#SQFT 5: Establishing your development costs and structuring your team

Experience

Your spreadsheet is King, and must be worshipped.

The correctly laid out spreadsheet is the difference between being taken at all seriously or not by banks and investors so the better it looks, the more informative it is and the easier to read – the better chance you have of raising funding for your deal.

At last count, I think I have modelled nearly a thousand spreadsheets for potential deals (yes, I am a an Excel junkie) – but strangely, I still love them. By consistently modelling deals in a simple costing format, we can develop a very quick eye to establishing whether a site is a deal or not. Remember, we don’t want a derelict house, we want a deal and the price we pay and sell is all that matters. Looking back to my first speadsheets, I’m embarrased at what I didn’t know – but how could I without the experience? Start getting down as much information as you possibly can about a deal so your model very simply shows costs, sales and (hopefully), sufficient profit.

It is highly recommended to build a template in Excel that just needs certain cells filling in – some will always be constant and some you will have to guess – so guess higher than you think. It’s better to under promise and over deliver but so easy to convince ourselves that one cost will be a little less and sale price will be a bit higher. Break down your costing to illustrate all acquisition costs (purchase, SDLT, professional fees, due diligence fees), Development costs (don’t forget tax, professional furnishing, more professional fees), Finance Costs for the duration of the deal and a contingency and finally disposal costs (legals, agents fees). This will summarise your Gross Development Cost. Your expected sales them summarise your Gross Development Value – and this should be comfortably 120% of your GDC.

As time goes on – we always will discover new costs that we did not allow for – usually small ones, but notable. Always add them to your model in order that over time it develops into a beautiful summary of your deal expectations. This data is the first step, but I have found over years, the tidier you can make it, the easier people will read it and longer their attention span will be on it. What does this mean? Make sure your cells for formatted, if you use colours for cells, make sure they are consistent. Basically, make it as visually appealing as you can – it may not enhance the data but to a banks underwriter who sees thousands of these, you will gain their attention and be signed off a lot quicker.

Your spreadsheet is King, and must be worshipped.

Starting out, certain costs will be difficult to guess so seek as much professional advice as possible; call a party wall surveyor, a QS, a planning consultant, an accountant – chances are they can give you a very good approximation in seconds and they will definitely want your business so pilfer their knowledge. Again, always try to over allow on costs by projecting down to the end of the project – would you rather come in over budget and lose all of your profit or under budget with a fat profit? In summary, don’t try and make the deal work.

When selecting a professional team, many will advise on calling a few, getting some feedback, quotes, references etc. At this risk of sounding sloppy – this is a waste of time. You will never know the proficiency of each member of your professional team is until you have used them – and some of them will be utterly shit, unobtainable and miss out on fairly important factors. This is a fact of learning and best done by trial and error than procrastinating and wasting time researching. When speaking with a professional for your team, preferably get a recommendation from someone who has used them – then establish 2 things; how long will their bit of work take and how much will it cost. These are the two main factors that have an influence and the professional in question can be reminded of so make a note of them early on.

Experience has shown that I rarely need the use of an architect on my professional team. Architects are incredibly talented at making something beautiful – they artists in their craft. We don’t need an artist, we need a product – and if an architect is needed to create it, chances are it is too complicated to be dealing with. The answer is to find a really good CAD technician (very easy on Google, eLance, Odesk) who can draw up all of your plans at a fraction of the cost of an architect, quickly and easily. Architects are usually rather insulted and unmotivated to create such a basic product and are best suited to home owners who are less focused than developers about costs and time.

A past challenging scenario and how it was overcome

When building a cost model, I have been caught out on numerous occasions, beyond my own capability on the subject of various taxes. I could bitch and moan endlessly about how much developers get taxed for creating new homes which the government desperately needs but that is for another dinner party and negativity will only keep us from succeeding.

Taxes in question that have caught me out significantly in deals are those of Community Infrastructure Levy (CIL) and Stamp Duty Land Tax (SDLT). The reason I have been caught out is that the goal posts have been moved by various governments during a deal (or the lead up to a purchase), meaning I could not allow or expect them but have to either find a way to deal with them or drop the deal and costs spent to date. Notably, don’t be afraid to drop a deal before purchase if substantial changes occur in the costs – better to lose £10,000 than £100,000. Painful but better).

On one purchase in 2014 of a property just over £2m (which was a steal for what it was), the delightful George Osborne changed SDLT rules beginning at midnight the same day. Bollocks. This resulted in the SDLT of our purchase going North rapidly and having a significant impact on our costs and therefore profit. Our only solution was to offer to split the difference of this hike with the vendors of the property by reducing our asking price. Not fun for any of us but it meant the difference between a sale and no sale so after various shouting, insults and strees this was agreed in a little under 24 hours.

Another purchase in 2016 became impacted by rule changes and the actual confusion around CIL and how it was charged on a purchase. Basically, if you extend a property more than a specific amount of space – the government taxes you. What the government failed to do in this instance was make the actual rules of how this tax was implemented clear meaning that even our accountants did could not decipher the chargeable amount. The fact we were increasing the square footage of the property under the level that attracts CIL, BUT we were splitting the development into separate flats meant that a £20,000 bill came through with our planning permision. At this point and too late to back out – we had to take actions to erradicate this extra unknown expense. By playing the local authority at their own game, we managed to apply for planning permission for one large unit to avoid the CIL associated with flats. Once built, we just reverted to the permission we already had for 2 units. A lot of extra work but worth the £20,000 saving a mildly rewarding to raise the proverbial two finger salute.

Summarily, we will always throughly check and confirm our expectations on costs on every possible factor where a f*cking idiotic regime can impact our perfectly legitimate and beneficial business. Of note, all company purchases of property now attract the additional 3% SDLT associated with second home purchases though it is the only purchase a company is making. Bastards.

Top 3 tips for costing and structuring a professional team

  1. Become a spreadsheet junky and keep developing your model template. It will never become perfect but this is the framework of your entire business so getting it wrong will have catastrophic consequences.
  2. Always allow enough margin and contingency because things ALWAYS go wrong. Expect this to happen and advise your investors that they always will and the experience will be a much smoother one. The skill in a good developer is expectation of problems and the calmness in handling of them.
  3. Use professionals wherever you can afford to – they are better than you at what they do. Above all, this applies to a Quantity Surveyor as they can manage your build costs which (second to sales price) can have the biggest impact on your profit. With all professionals, always outline what you need from them and ascertain what it will cost and how long it will take. Remember, they get a fee regardless but you get a profit or loss!

This story is listed in: Investment, London Property market, Property development, Property Market

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£20,308,750

GDV to date

£970,308

Average acquisition

£1,562,212

Average GDV

£351,115

Average Equity raise per deal

£343,558

Average profit per deal

97.75%

Average ROI on equity

11

Deals completed

8

Currently units in progress