Develop property and make money?!
If only it were so easy but get the basics right and leave little to chance is the starting point which will hopefully lead you to success.
This is a first steps general guide for the less experienced Developer and whether you need to consider all of my recommendations will depend on the size and scope of your development;
Myself and a client of mine who is looking to develop a property are both of a certain age and he greets me with the words ‘Mange tout’ ‘Mange tout’ and ‘next year Rodney’….. All joking aside….. it is all so easy to make a mess of your financial life (as they did all too often on ‘only fools…’). You can get a development wrong and it is often those with the least experience who are at the greatest risk and so how do you reduce those risks?
The over used phrase is ..location, location, location…but it remains the most important consideration. Is the property in a location which is popular for the demographic and market that you are looking to attract?
Are you developing to sell on or to rent out as a given property’s location may better suit one of those markets rather than both?
Understanding the market where you have or are going to buy the development is fundamental.
Do you have your finances in place or agreed in principle or are you just assuming that ‘it will be no problem…’? Please see a qualified independent mortgage consultant as a first step and definitely do not just ‘assume’ anything – that word is banned from my office!
Any required development finance provider will want to ensure that the borrower has all their ducks in a row in relation to timescale, builders contracts, schedule of works and exit/repayment strategy before they will issue an offer for the money. Therefore it is not only advisable to get all your development planning done beforehand, it is also compulsory if you need to borrow money to do it.
Have you also spoken to your accountant about the tax implications of your proposed project and how this may affect you and your exposure to tax?
Even if you are buying the property in the right location and have the necessary funds available consideration has to run deeper. Consider the world economy then the UK economy and then the local economy before you purchase the development opportunity. The project may take one, two or three years (or may be even longer under certain circumstances) which is likely to put pressure on your finances?
I suggest you have the equivalent of a business plan in place and then you will need Architect drawings and then detailed plans and structural calculations to achieve the necessary local authority consents and then once these are achieved a full detailed schedule of works including project time which will need to prepared by a competent person and will be required in order for you to go out to tender with say three construction companies ensuring that they all have the appropriate experience with testimonials plus you should also review some of their work personally if you have not used their company’s before.
If you are not going to project manage the work yourself (you should only do this if you have the required competences) then your project manager who may or may not be the person who prepared the schedule of works will need to be instructed and you may also wish for that person to be involved in issuing the tender document out to contractors and then follow the process through for you. All of the above will have costs associated with them and these need to be factored in at the earliest possible stage to minimise the risk of nasty surprises going forward!
Budget for how long the project will take and be realistic that your money whether borrowed or not will be tied up for a long time (and often longer than initially predicted) without reward but at a cost and while sale and rental markets have a track record of increasing in value in the long term, shorter term periods have a possibility of either benefitting from an increasing or suffering from a decreasing market hence my recommendation that you look at economic factors which while you cannot control, can guide you’re judgement. Please ensure that you have factored all possibilities into your equation and be conservative with a small ‘c’ rather than optimistic which I have seen people do just to make the financial calculations work.
If the reason that you have become a Developer is to make a quick million then please think seriously before you part with your money as it is not a path that is necessarily paved with gold and while Del Boy (from ‘Only Fools..’) was not a Developer, he made his million through luck but you may not have that and so you will have to work with financial calculations and a number crunch as the next best consideration:
How much is the initial purchase price? Can you purchase it at a below market price, ideally 10% below? Now while that reduction may not be achievable you or your advisors have to know the market figures and not rely on what the selling Estate Agent is saying. Remember, the agent, while I am sure will be a very nice person is working for the vendor which is where their first loyalty lies!
The purchase price including all costs, stamp duty, solicitors, survey reports (plus all the costs as previously outlined and this is not an all-inclusive list) is often where the success of the development initially lies and that’s before any trades start work. If you pay 10% below market price it is likely to prove a successful development and if you pay 10% over you may have to let the subsequent flats out for a number of years just to allow for the market to improve thereby absorbing the mistake that you made in the capital value. Undertake a yield calculation if renting or sales assessment of achievable end sales figures if selling is your end goal and these can be quite accurately determined prior to building work being undertaken.
Have the correct experts on your side and if you are going to be renting out the properties an ARLA (Association of Residential Letting Agents) licensed letting agent is a must to assist you with assessing the letting potential of the project, risk of void periods, yield calculations, required standard of finish and so on. You should start building a good working relationship with an experienced and licenced letting agent or selling agent in the very early stages as it is vital for you to be able to assess the project’s initial viability and then you will have trusted experts to refer to as the project develops. They will be helpful to you and usually without charge if they are going to be in receipt of business at the end of the project. Agree the detail of this working relationship with them at the beginning and what their fees will be when they finally sell or let the properties for you. That way you can ensure loyalty to them and not run the risk of falling out at the end of the project over their fees because by that stage you will already have spent a number of hours with them requesting and taking advise over various matters and in return they will be expecting that you will providing them with your instructions!
As you can gather, much more thought, consideration, research and planning work is required than first thought prior to any physical work being undertaken. At the point of visible work starting, the potential success or otherwise of the development has already been determined!
I hope that this is of help but should you require any further pointers, advice or would like to meet to discuss a project that you are working on please let me know. You may also wish to attend a seminar that myself and professional colleagues of mine will be holding at The Double Tree Hilton, Newbury off Junction 13 of the M4, at 10am on Saturday 7th October 2017 where all of the questions raised by this blog and much more can be answered by the experts in the room. If you would like to register to come along please email myself or Michelle Douglas, including your contact details on: firstname.lastname@example.org