Some people question the concept of creating value; they don’t get it. With this in mind, we’ll attempt to demonstrate how value is created by breaking down some great deals over the coming weeks.
None of these deals is beyond most individuals’ ‘potential’ skill. You need to figure out the game of property development by studying it and then put yourself out there to find the opportunities.
The easiest line to spout for individuals just starting in property is ‘I don’t have the money to get started’, implying that only the lack of money is holding them back. The reality is that those just starting in property may not have the cash to get started, but let’s not forget they also lack the skills and knowledge required in every area of property development and wouldn’t know a good deal from a bad deal.
That’s the reality; you may not have the money, but the chances are you don’t have any of the other skills needed either. Money is just one part of the equation.
But let’s assume for a moment you have all the skills needed; it’s just the fact that you are cash-poor holding you back. If that’s the case, partner up with a developer to source their deals, as deals are the lifeblood of a developer, and if you bring good deals to the table, you won’t be short of money.
The reality is that most developers are short on money themselves; they just know where to find it when a great deal comes along.
Become an expert in development so you know what to look for, find and secure great deals, and partner with established developers. These components will make you a developer.
Good luck in seeking out deals where maximum value can be added.
Ealing, London: On-Market Deal with Blockbuster Profits
This deal was for sale on the open market, the place where they say you can’t find great deals. Yet great deals can be found anywhere; they just don’t come with a sign that says easy money to be had.
The biggest downside to on-market deals is the intense competition to purchase, which makes most unviable. Many great deals are on the market, but not everyone can spot the angles that turn an average deal into a blockbuster.
Many like to dismiss on-market deals as being a waste of time. That might be true for most on-market deals, but then that’s true of most deals in general. Most deals don’t stack up when working to a high threshold; just like all deals, you need to be creative and see what could be.
In this case, the site was being sold with planning secured for the conversion of the existing building into two units, and the site was guided at £600,000. A bid at that price wasn’t going to win the deal, though.
The angle to this deal was to dismiss the approved planning permission and look to revise the scheme with a new-build development. In this case, it involved the demolition of the existing building and the development of two new blocks containing 9 units overall, totalling 7000sq ft. Based on that potential, a bid of £1m secured the site.
Build costs of £1.5m, with the site having a GDV of £4.7m.
Projected profit £1.9m, 40% of GDV.
The real value added to this site was to dismiss the existing building and fully maximize the potential of this long, narrow site. This was achieved by creating two separate blocks, one block located to the rear of the site and one to the front of the site. The two buildings had three separate entrance areas to reduce the need for large communal spaces. The building also ended up being four stories in height in some areas, pushing the limits on what was acceptable in the area.
So, how do you find a deal like this for yourself? It would be best to search far and wide, as that’s the challenge, and that’s what it takes to become a great developer.
From the outside, property can appear like the easy road to riches, with people saying, ‘If only I had the money, it would all be so easy’.
The reality is somewhat different. Great property entrepreneurs, in most cases, do not start with millions of pounds in the bank. Most outsiders assume the missing ingredient is the lack of funds when the money for a great deal can always be found.
The most significant challenge for any developer is sourcing and securing land at an attractive price.
You won’t get ahead in property development by purchasing development sites listed on the market already with planning permission unless you understand the planning rules better than others and can increase the GDV by improving the site.
For readymade sites, those with planning permission, the fact is that most of the value (profit) is likely to have been sucked out of the deal by those who put the deal together and secured the planning permission.
What is left in most cases for those deals on the open market is a slim margin, where for purchasing the land, building it out, and selling, the developer hopes to make a 20% return.
The problem with taking on deals with a 20% projected return is that this often gets eaten along the way through cost overruns, reduced selling prices, and increased finance costs. This results in a very marginal deal and does not fully account for the risks associated with it.
Unless a deal offers a way to increase the profit margin above the industry standard of 20%, you should stay well away.
The real difference that sets great property entrepreneurs apart from the rest is that they see something others don’t and, by doing so, add value, using their skills and knowledge to improve the site.
The financial rewards would be great if you could do this, and it’s not rocket science.
