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Property development On the TV, there are many programmes now featuring people making money by developing property, but how difficult is this in reality. Would it also be a way to speed up the entry into buy to let. We take a closer look. Introduction Property developers do make money, and with experience, most of the time. However the vast majority of examples featured on TV shows, do not do as well, many getting the same cash return, through property in the area going up, as if they had sat on the property and did nothing at all to it. If you look at property that is poorly presented, not selling, or where the seller wants to sell in a hurry, therefore not being sold at its full potential, but not requiring any major work, it is possible with very little work, and cost to improve the presentation and by this increase quite considerably the value and price it will sell for. Of course there have been programmes looking at property that will not sell. They start often with a general declutter, go on to do minimal work, perhaps an odd carpet or two being changed or a bit of redecoration, and for very little cost make the property attractive enough to sell quickly. Another approach So could you buy property that is undervalued, but requiring little major work. Perhaps it looks tired, approach and first impressions are poor, perhaps its smells of the odd dog or more and is being used in a way that makes it appear both darker and smaller than it is. Often the current owner moving out solves a lot of the problems, as they take their furniture and clutter with them. You could start with a really good clean, including quality carpet cleaning. and a day or two cleaning up the kitchen and bathroom. It is likely that the magic you have performed has already made considerable difference. Next look at light repairs, filler in any holes, touch up painting, doing only what is essential. Similarly, if you have a garden, take a set of clippers or secaters and trim everything, but don't destroy it or attempt to remodel. At this point you can stop and take a fresh look, do you need to replace any carpets, roller walls, or do any other items. The critical word is NEED, not what would you like to do. You haven't moved the bathroom, built any extensions, remodelled the kitchen, taken out or built in walls or wardrobes, or searched out replacement old features to put into the property. You have had no builders, no problem in getting planning permission, and all the above has been possible within a week or two at the most. This is the point where you stop and do your sums. What is the property now worth, maybe you need a few valuations, and what would the property be worth if you refitted the kitchen, in different ways, for example just changing doors, or doing more. Plus looking at other changes you could make, what difference would it make to the valuation. Given the increased valuation available, if you did make further changes, you now have to consider what costs and time is involved. Working this out, but always remembering that, in many cases, it will eventually both cost more and take longer than you estimate. The next question is, could you let it in its current condition and what rent would it fetch now, and what rent would it fetch if you made improvements. You will find that in many cases, you have already added considerable value, and you could get a better return by letting it for a period and then selling, than in using the same time to slowly try to do it up yourself and then selling for a increased price, but with probably a far lower margin. So where can you add value, beyond the basics above. The kitchen we have mentioned, heating and plumbing improvements possibly, and making it more attractive to more markets perhaps. So is it worth doing at this level Like playing with shares, the costs involved have to be remembered. To buy a property will involve some costs, typically valuation fees and application fees for a mortgage, solicitors fees, and stamp duty. While you hold it there may be local council taxes, will be water and sewer charges, electricity, and insurance, and when you come to sell it, you have solicitors and agents fees, plus if you have a profit maybe tax on this as well. This all adds up to quite a sum, so you need to be able to make a substantial difference to the value of the property to make this worth while. If you are lucky , while you held the property, it like all other property in your chosen area, will have gone up in value. In reality in most cases this is where the real profit comes from. Increases in property value. You buy a property wisely, and keep it, it goes up in value, you could sell it or keep it, if you keep it, it goes on up in value...... Alternatively you could have bought one property, it went up, you sold it, bought another, it went up so you sold it..... Unless you bought cheaply or did something to improve the value above the general increase, the first model above would have been more profitable, as you had no sale, and purchase costs beyond the first purchase, no ongoing costs and as well as the increase in value have had a tenant paying you rent. The person who holds a single property also out performs a serial developer, as they have a property all the time, so get all the increase in value where the serial developer may have long periods where they are searching for a suitable property to improve. Where the serial developer can score At each stage the developer has released the equity in their property and can use this to gear up and take on larger projects, so the first project may be a small flat, the second a 2 bedroom house.... down line they may get to re-developing a large detached property. At each, if they are buying in the same market, each increase achieved is conceptually used up in the increase in the price of the next property purchased, but of course they are only putting up a percentage, so the mortgage constantly gets larger. If you are able to release equity, and to use this to gear up to buy further properties, holding on to your property can be more effective to selling. What you may not be able to do is to release all the equity as fast as you may like, as rents do not necessarily rise in line with values, and many lenders will expect there to be a far higher rental coming in than mortgage payment going out. Room for designers Many of the people attracted to re-development, are attracted by the theoretical profits available, but some are also attracted by the design challenge, an art form that is profitable, at least in theory. With their artistic skill, they believe they can add value, make it look more attractive and attract more people willing to spend more. At the same time they are aware that they need to keep it as neutral as they can, to make it attractive to the widest group of people. As to added value, this probably depends more on the people they will target as potential customers than being a part of a mathematical model. The question then comes up as to how much above the going rate, will a person pay for the design or artistic representation, or for certain fittings. In most cases this will vary greatly from one group of people to another. It is unlikely to make any great difference when selling the first time buyers house, or the family home, but the property intended for the well off professional may have artistic appeal, and be prepared to spend more. Perhaps also where the person buying has only recently come into more money, there may also be a greater desire for artistic as opposed to functional living. Like involving an architect, a designer is an additional person to feed out of the project. If it adds more value than cost, then you are ahead, more cost than extra income, and you are behind. Often the amateur, will see themselves as the designer, and the builder and others brought in still want their profit, plus you to cover the risks and pay more for overruns, and any unexpected extras as well as any changes you come up with. Your inexperience, you can expect to add costs, and your design flair will in most cases increase cost. You have to ask then where it is that you are adding value. If your added value is that you are the opportunist to make it happen then question if your involvement is needed in a design role at all, or if you could agree a fixed price quote for a complete job, and save money on costs as well as reducing risk. Can redevelopment be done profitably as a full time job The answer has to be yes, but there is considerable difference between the professional developer, and the amateur designer. The amateur may want to be involved, helping out with labouring and perhaps decorating, but they will not have as good a grasp at what is involved, the costs, which tradesmen are performing well and which are not, where to get supplies at the very best prices, and knowing exactly what needs doing , and in the right sequence. The ideal developer is a jobbing builder who works with someone with a better knowledge of the market, and many have arrangements with local agents. The agent knows that having sold it to them, they will get a say in what is done to maximize returns and of course the second lot of commissions in selling it again. It is not therefore surprising that often a builders offer coming in very quickly when the property is put on the market is often recommended to be accepted, well before others have even worked out it is available. The ideal jobbing builder can do most of the work himself, using only a small number of people for specific tasks and often then working alongside them. In this way he has total control of costs and timescale. This type of developer, soon gets a good grasp of the type of properties and area he is specializing in, knows the problems that are likely to come up and how to overcome them, looking specifically for any costly problems before deciding to buy. In most cases he will establish a working model, even if he does not realize it, and run the same model many times, he is not likely to be so attracted to scaling up from one job to the next, but far more likely to be searching out the next property at a far earlier point so that he is not left idle, so eventually will have several projects at various stages as opposed to larger and larger projects. The professional developer therefore has a good grasp of all costs, is able to do much himself and get the right people to help him when needed. He has a greater flow of properties, can move quicker, get materials ahead of need, at full trade discounts, and avoid many of the costly mistakes experienced by the amateur. The model he uses for his business will work back to front to the amateur. He will look at what the property would fetch after modifications, deduct the cost of getting it to the required condition, legal, finance and other costs and his margin, leaving the maximum price he can pay for the property. If he can buy it below this price it is viable if not then move on and look at another. The amateur usually works the opposite way around, starting with the asking price, takes a wild guess at cost, and then projects what he would have to sell at to break even and then makes a higher guess as to the valuation and the margin available. The amateur will also often waste extra money on fitments, and spend money on tasks which add no value to the property while missing opportunities to add value. The professional has his designed in margin plus the value increase in the property over time, the amateur whatever is left after an overspend out of the initial target plus the increase in value. As a result of different models being used, the professional will have quickly taken what he wants, and left for the amateur market those properties that cannot be so profitably re-developed at the price being asked. Buying clever The single most important factor in determining the profitability of a project is in financially modelling each case, and using this information to buy clever. Buying because it sounds cheap, without knowledge is not wise, as what sounds cheap to you, looking from your own experience, area and style, may be completely misleading when applied to another area and property type. All decisions and calculations have to be based upon the location and market the property is in. Buying clever is essential, and the larger the discount you can get the property for below your maximum buy price the larger the profit you should be guaranteed to make. You should always remember that you cannot just add price to the sales end, so the budget you set has to be reasonable and be tightly managed, and every pound overspend is a pound lost from your profit. Managing a project yourself If you are going to manage the project and subcontract to many people small parts, one of the largest problems you will find is in getting people on site at the time you want, and getting them to complete the project before going to another job. Particularly if paying by time, it uses up a lot more time keep jumping about job to job, and is far more difficult to check up on than when a contactor arrives does the job and leaves. You have very little power in the deal, in that there is such a shortage of some building trades, that unless you can do it yourself, you may just have to put up with what you get. However there are a number of costing guides, and you can produce a specification for a job, including times from the guide, and get your contractors to agree or adjust these as a part of the quotation process if they are not going to give you a fixed price. Another risk of using contractors is where a contractor will agree to do a number of things, do some, and expect to get paid for these, before deciding not to complete the job. In effect they have cherry picked those parts that were most profitable and then left you high and dry, mid project, not only costing you more but, completely messing up your time schedule. A warning of this, is where the contractor appears to be doing some jobs out of logical sequence or avoiding doing some work that should be started. To be good at managing contractors you have to be tough, mean what you say, but also at the same time be reasonable and fair. You should either have enough knowledge or know someone very well who has been involved in the construction game, a relation or friend into DIY does not count for much. Another good contact to develop is the building inspectors from the local authority, they get to see a lot of work, some better than others and perhaps you may be able to tap into some of their experience and save the pain of getting the experience first hand. Becoming a professional property developer If you feel that you do want to become a professional property developer, then perhaps one approach would be to look for a partnership with someone with a background and good contacts in the building industry. A person who would welcome your enthusiasm, ability to raise funds and willingness to listen to what they have to say. Between you, you need to decide on the area, type of property, and get friendly with local agents, deciding who to work with. Initially you don't need to stick with one agent, but perhaps could make a policy decision and inform them, that each time you buy a property through an agent, the same agent will be asked to resell the re-developed house. Over time you will probably find more and more you are working with one or two agents. Another approach is to look towards getting the DIY or jobbing building skills and costing guides, so as to be able to estimate accurately what needs doing. Perhaps then working with one or two builders who you have got personal recommendations for, and who are prepared to give you fixed price quotes. However you should remember that many people are not very good at managing their own money, and its considerably easer to spend someone else's. Concluding While there are a vast army of amateur property developers, many who feel they are doing very well, you should remember that you will hear people talking more about successes than failures, and most have made money in a rising market. Many without property values increasing, would not have come out ahead. Each and every project needs to be looked at independently, a financial model created the right way around to determine what the maximum price that you could pay to get the margin required and if you don't have the experience to identify likely problems then get someone involved at the beginning who has. |
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