Buying Undeveloped Land And Get Into The Business?

These real questions on buying undeveloped land are answered by... Read More

Attention To Details Helps Homeowners Sell Fast In A Buyers Market

Your boss has just given you the career opportunity of... Read More

Buy to Let Property Investment

In recent years buy to let has been a popular... Read More

Preserve Equity, Build for the Future Using a 1031 Tax Exchange

Thinking of trading up on an investment resort property? If... Read More

Staging® Your Home for Sale: a Superior Real Estate Home Marketing Technique: Part 1

Every Realtor KNOWS that a home should be shown in... Read More

Chapter One FSBO the Russ Miles thriller/mystery novel

Chapter OneShe reached the phone on its second ring. "This... Read More

Realty Agents: Don?t Ask Don?t Tell?

Real estate stories radiate from the water cooler and cocktail... Read More

How To Give Your Home A Face-Lift: The Sellers Guide To A Quick Sell

One of the great challenges to selling a home can... Read More

Selling Houses: Flooring & Feelings

Buyers think they love Italian tile and other hard floor... Read More

Home Inspectors: 5 Tips to Choosing the Right One

Choosing the wrong Home Inspector can cost you a lot... Read More

Creative Real Estate Investing

With a job that paid $3.40 an hour, I saved... Read More

The Many Benefits Of Lease Purchasing

Lease Purchasing affords wonderful benefits and opportunities to sellers, buyers,... Read More

How to Sell Your Home Without a Real Estate Agent

Considering the rapid rise in home prices over the past... Read More

Selling Houses: Design Psychology and Interior Colors

Interior colors are vitally important to selling your home quickly,... Read More

Golf and Waterfront Living: Live, Play, Relax

With today's planned lifestyle communities, golf and boating enthusiasts have... Read More

Using Color Psychology to Sell Your Home

When painting your home for resale, choosing the right colors... Read More

Basic Tips for First Time Home Buyers

Choosing a first home can be a daunting task, but... Read More