One of the most common issues experienced by property developers is cost overruns on legal fees. Failing to properly manage your legal fees can have a major impact on the feasibility of your property development and unnecessarily erode into profits.
Here are 7 tips to reduce legal costs for your next property development
Request a fixed fee
The days of lawyers providing loose estimates of legal fees and charging excessive hourly rates are over. Increased competition and developers becoming more price sensitive in softer property markets has seen property development lawyers becoming competitive on fees and ensuring they meet the demands of their clients.
One of the major trends has been a shift away from hourly rate billing towards a fixed fee model. This model provides cost certainty to you, the developer, so that you know the final cost of the job before any work is carried out.
When engaging a property lawyer on a fixed fee basis, it is important that the develop and lawyer are on the same page for the work to be carried out. This is generally referred to as the ‘scope of work’. Anything ‘out of scope’ will generally be charged at an additional fee.
No fee approval means no payment
An important strategy in managing legal costs is to have an arrangement where any work is only carried out with your prior approval and agreement on fees. This means you have the opportunity to receive and negotiate a costs agreement before work is carried out.
A part of this arrangement is that the developer is not required to pay any bills unless the fee was previously agreed.
Urgent Urgent Urgent – Don’t leave things to the last minute
In the age of technology, it seems the pace of life is ever increasing with more demands from buyers, sellers, consultants and all those involved in the property development lifecycle. A part of the increased pace has been an expectation for everything to be done ‘now’. Before you instruct your next lawyer, you should consider whether requesting an urgent turnaround is really in your best interests.
Here are two of the main issues we’ve seen with urgent work:
- If there is a tight deadline, your property lawyer will often get started on the work immediately and worry about fees later. Although this means your deadline will be met, it also means an often uncomfortable discussion between developer and lawyer about the fees to be charged. Sometime what a developer thinks is a small $1,000 job is actually a major $4,000 exercise.
- Urgent work is performed by the lawyer with the time to do the work, rather than the best person for the job. What this means is that the quality of your final legal documents may be lower than they otherwise would have been if you could have waited an extra few days to allow the relevant expert in the field to do the work for you.
Remember, is it actually urgent or is it an artificial deadline? Would it be more beneficial to allow a few extra days so that a proper fee arrangement can be put in place and the work can be done properly?
Consider flexible pricing models
While hourly rate billing is the tradition and fixed fee billing is quickly becoming popular, there are other flexible pricing models that might be more suitable for your property development. Some developers are looking for the lowest price, while other developers are looking to manage cashflow and weight development expenses towards the end of the project.
Here are some flexible pricing models for you to consider for your next development:
- All legal fees paid on settlement of the developed lots. While this is the best from a cashflow perspective, developers will generally pay a higher rate with this model as the law firm is carrying the legal costs for the duration of the project.
- A fixed fee for the entire project that includes all expected legal work. This model is very ‘feaso friendly’ and ensures that unexpected legal fees are kept to a minimum. The most important aspect of this model is ensuring the scope of works is clearly defined and includes all of the work reasonably required for the development. This model also allows for the fixed fee to be paid in monthly instalments or on other milestones (such as upfront, drawdown of development finance and settlement).
- A fee based on a percentage of gross revenue. Rather than paying for legal fees as they are incurred and dealing with unexpected issues throughout the development lifecycle, another option is to simply pay a fixed percentage on each settlement. This model provides cost certainty and is also best for cashflow with legal fees not being paid until settlement of the developed lots.
As an example, a project with an average sale price of $400,000 and an agreed fee of 0.5%, the developer would pay an average of $2,000 in legal fees on settlement of each lot. This fee includes the off the plan contract, project finance, contract terminations, drafting of special conditions, conveyancing, registration of survey plans etc.
Don’t jump the gun
Time is money and holding a development project longer than necessary can have a serious impact on profitability. With that said, jumping the gun and trying to get to market before you’re ready can cost you more in the long run.
The main issues we see with trying to go to market before the project is ready are changes in design, development approvals, operational works approvals or development structure requiring contract documents to be updated and further statements to be issued. These changes result in increased legal costs and can potentially allow existing buyers a right to terminate if they are materially prejudiced.
You should ensure that you provide all of the documents requested by your property solicitor as soon as possible and that these documents represent the final documents as closely as possible. Some of the mistakes we see developers make are:
- Failing to contemplate and obtain copies of proposed service contracts at the start of the project (such as bulk utility supplies and meter reading).
- Going to market before obtaining development approval and requiring significant changes due to unforeseen conditions in the development approval.
- Making changes to floor plans or lot layouts after the first presale contract has been signed.
Issue contracts the right way
Off the plan contracts and disclosure documents can often be anywhere from 100 to 400 pages. Given documents are usually issued in duplicate, this can be up to 800 pages for a single sale. By the time you add professional printing and binding, the costs to prepare physical contracts can be thousands of dollars. We’ve even had large projects spend more than $35,000 in printing contract documents!
In addition to the cost of printing contract documents, most lawyers will also charge a fee for preparing and issuing contracts for each individual sale. We find that it is generally unnecessary for property lawyers to be preparing individual contracts and you should consider having the agent prepare contracts based on the template documents provided by your property development lawyers.
McAndrew Law are at the cutting edge of electronic issuing and signing of contracts and this can represent a significant cost saving to developers. We can set up an electronic portal so that agents can easily issue contracts in real time. The buyer can then either sign electronically through the portal or print the documents to sign in the traditional way.
If you haven’t already adopted electronic issuing and signing of contracts for your property development, get in touch with us today to see if your project is the right fit for our portal.
The ‘lazy tax’ is rife in the property development industry with developers going to the same lawyer project after project without considering if they’re the best fit for the job. If you haven’t recently evaluated your legal provider, now is the time to take action and consider whether now is the time to move to another law firm.
As Brisbane’s expert property lawyers, McAndrew Law understands the importance of being transparent with legal fees and helping developers manage and minimise their legal spend. Get in touch today to find out how we can help you with your next property development project – 07 3266 8555 / firstname.lastname@example.org.