by Richard Little
To become a successful and confident property developer, you really do need to get into the right mindset. And that means moving up from being an amateur to becoming an elite.
From buying in the wrong area, to cutting corners by not carrying out a full development appraisal: the clue to getting to the next level is all about knowing how to avoid making common mistakes. Let’s take a closer look at the pitfalls – and how to avoid them.
Location, location, location
Whether you are looking to develop and hold your latest property development project, or develop and trade it on, location is absolutely vital. A good location must always relate back to the person who’ll make it their home.
For example, there’s no use building a block of student accommodation that’s located three miles from the university campus – or developing high-end luxury homes next to an industrial estate. It may seem obvious, but it’s amazing how often the PDA sees schemes that propose the right type of property in the wrong location.
So, where should you be looking? Well, historically, in most towns and cities, industry is found to the north and east, resulting in areas of lower value property. But some of the most successful developers specialise in buying in lower-value areas, assisting in regeneration, and making substantial profits along the way. These areas often represent great opportunities for a buy-to-hold strategy, and a way of dramatically increasing your portfolio in one deal.
In most towns and cities, higher value property is often located in the south and west. So, first identify the high-value areas in your chosen location, and then look towards the fringes of that area. Because, developing on the fringes of high value areas offers the opportunity to raise ceiling prices in the area.
Always get a full development appraisal
Even some of the most experienced property developers can overlook some of the key areas during the appraisal process. And this can have a significantly detrimental effect on the final success of a project.
In a rising market most can turn a profit, but as we’re all aware, the market isn’t always travelling upwards. Whether it’s down to lack of experience, not having a good understanding of the business, or the motivation that is driving people to make snap decisions, it’s actually quite alarming how many would-be developers we see doing deals without fully appraising them.
If a potential deal hasn’t been fully appraised, it doesn’t necessarily mean it won’t turn out being a great deal, it just means that you are taking on much more risk than necessary. Often, the worst thing that can happen is for an inexperienced developer to get lucky and make lots of money: it’s a bit like building a house on the sand, when the tide is out the house is structurally sound, but the incoming tide washes away its unsteady foundations, taking the house down with it.
So, investing time and money during the early stages of your development journey – including on your own education – and taking time to develop relationships with successful, experienced developers will ensure you always build your house on strong foundations.
Don’t pay too much
Paying too much for a site usually comes down to underestimating time and costs, and overestimating market values. And, unfortunately this is where we see a lot of amateurs come unstuck. The most common question we get asked at the PDA is ‘how much will it cost to build?’
Although the build costs represent the lion’s share of the overall project costs, there are others costs that are often overlooked that can have a detrimental effect on the profitability of a project. So, it’s important to allow contingencies on time as well as costs.
Underestimating time for planning, the build and sales will result in increased financial costs – and you may find that you miss the optimum time of year for selling. Most costs and timescales can be established during the full development appraisal. My advice? When assessing a potential deal, always use the services of a quantity surveyor or project manager, especially for larger projects, at the earliest time possible, because this will make your appraisal more realistic.
Don’t always go for maximum gross development value
Achieving the highest gross development value (GDV) on any given site doesn’t necessarily result in achieving the best profit margin. Often we see people making the mistake of going forward with schemes with a high GDV, expecting to make a huge profit, when perhaps an alternative would have resulted in a better return on their capital.
To give you an example, a recent development I have been working on involved the conversion of two churches into a multi-unit scheme of high-end apartments and houses. Initially, we looked at a few different schemes when appraising the deal, and although the sheer size of the site gave us the potential for a dense scheme of 40+ units with a higher GDV, we decided to go with a scheme of 20 units and a smaller GDV.
Why? Because the balance of scheme is much better, the spend is less, and the profit margin is almost the same. A successful developer will always focus their attention not on the GDV, but on the difference between the GDV and cost.
Avoid poor design
This can often be the difference between making a profit, or even a loss, and maximising your profit. Effective scheme design is about finding a balance between what is possible through planning, and what is desired for the different property types and target markets.
For example, it may be relatively easy to get planning permission to build a block of 12 two-bedroom apartments on a town centre site, but demand may be poor due to oversupply. By contrast, getting planning permission for a mixture of four two-bedroom apartments and 12 one-bedroom apartments may be more difficult because of the increased density – yet it may suit the demand-side much better.
The success of a development should be judged at the very end, when all the units are either sold or tenanted, and not when you achieve planning approval. Good scheme design, space planning and interior design is essential to maximise profit and the speed of sale or rental. Get it right and you can raise both sale and rental values in the area.
Bringing together the expertise of an interior designer and a scheme designer as early as possible is advisable: this will result in you delivering a better, more valuable product onto the market. Interior design isn’t about what colour to paint the walls – a good interior designer is an expert in lighting, electrical layouts and finishes.
If you bite off more than you can chew, and there is an unfair balance in a deal, it will most likely go wrong. Success in property development isn’t just about the amount of money you can make from any one project; it is about solving problems, improving lives and making a difference.
Those with short term thinking are more likely to focus on making as much profit in as little time possible, at other peoples’ expense. Experience shows us that when starting out, or in the early stages of your development journey the focus should be long term. It should be about building a sustainable business centred around providing solutions to other people’s problems.
Don’t become a motivated buyer
Motivation is a key driver of success. The majority of people in property development that I meet week in, week out, are motivated towards moving into property development at some stage on their property journey. But it’s important to channel your motivation in the right direction. If not, it can lead to making decisions fuelled by desire, and not by carefully considered facts.
I’m sure we can all think back to a time when we were overly-motivated to buy something. But this is when we can get ourselves into hot water.
Great development opportunities are all around us, so direct your motivation into learning, and getting into place the right systems, processes, and people.