Without completing one you will not be able to apply to a Lender for development finance – that makes it pretty important.
There are two sides: 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 wheel of property development process.
To help you come to grips with term, feasibility study, it might help you if I call it a, Financial Analysis, of all costs and income revenue that tell you if your development will produce a profit.
Where To Start?
When you are at very beginning of preparing a feasibility study – I mean when you are just thinking about buying 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 beginning is ‘asking price of land.’
Hopefully land cost will be less than asking price after you complete buying negotiation. Can you see that there is going to be a difference in just that first item of feasibility study – land cost?
OK – if you accept that, you’ll also accept that 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 ‘best’ figures you have available at time. The last stage is when all your cost figures are firm and final.
But as you are only at stage of deciding to buy land or not, you figures are "general and loaded with safety" – in dollar terms.
Let’s be clear about what I mean here. For land cost you would use full asking price and all associated costs, at full calculation for your initial entry in feasibility study. Then if you negotiated a lower price you are safe.
If you first feasibility study shows a satisfactory profit return for risk of doing development, you will proceed and gain legal control of land.
Well, to gain control, you must have concluded a negotiation on land sale price – so you have now “firmed up” on one of cost items. Hopefully it is lower than, or same as figure you allowed in feasibility study.
In first feasibility study you will allowed a figure for fees of design consultants.
People like architect, engineer and so on. Well now you have to engage them to create 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 constructions cost.
If your development comprises ten town homes, that are aimed at luxury end of 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 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 $1.8 million, then you may decide to leave $1.8 million figure in your feasibility study. This would be smart if buider's figure was say, $1.7 million.