Development Feasibility 101: Running the Numbers Before You Commit

If you remember one thing about property development, make it this: the deal is won or lost in the feasibility, long before a slab is poured. Feasibility is the number that tells you whether a project makes money. Everything else is detail. Here is how it works, without the jargon.

This post supports our guide to small residential property development.

Feasibility works backwards

Most people think about development forwards: buy land, build, sell, hope for a profit. Developers think backwards. They start from the end value and work back to what they can afford to pay for the land.

The logic runs like this:

1. Estimate the end value, what the finished homes are worth.
2. Subtract every cost to create them.
3. Subtract the margin you require for taking the risk.
4. What is left is the most you can pay for the land. This is the residual land value.

If the asking price for the land is higher than your residual land value, the project does not work at your required margin. Simple, and brutal.

A simple worked example

Say two townhouses will be worth 650,000 dollars each when finished, so 1,300,000 dollars in total end value. (These numbers are illustrative only.)

• End value: 1,300,000
• Construction and design: 560,000
• Council, holding, finance and selling costs: 190,000
• Required margin (say 20% of end value): 260,000

Add the costs and margin: 560,000 + 190,000 + 260,000 = 1,010,000. Subtract from end value: 1,300,000 minus 1,010,000 = 290,000. That 290,000 is the most you can pay for the land and still hit your margin.

If the land is on the market for 250,000, you have room. If it is 350,000, the project does not work unless something changes: a higher end value, a lower build cost, or a smaller margin. And shrinking your margin to force a deal is how developers get hurt.

The numbers that move, and how to protect them

Three inputs do most of the damage when they move:

• End value. Be conservative. Use realistic comparable sales, not the top of the market.
• Build cost. This is usually the biggest number and the most volatile. Fixed-price contracts and contingency help.
• Time. Every extra month is holding cost and finance cost. Delays quietly eat margin.

Good feasibility bakes in a buffer for all three. Our discipline is to stress-test the numbers, then only proceed when the margin still survives the stress. It is the same evidence-first approach we bring to deciding where and when to buy.

Why this matters to an investor

You might never run a feasibility yourself. But understanding it tells you what good looks like. When you co-develop for a cash return, the entire proposition rests on a feasibility that stacks up on day one. The growth is not hoped for, it is designed into these numbers before construction starts.

That is the difference between a genuine development and a gamble dressed up as one.

Next steps

• See how feasibility fits the wider project in the 7 stages of a small residential development.
• Return to the small development guide.
• Understand how the margin becomes your return in manufacturing capital growth through co-development.