The 6 Mistakes Every Amateur Makes in Property Development
We’ve all been a beginner at one point in this industry and sometimes it can be a hard path to walk. Mistakes will be made, but you can limit those and increase your likelihood of success by learning from those who have come before you.
Here are the top 6 mistakes we have found people to make (and a little bit of advice of course)…
1. Buying in the wrong area
Whether you are looking to develop and hold, or develop and trade — location is absolutely vital! And a good location has to relate to the potential end user. We all know there’s no use in building a block of student accommodation three miles away from the university. — It may seem obvious but it’s amazing how often it gets overlooked.
Be aware of your regions as well. Historically — industry was found to the north and east, resulting in lower value areas of property. Whereas the higher value property was located in the south and west. So should you consider a buy-to-hold strategy in the East, where there may be regeneration potential. Or maybe look into fringe opportunities near property in the South, where ceiling prices could rise in the area. This is where local knowledge of an area can be vital and very rewarding!
2. No full development appraisal
We’ve found that even some “experienced” developers will overlook key areas of the appraisal process. This can have a hugely detrimental effect on the success of a project.
We all know that in a rising market, most can turn a profit, but the market isn’t always travelling upward. So while a potential deal that hasn’t been fully appraised doesn’t necessarily mean it won’t turn out to be a great deal, you will be taking on far more risk than you need to be!
Whether it’s down to lack of experience, not having a good understanding of the business, or motivation driving people to make snap decisions, it’s actually quite alarming how many people do deals without fully appraising them.
It’s a bit like building a house on sand; when the tide is out, the house is structurally sound. BUT when the tide comes in, your unsteady foundations will be quickly washed away.
3. Paying too much
Paying too much for a site usually comes down to two things; (1) underestimating time and costs, or (2) overestimating market values. Having a clear view of your site value (Total GDV — ALL costs — Profit = Site Value) will help you avoid these mistakes.
Remember to be consider all potential costs; the build costs will take the lion’s share of overall project costs, but there are other, often overlooked, costs that could have a damaging effect on the profitability of your project. Equally, you need to allocate contingencies on your time; underestimating time for planning, build and sales will result in increased finance.
When assessing a potential deal, using the services of a Quantity Surveyor or Project Manager (at the earliest time possible) will make your appraisal much more realistic, and could save you time, hassle and money!
4. Going for maximum GDV (Gross Development Value)
Achieving the highest Gross Development Value on any given site doesn’t necessarily result in achieving the best profit margin. We often 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 offered a better return on capital employed.
A successful developer will focus their attention not on the GDV, but the difference between the GDV and the costs.
5. Poor Design
Poor design can 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. Good scheme design, space planning and interior design is essential to maximise the profit and speed of sale or rental.
Get it right and you can raise both sale and rental values in the area.
If you bite off more than you can chew and there is an unfair balance in a deal, it will most likely fail. Success in the development industry is about more than just making profit. You should be 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 as possible at other people’s expense. Experience has taught us that this is not the way to go. The focus should be long term; building a sustainable business centred around providing solutions to other people’s problems.
The real way to create win/win deals is to gain credibility, build your brand, attract investment and enjoy the journey along the way.