Small-scale property development mistakes to avoid

Ritchie Clapson is co-founder of propertyCEO and a a veteran property developer of almost 40 years 

It’s hard to think of a better time to get into small-scale property development. The stars have aligned: there is a huge housing shortage; there’s been an increase in permitted development rights; there are a glut of properties that are ripe for conversion to residential; and the alternative buy-to-let business model is looking less commercially attractive by the day.

Barriers to entry are few, but it’s easy for newcomers to the sector to trip up.

A lack of brandingHere are some of the biggest mistakes you want to avoid:

1. Poor or zero branding

Branding is the first thing we teach people to get right because you need to have it in place before doing anything else. You only get one chance to make a first impression.

Imagine a new developer asking you to invest tens of thousands in their first development project, promising you a healthy 8-10% return. They may have a friendly smile and a firm handshake, but what if they had no business card or even a business name? What if there was no website you could look at? If someone hasn’t invested in their own business, why should you?

The same concern applies to commercial agents. They need to know that you’re proceedable: in other words, that the deal is not likely to fall out of bed weeks or months down the line. Which developer sounds like the better bet: the one with a professional-looking business card and logo plus a good-looking website containing details of their highly experienced professional team, or the new developer who hasn’t invested in any of those things?

2. Poor relationships

Over half of all property development deals never come to the open market. For estate agents, selling properties on the open market is more expensive and time-consuming than selling them off-market. Here’s what they do when they receive a new instruction: they get out their black book and ring round a handful of ‘hot’ buyers they know will be interested in the property. If one of them bites, the agent doesn’t need to measure up or take photos, there are no emails and zero advertising fees. Just half a dozen calls and a handful of viewings, and the deal is potentially done within 24 hours.

The best deals are being sold through the black book, and if you’re not in it, you’ll only see the deals that the hot buyers don’t want. That’s why you need to have great relationships with agents to ensure you get that early call.

3. Poor planning

Even a small-scale development project can generate significant profits, but with some chunky numbers involved, even a simple spreadsheet error, pricing oversight, or miscalculation can dent your margins.

You’ll start with ball-park pricing estimates, but before the deal goes ahead, you should be getting accurate pricing for the project from your quantity surveyor/cost consultant. A common mistake is to fail to firm up all your pricing estimates in this way or to assume that the price you were quoted on the last project won’t have changed much.

Not allowing for a contingency fund is another biggie. Always allow for 10-15% of the construction costs as a contingency because you will almost always encounter unexpected costs. Too many new developers either fail to have an adequate contingency or dial too many of their pricing assumptions to ‘optimistic’ to get their numbers to work.

Finally, make sure that you’re targeting a profit of at least 20% of the gross development value (GDV). That way, even if you encounter some unexpected bumps in the road, you should still end up with a profit.

5. Poor delegation

Dogs and barking yourself comes to mind. I never manage my own projects, and neither should you. You hire a main contractor and a project manager. On a small-scale project, I would expect to spend on average around 4 to 8 hours per week working on it – significantly less once the project starts on site.

Too many new developers think that it would be a good idea to manage their projects. Or perhaps they know no better, having previously project managed a few flips or refurbs. It’s a terrible idea for the same reason I don’t lay my own bricks or do my own dentistry. Paying someone a lot more experienced and better qualified to do the job is the ONLY way to go, plus it frees up a massive amount of my time and gives me less stress. I become the CEO of the project, not its operations manager.

5. Poor or zero training

I train a broad range of people, some of whom have already developed property before. Why do they decide to be trained AFTER they’ve already started developing? It’s nearly always because they’ve found out the hard way that crossing a minefield is easier if you know where all the mines are. And in development, there are quite a few mines to look out for.

The other side of training is all about finding opportunities. Now that you know that over half of all development opportunities never reach the open market, it’s not unreasonable that you might not want to understand how you can tap into this hidden pool. Well, with training, you can. Similarly, you might think you could convert that old commercial building into five flats, with your 20% profit coming from the last apartment you sell. But what if, with training, you could see how to get six flats? That doesn’t simply add a few pounds onto your margin; it almost doubles your profits and makes it much more likely you’ll win the deal.

Given that a modest, small-scale development project with just a few flats should net you a healthy six-figure profit, the cost of any training is likely going to pay you back many times over. Education comes at a price, but a lack of it usually ends up costing more.

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