In a nutshell:
- When the market's running hot, almost anyone can make a quick buck as a property developer—but if you want to be successful long-term, it takes a lot of hard work.
- Being able to ride out the highs and lows of the property cycle takes skill and resilience, coupled with robust systems, solid relationships and a deep understanding of the potential risks (and how to manage them)
- The best developers in the game care deeply about the quality of the homes they're building—and delivering what their end-buyers want—not just about profit (although that's important too).
- We've rounded up the most common mistakes new developers make, and what to do instead if you want to do well long-term.
Anyone who’s ever achieved long-term success as a property developer will tell you one thing: there were some tough lessons learned along the way.
If you’re considering entering the development game, it’s essential to understand the potential risks and common pitfalls—and how to manage them—to give yourself the best shot at success.
Here are the most common mistakes new developers make, and what to do instead.
- Being over-confident (and not having a good handle on risk)
- Being in it for the money alone
- Ignoring the numbers when they don't stack up
- Not getting the right land at a reasonable price
- Being prepared to take too much of a risk on sales price
- Surrounding yourself with yes-people
- Not taking the time to nail your product-market fit
- Not having robust systems in place to keep your projects on track
- Not building good relationships
- Cutting corners to save on costs
- Assuming that the past will repeat in the future
1. Being over-confident (and not having a good handle on risk).
There are some parts of the housing cycle where it doesn’t take a genius to make money as a developer.
When demand is high and house prices are rising, you’re almost guaranteed to do well even if you don’t know what you’re doing.
We saw this a lot in the wake of the pandemic. The housing market went nuts, so every man and his dog jumped on the bandwagon in the hopes of making a quick buck. And a lot of them did okay…for a while.
Until the housing market tanked, that is, and many were found out.
Moral of the story? Success is easy to come by when the market’s running hot—but that doesn’t mean it’s guaranteed when the tide turns.
Achieving sustainable, long-term success is about having a clear understanding of risk and strong systems to manage it (while still making money) throughout the housing market cycle.
2. Being in it for the money alone.
Obviously, making money is important if you want to succeed, but if it’s the sole reason you’re getting into development, you’re setting yourself up to fail.
The best developers have one thing in common: They’re incredibly passionate about what they do and care deeply about the quality of the homes they sell.
They’re not out to cut corners and don’t make decisions based on what will save them the most money. In fact, they’ll often do the opposite—spending a bit more where they know it’s going to make big difference to the end-buyer’s experience.
Of course, they’ve also got highly efficient business systems in place, which enable them to make money along the way. But that’s almost a by-product. What really matters to them is that sense of purpose.
The long and short of it is that buyers can tell when a home has been designed thoughtfully and with care and when it hasn’t. And the developers who succeed long-term are the ones who are driven by more than just profits.
3. Ignoring the numbers when they don't stack up.
If your feasibility doesn’t stack up, you should trust that it doesn’t stack up for a reason.
And if you find yourself in this scenario, it’s better to walk away than try to force the numbers to make the project work.
There are two parts to this equation.
a) Not getting the right land at a reasonable price.
If your feasibility doesn’t work—or doesn’t work as well as you’d like—it’s typically because of the land. You’ve either bought the wrong land or paid too much for it.
While this is one of the most critical factors to the success of any development, it’s also notoriously tricky to get right, especially when there’s lots of competition in market.
When you’re up against owner-occupiers who are prepared to pay a premium for the right property, vendors with unrealistic expectations about what their property is worth, or other developers helping to drive the price up, you can easily end up paying more than you wanted to for a block of land.
You need to be prepared to put in the hard work—and solid due diligence—to find a good deal, even when it’s tough.
b) Being prepared to take too much of a risk on sale prices.
Over the years, I’ve come across more than a fair few developers who think the answer to fixing a poor feasibility is to crank up their sales prices, but the second you’re having to do that, you’re in trouble.
Even if you can get the numbers to look good on paper, those bad assumptions will come back to bite you as soon as reality hits and it’s time to sell.
When it comes to setting your sales price, make sure you’re partnering with good people—real estate agents and independent valuers—who can give you a clear idea of what’s realistic.
And even then, always err on the conservative side.
4. Surrounding yourself with yes-people.
If you want to be successful as a developer, you need a team of people around you who aren’t afraid to challenge your assumptions and give you an honest opinion (whether you ask for it or not).
You might think, “Well, that’s what I’m paying my consultants for”. But that’s precisely my point. You’re paying them, and their fee is the same regardless of whether or not the development turns out to be a success.
At the end of the day, you have the most on the line—and you need to keep that in mind when it comes to building your team.
5. Not taking the time to nail your product-market fit.
Getting your product-market fit right (i.e. knowing your market and making sure you’re building homes that suit their wants and needs) is critical to the success of any development.
It sounds obvious, but you’d be surprised at how often developers get it wrong — investing all this time and money into a project, only to end up with a finished product that no one wants, or that takes forever to sell.
One of developers' most common mistakes in this space is underestimating the importance of adequate carparking.
The reality is that most households in New Zealand (and Auckland in particular) have at least one car and likely two. If you’re targeting the luxury end of the market, large families, or building on main roads where street parking is either at a premium or non-existent, homes without carparks won’t cut it.
Every aspect of your project needs to be designed with the end buyer in mind, considering how they want to live.
6. Not having robust systems in place to keep your project on track.
Unexpected costs and delays can turn a good, profitable project bad very quickly.
It’s easier said than done when you’ve got so many moving parts to consider, but if you want to do well, you can’t afford to let anything slip.
That means you need robust, repeatable, end-to-end systems in place to manage everything from your initial planning and due diligence—assessing risk, buying the right land, putting together your feasibility and design—to keeping track of costs and deadlines over the course of the build.
It also means you can’t shy away from tough conversations when needed. If someone promises to deliver something by a certain date or at a certain cost and doesn’t follow through, you have to hold them accountable.
7. Not building good relationships.
Reputation is everything in business, and the development world is no exception.
New Zealand’s a small country (and the internet is a potent tool), so if you don’t treat people well, you’ll very quickly earn a reputation as the sort of person no one wants to work with.
So, yes, you’ve got to be ruthless about holding your sub-contractors to account—keeping them on time and on budget—but that doesn’t mean you have to be a jerk.
Little things like setting clear expectations and deadlines, maintaining open lines of communication, and having the basic courtesy of paying people on time will all go a long way.
And how you treat your buyers is equally important, given that word-of-mouth is one of the best marketing tools any business has. When it comes to your buyers, you want to prioritise the same sorts of thing:
- Being transparent: setting clear project deadlines and expectations.
- Clear communication: use clear language (no jargon) and keep them regularly updated on where things are at
- Delivering as promised.
8. Cutting corners to save on costs.
This is the other side of reputation.
Sometimes, despite the best-laid plans, things will go wrong. Maybe you’ll have a blow-out on material costs, or something unexpected turns up as part of the in-ground construction phase—and you’re left desperately looking for ways to save money.
Sure, if it’s a one-off, cutting a few corners here and there to protect your bottom line might not have too much of an impact. But if it becomes a routine part of your operations, you can bet it’ll catch up to you eventually.
If the goal is to be successful—and you’d like to still be around in 10, 15, or 20 years’ time—it’s often better to take the financial hit rather than compromise on quality.
Accept that this project won’t be as profitable as you’d hoped, finish it, and move on.
9. Assuming that the past will repeat in the future.
In New Zealand, the assumption is that house prices will increase between 6% and 7% every year.
Now, that assumption exists because it’s been more or less true over the last few decades—making money off property has been relatively easy, thanks to the tailwinds created by falling interest rates.
From their peak of around 20% in the mid-80s, interest rates have steadily fallen over the last 30 to 40 years. As that’s consistently flowed through to higher house prices, it’s lulled many people into this false sense of security that property is almost a guaranteed way to make money.
But it’s a different story moving forward.
With interest rates expected to remain relatively flat, high levels of debt saturation meaning people can’t afford to borrow more, and a government hellbent on keeping house prices down by any means necessary—which is a good thing, by the way—we’re heading into a pretty low price growth environment over the coming decades.
House values will still gradually increase, but it will be much more in line with economic and wage growth.
For developers, relying on house price growth alone is no longer a strategy for success. You’ll need to be really good at what you do, because competition will be a lot more fierce.
If you don’t have your ducks in a row, you’ll get eaten for breakfast by someone who does.
Squirrel’s development lending experts know the market like the back of our hand. Book a chat today if you’re looking for the right funding solution to help you get your next project off the ground and unlock the off-plan market.
