10 Lessons - Part 8 - Costs
Hi, and welcome back to part 8 in our 10 part article series on the 10 things I have learnt about property development, while navigating construction and property investing in South Africa.
At some point in most of the articles so far the point of additional costs has come up, and those would have given you an idea of some the items that can increase your project's development cost. In this article I am going to expand on this point a bit further, because as investors there are some things you can look out for, for yourself which can help to keep these 'surprise' costs to a minimum.
Having done a desktop due diligence would have provided a reasonable estimate of the anticipated costs for the project. Most property investing courses will teach you to include for all the bond, attorney and transfer fees, to account for holding and vacancy costs, and the renovation costs as provided by your builder friend. However, in many cases with simple desktop or estimated assessments there are costs that can be missed, over or underestimated. This is why it is important to put a suspensive condition into the offer to allow for time to do a proper due diligence, so that the correct cost can be determined. Additional fees from professionals service providers, town planning approval costs, and decorative finishing items can bring a large price tag.
Let me give you an example.
The property to be redeveloped has an existing building which needs to be demolished, but there are no other items that appear to need special attention. The external wall looks in good condition and there are some large trees in the yard. An architect friend drew some plans that will go to council for approval. The contractor has given a quotation which includes the demolition of the existing building and building the new house. All of these costs are allowed in your deal calculator and the deal is looking very good.
Starting with the due diligence process, shows that apart from the building plan approval process, there are other approvals also required for the demolition of the existing building, and to obtain a wayleave for the pavement and driveway indicated on the building plans. Obtaining these approvals requires drawing submissions by professionals, therefore additional costs are incurred through professional fees and council submission fees. There are also instances where further reports are required to support an application, which increases the professional fees even further.
The large trees in the yard are another point to note. If the new building requires that the trees be completely removed, as they will interfere with the placement of the building foundations, then it is important to realize that tree removal is an expensive cost, as large trees require the entire root stump to be removed which can run deep into the ground, and are heavy to move.
Contractors often leave things out of their quotes, or will provide a provisional sum value, especially on items that need to be manufactured and installed by specialists. These would be things like the type of tiles, air conditioning systems, solar or generator power systems, landscaping, etc. Extra items like this can start to add up in cost very quickly.
A list of additional costs like this can make or break a project, so know what is coming to build a better deal, and then stick to the budget. If everything is agreed upfront in terms of costs and specifications, then apart from annual escalation, there should be no reason for costs to move.
There you have it, part 8 of the 10 lessons I have learnt about developing property through being a project manager. I hope that you have gained some insight from this article that will help you to make more informed decisions on your next building project.
Be sure and keep an eye out for my next articles on the remaining lessons, and leave a comment with any questions or topics you would most like to hear about next. You can also sign up to our mailing list and receive our articles direct in your inbox so you never have to miss an issue.