Hints and guides for property developers

How to become a property developer

Property development can be very profitable, but the first step is to understand how the various financing options work.  Once you understand this you will then be able to appraise potential projects to see if they are viable for you.

There are four common approaches to property development:

• Property Refurbishment: this involves buying a property that needs work done such as refurbishment, repairs or even adding an extension and then selling it on for a profit.  This route is relatively low risk, provided you do your homework on the costs involved and the potential value of the property once the work is done.
• Flipping Properties: this means buying a property at a low price and then selling it on immediately for a profit. The trick is to find properties that are selling for under their market value so having the right contacts can be key.
• Property Conversion: this involves buying a property and converting it to a new use.  For example, buying a commercial property such as a block of offices and converting it into flats. In some cases, the development may be covered by permitted development rights, which means that you won’t have to apply for planning permission. Also be careful about the change of use for a property. Note: The risk of this type of development is slightly higher than for refurbishments and flipping properties but the profits can be greater too.
• Ground Up Development: building from scratch can carry the highest risks but potentially offers the greatest profits.  Planning permission will usually be required and accurate costings for this type of project are essential.

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Developing your skills as a property developer

Starting out with smaller projects will enable you to grow your knowledge and experience as a developer. Gaining experience through smaller, low risk projects will mean that learning from any mistakes won’t be so painful. This is advisable before you decide to take on any large-scale developments.

Finding the right project

Don’t be tempted to rush into a project, making sure you have found the right property is essential. No amount of hard work can make a project profitable if you have chosen the wrong property, or a property that doesn’t suit you with regards to your own talents, in the first place.

Building up your knowledge of an area, and contacts, is really important. You need to learn where to find, and recognise, properties with the right potential.  So be prepared to do some leg work and visit auctions, estate agents, and speak to other developers, to help build up your own network of useful contacts.

What to look for in a development property

When weighing up the merits of a development property you will need to consider:

• How much can I afford to pay for the property or site?
• What will be the build/work costs?
• What is the likely value on completion of the project, based on similar sites in the area?
• How much demand is there for this type of development?
• What is the profile of my target buyer?
• What kind of local competition is there from similar developments?
• Are there any issues with the property or site that will impact on my plans?  For example, are the drains and utility services in the right place, or will there be additional costs involved to prepare the site?

Key tips for property developers:

• If a property or site is being remarketed, try to find out why the original sale fell through – did a problem come to light that meant other potential buyers walked away?
• Is the price being asked reasonable or has it been artificially inflated by an agent, by getting developers to bid against each other?  If you end up offering to pay too much then your potential profit will be hit, and you may find that your lender will no longer be willing to fund the project.
• Make sure you build in a buffer in case costs exceed your original estimate.  This also allows for the final sale price being slightly lower than planned for.  If you calculate your figures with no margin for error, then things can easily go badly wrong, meaning an otherwise profitable project can in fact end up costing you money in addition to all the time and effort that you would have put into it.
• Ensure that you are familiar with the local market.  This includes looking at things such as; the prices for similar properties, local amenities and their impact on property prices, the speed of turnover of similar properties in the area and any local competition.
• If you are bringing in outside help, then make sure you work with trusted and reputable professionals.  Do your Due Diligence by checking out their references and seeing for yourself examples of their previous work.You need to be able to trust those you are working with so time spent at the planning stage is time well spent to avoid costly mistakes.
• Once the project is underway don’t keep making changes.  The cost of even small changes will soon mount up so once you have agreed the plan, stick to it!

Documents needed to support your development finance application

To help make life simple and get your application for development finance evaluated quickly, it’s essential to have all the right documentation ready when your application goes into the lender.

By providing all the require information up front we can ensure that the chosen lender has enough information to make a fast and informed decision on whether they will be prepared to finance your project.

You will need:

ID Documents, Proof of Residence and Evidence of Your Deposit – in order to satisfy anti-money laundering regulations, you will need to provide ID, proof of residence and evidence of your deposit to the lender. Producing this information upfront can avoid any delays further down the line.

A full and detailed breakdown of all costs - After an initial look at the headline figures, a lender will need to get into the detail and will want to understand all of the costs associate with the project. Having these prepared and ready will speed the process along and will enable the lender to agree any draw down facility that you might need.

Your CV and details of your experience - Many lenders will only consider developers who are experienced so it’s essential to have an up to date CV outlining details of your previous projects. Even if you are new to development, having a CV with details of experience in other sectors may prove useful in supporting your application.

Details of any planning restrictions or CIL payments – Lenders need to know about any planning restrictions that will affect your proposals. They also need to know if a CIL (community infrastructure levy) will be imposed on the development by the Local Authority, as this may affect your anticipated profit margin.

Copies of planning permissions – by providing copies of planning details and any drawings of the plans, the lender will have a clearer idea of what the finished project will look like and be better able to scrutinize the proposed costs of the development.

Details of your team – Lenders will want to know which contractors, architects and other professionals will be part of your project team. They will be more willing to lend on a project where team members have a proven track record of delivering quality projects on time and within budget.

Detailed time line of the project - providing a breakdown of the various stages of the project alongside details of the costs at each point will support your application, especially if you are arranging staged payments.

Asset, Liability, Income and Expenditure summary (ALIE) - Lenders will want to see an ALIE before they agree finance as they will want assurances on your personal financial situation. This is for 2 main reasons. Firstly they will be looking for assurance that you can support yourself if your income falls or ceases during the duration of the project. Secondly they will want to assess your ability to support a personal guarantee if one is required for your application.

An estimate of the project’s GDV - the gross development value of any project is one of the key statistics that lenders will base their decisions on. Generally, they will be looking for a GDV of around 20% above the total costs of the project.  If you can get a couple of local agents to give their professional view on the final value this will really help your application.

Things to consider if it’s your first property development

Embarking on your first development project can be a bit daunting but our simple guide sets out some of the key things to remember to help you avoid the common pitfalls.

Make sure you have a good team around you - Having the right team around you can make or break a project. You need the right people with the right skills at every stage who can help you to deliver results. When recruiting others to work with you make sure you do your homework and look at online reviews of their work to ensure they are reliable and have the right experience to support your project.

Know your local market - Before you embark on a project you need to check out if there is demand in the current market for this type of development. It’s also essential to try to find out if there are any other similar developments coming onto the market around the same time as this could affect the demand for yours, especially if you hit any delays and your competitor is ready first. Before you start, speak to local agents to see if they are aware of any similar developments planned in your area.

Know your numbers - It’s essential that the figures add up when planning your project. You need to ensure that you don’t exaggerate the final value of the project or underplay your likely costs when applying for finance, as this will soon become apparent to the lender who may then lose confidence in the project.

Plan for the unexpected – Always allow for the unexpected and plan some contingency funding into your figures. Delays can cause costs to escalate as can other unplanned for expenses, so make sure your budget allows for some additional costs should they arise.

Plan ahead for utilities and drains - Make sure you know exactly where the drains and utilities are on your site and whether anything will need to be moved to fit with your plans. Overlooking this until later in the build can add significant costs that could put you way over budget.