The time vs. profit quandary is also one that should be at the front of your mind when assessing deals. Developments that involve a lot of hassle and time may not be worth it if there isn’t a good chance of a healthy profit at the end. Many people don’t assess the amount of time they need to invest in a deal to make it work, and they don’t effectively cost this time in the form a notional salary that needs to be paid from the deal. A little like a percentage interest rate that needs to be applied to any cash you inject, you must cost this time to get a real understanding of what the overall all-things-considered return is from a deal.
It is also important not to be too swayed by what others are doing. Ironically, the worst time to invest or develop buildings is often when the most people are interested in doing it, as it indicates that you may be nearing the end of the cycle. Conversely, when things are really bad during a recession or downturn, people look at you strangely when you say you want to develop or invest in buildings. I have often found that these are the best times to invest. It’s therefore important to ignore most people and focus on the few who have been around for a long time, investing at all points of the cycle, and preferably focus on ones that have seen at least one dirty recession.
Critics, or conversely lots of competition, don’t make something necessarily bad. In the end, you need to rely on your own testing and measuring as it’s the only way you will work out what works for you, with your skill set and with the resources that are specific and unique to you. Once you have found something that works, keep doing it.
But make sure you also have other types of business in other sectors, or if something is particularly capital-focussed like developing, make sure you have other income-based streams that won’t be affected at the same time as a development or building project may be, for whatever reason. Sometimes people are just jealous – this can manifest itself in multiple ways, and they may knock what you are doing. It’s important to insulate yourself from this, and these people, as the toxicity that they can inject into you may be very costly to you over the long run. If you must have them around, perhaps it may be easier not to explain the new journey you are on.
Deal analysis if your project
Having reviewed your visit, if you come to the conclusion that there might well be a deal available to you, it is time to assess the deal in detail, in readiness for your offer. It cannot be stressed too highly that your analysis tool must be as robust as possible with lines for almost every eventuality, reminding you to consider all the various costs that are applicable in property development.
There are costs associated with buying, designing, planning, constructing, financing, selling and investment. There are all kinds of costs at every stage, and whilst in every deal you will find costs that you may not have considered, or perhaps factored in accurately, you need to give yourself the best chance to ensure that you are no more than a few percent out.
Let’s list some of the lines you should consider in your appraisal tool:
- Purchase price
- Finder’s fees
- Working capital
- Stamp Duty
- Conveyancy fees
- Insurance
- GIA ft2
- Number of units
- Build cost per ft2 (ex. VAT)
- Subtotal build cost (ex. VAT)
- VAT
- Contingency
- Contamination provision
- Utilities
- Lifts
- Total build estimate
- PD preliminary planning fees
- PD architects first stage (incl. VAT)
- Surveys (asbestos, flood, environment, contamination, drainage)
- Mechanical and electrical engineer
- Party wall surveyor
- Building control (£240+VAT per unit)
- SAP & EPC
- PD architect and planning fees – second stage (incl. VAT)
- Prepare specification for works
- Tender preparation and contract docs
- QS
- Architect project management
- Project management
- CDM consultant
- Section 106 payments
- Council fees (e.g. transport contribution, deed and monitoring fees)
- Interior design
- Guarantees
- Landscaping
- Other professional fees necessary for your opportunity
- Sales agents fees
- Legal fees on sale of units
- Marketing costs
- Brochure costs
- Dressing of units
- Cost of funds for bridge, development finance, and investor funds
This is by no means an exhaustive list, but it does cover most of the usual considerations for a commercial conversion. Work these into your spreadsheet model and continue to iterate it until you have a robust and comprehensive model you can use to assess your deals.
