15 Rules for the business of property development
The Rules the Developer has to follow could be said to be complying with all the law that runs through the development process. Here I am not referring to those but the unwritten rules I advise any Developer to follow. These are rules based on experience not those imposed by statute or common law.
1. Spread your risk
A Developer with three speculative projects on the go at any one time may be on his way to make his fortune. He is however taking a large risk especially if he has borrowed large sums of money to undertake these three projects. History supplies evidence of this risk. What is better is to spread the risk. One speculative project one Joint venture where the risk is shared with a funding partner and one custom build project. Sure the profit gained from the JV and Custom build is less than it might be but so to the potential for loss. The second piece of advice I give to mitigate risk is the sale off plan. This cannot always be achieved but consider, if a site of say 5 houses has say 2 houses under contract consider the confidence that gives to the developer and his funder.
2. Do not be against “turning” a site
Imagine you have worked hard to get a site prepared. All planning approvals are in place and the Project planning is agreed, professional team appointed. You have had meetings with neighbours about the scheme and given them assurances as to the construction and outcome. You then get an attractive offer from another developer to sell the site to him as he needs to have a project to move ahead with. The last thing you want to do is to sell the site. You have put your heart and soul into it. My advice is to detach your emotions. Sure some people may feel let down if you sell and sure the profit on the turn will be likely to be less than what you forecast for the development but consider.
A quick turn gives you, no delay in completing the project, no need for bank borrowing, no potential cost overruns or collapse of the sales market while the development is being completed.
3. Choose your area of operation and stick to it
You will not be the expert in every geographical area. Sales values and planning policy are two examples of factors that vary from area to area. I would always recommend choosing an area based on Local Authorities areas. Say you live in Bromley you may add Bexley and Lewisham. You get to know the agents and professionals in those Boroughs and the planning policies that each have. Concentration of sites also contributes to a recognition of your brand too. A development site with clear signage will attract enquiries.
4. Site Investigation. Make sure to be thorough
Often referred to today as Due diligence or the Pre Contract report . It is important to document the investigation and my advice is to record everything so that if you need to look up any information it is there in you Pre Contract report. Even minor information such as post code and Grid references. When undertaking Due diligence identify the Key issues first. If you consider that they will not be overcome do not continue with an acquisition.
5. Staff and overheads
Outsource activities where you can. Fixed overheads are not appropriate to the development business where a planning refusal can keep you inactive for months.
You will need a site manager on each site and to make arrangements for payment of invoices so a part time administrator for this role. All other staff can be outsourced to professional consultants. Remember that the consultant specialising in one subject is bound to be more up to date than you and can save you a great deal of time.
6. Keeping Records
Keep records of everything. Copies, plans, addresses, certificates. This is so much easier with a cloud storage system. You never know when information proves valuable and buyers lawyers do have a habit of asking for copies of obscure records the day before exchange of a sale.
7. Vanity projects
It is not your obligation to take on a project for the community benefit nor is it your job to prove that you can take on a project that no one else can. Avoid vanity projects.
8. Personalising the project
If you are a fantastic celebrated designer then it might be that your efforts to personalise your project result in praise and profit. For the rest of us the rule is do not personalise. Colours are neutral for a reason. Not because everyone likes them. Because they are less likely to offend. The bright blue kitchen that looked stunning in the showroom losses its appeal in your show house. Soft neutral colours . Uncomplicated design. Quality finish. The buyer will personalise in time.
9. Unconditional acquisition
By unconditional I mean that planning permission has not been granted for anything so you are taking a punt on this. Such acquisitions are often the first step in a site assembly. Site assembly can take a long time. You may find yourself holding on to this property for years. My rules here are first, only buy property unconditionally if there is some income from it. If you buy a house and let it out it will at least yield some income. Also do not borrow to buy. Only buy unconditionally if you can afford to wait for an outcome. Also if you are buying unconditionally do not be tempted to reflect development value. You buy at current use value.
10. Go with the flow
Go with the flow when dealing with planners. Swimming against the tide is hard. Whatever you may feel about the decisions the planner makes she is advising her councillors not you.
Appeals are always uncertain. Try to agree at local level.
11. Be prepared to engage a first class professional team
You may wish to save costs by using Bill from the pub to knock up your plans. This is not good policy and indeed could cost money. First Bill is not a professional and does not have the Professional Indemnity insurance that your funder will wish to see. Also your New home warrantor is an insurer. He will price the premium based on risk and the absence of PI will be a risk for him. In addition you are of course at risk if there is a fault in the design. Ensure that professionals scope of work is in writing.
12. Residual land
When completing a development there may be slivers of land or perhaps an access road that is not part of any one of the plots. There are several ways of dealing with this. First to split the access drive between the plots. The issue here is that the area will be included in the New home warranty as it is sold with the plot. Next you may wish to sell it with the furthest house, the one that uses the whole drive. Then you may wish to create a management company to hold the access and common parts, the bin store, cycle shed and landscape areas. This is advantageous if you wish to create mutually enforceable restrictive covenants on the plots. The common parts can take the benefit of those covenants. My advice is to retain any private road or land that might offer a future access to adjoining land. This is what I mean as residual land. This residual land will have no value until you receive a call from the neighbouring owner’s Executor to say that the adjoining property is to be sold.
It then takes on an exciting potential for further development without the threat of competition.
13. Estate agents
You will have decided which agent to use to sell the project. Either you bought through them or they seemed most responsive when you undertook the sales survey. Do remember that the agent will no doubt be dealing with dependant sales and this is an important role. Good contact with the market is essential for this.
14. Invest in your Brand
I am not suggesting spending a great deal of money on promotion. However the local developer will benefit by a reputation for quality, good design, service, considerate construction. A good reputation for quality will help with sales.
15. Never fetter your discretion
Sometimes you are faced with a request when entering a contract for some form of overage payment contingent on a certain outcome. For example you are applying for planning consent for three houses and buying the site subject to receiving planning permission. The vendor states that he wants a further payment if you obtain planning permission for more than three houses. This does not seem unreasonable when you are keen to get the deal done. Following submission of the planning application however the planner says that the committee are to turn this down. They want to see five smaller houses. Your contract has fettered your ability to simply agree to this without further negotiations with the vendor.
I recently had a vendor require further payment if I sold the site to another developer when planning permission was granted. How can I know today what I may need to do tomorrow? What if the sale price to another developer is less than I am paying my vendor?