Profit with Confidence: Essential Exit Strategies for Property Developers
Property development is an intricate business with numerous moving parts and inherent risks. To ensure you make a good profit with minimal stress, having a well-thought-out exit strategy is crucial.
What is an Exit Strategy?
An exit strategy in property development refers to a plan for ending a project in a controlled manner.
The key word here is "control."
The more control a developer has over the end of a project, the better the outcome is likely to be. Control allows developers to maximize profit by taking advantage of opportunities or minimizing losses when risks materialize.
It is best to plan as many exit strategies as possible at the start of the project and to create new exit strategies as the project develops, if opportunities allow.
Why is an Exit Strategy Important?
Property development involves many moving parts, such as market conditions, regulatory requirements, and construction challenges. Each of these elements can impact the opportunity for profit.
Sometimes a market move can be beneficial, while other times it can be detrimental.
Having an exit strategy ensures that a project can be concluded in a controlled manner, allowing you to maintain control.
Losing control is the worst situation in property development. It’s worse than losing money. For example, consider two situations:
1. If you are losing thousands of dollars every week but can prove to your stakeholders that holding on to the project will yield millions in two years, that loss is considered an investment.
2. If you are losing $500 a week on a rental property with no end in sight, that loss is a disaster.
The ability to prove whether there will be 'millions in two years', or having no end in sight, or perhaps receiving rental income that can cover most costs allowing stakeholders to hold and wait for market changes, is what your multiple exit strategies provide.
By planning for various scenarios, developers can respond proactively to changes and uncertainties, providing solutions to stakeholders or themselves and proceeding with appropriate action rather than reacting hastily to unforeseen issues.
When to Plan and Implement an Exit Strategy
In the property development cycle, there are four primary stages where exit strategies can be planned and executed:
1. Buy: This is the initial phase where the property is purchased.
2. Development Approval: During this phase, the necessary approvals for development are obtained.
3. Build: This is the construction phase where the project is built.
4. Profit: The final phase where the developed property is sold, rented, or exited for profit.
Start by using these native stages as hold points and plan your exit strategies around them. Experienced property developers often incorporate additional hold points within these stages for other exit strategies to increase control and flexibility.
How to Plan Exit Strategies
Break down the work and review where you can get stuck, where the high-risk areas are, and where severe consequences could materialize.
In short, FEEL the project as you imagine yourself walking through the whole process from start to finish, based on the four stages named above. Where you feel uncomfortable, plan a few exit strategies to make you feel comfortable.
Common Example 1: Development Approval Stage
At the end of this Development Approval stage, developers can re-evaluate the project's feasibility.
They can decide whether to invest the next large chunk of capital and proceed to the build stage, rework the development approval, or sell the site based on the current numbers.
Keeping the old house on site and tenanted can help minimize cash outflow during this period.
Common Example 2: Build Stage
Developers might plan multiple exit strategies such as renting out the property, selling it, or using one of the units as their own office upon completion.
These options provide flexibility and increase the chances of achieving a profitable outcome.
Frequently Asked Questions
Q: What if my project isn't suitable for multiple exit strategies?
A: Ensure that your initial feasibility calculations show a higher profit margin from the start, and keep the project duration as short as possible to minimize additional risks over time.
For instance, in expensive suburbs of Melbourne and Sydney, where building a single, large, beautiful home with artistic garden can yield a 35%-40% profit on investment and the construction can be completed within 1 years, you might proceed despite having no alternative exit strategy other than completing the build and finding a great buyer.
Q: What if market conditions change unexpectedly?
A: Having an exit strategy allows you to pivot quickly. For instance, if property values drop, you might choose to rent out the property until the market improves rather than selling at a loss.
Q: How do I manage risks associated with construction delays?
A: Incorporate contingency plans in your exit strategy. Budget for potential delays and have alternative plans, such as securing short-term financing.
Q: Can I sell the project at any stage?
A: Yes, selling the project at various stages (with approvals, during construction, or post-completion) can be part of your exit strategy. Each stage will offer different profit potentials and risks, so evaluate the best timing based on market conditions and financial goals.
Q: How do I ensure my exit strategy is robust?
A: Regularly review and update your exit strategy to reflect current market conditions, regulatory changes, and project progress. Engage with experts, such as financial advisors and real estate consultants, to refine your plans and stay informed.
Call or ask us a question if you want to learn more about your project.
Disclaimer: We assume no responsibility or liability for any errors or omissions. The information is for general purposes only with no guarantees of completeness, accuracy, usefulness, or timeliness. You must engage a suitable consultant for your specific situation.