#SQFT 7: Getting Your Scheme Built

Past Experience

As of June 2017, we have been involved in around 15 schemes in Central London – which when writing it, does not sound like a lot. Given that each scheme probably takes at least 18 months however and the fact that earlier on – progress is and was only linear (i.e. One, then another, then another – as opposed to exponentially where multiple schemes can be concurrent) in our early days.

There are huge success stories, (Nick and Christian Candy spring to mind – www.candyandcandy.com) that are repeatedly published as they give property development an errotic appeal. The Candy Brothers’ story is a fascinating one – they are two immensaly driven and voracious guys who’s appetite eclipsed all others – and their timing in the London market was rather exceptional. These types of developers make the money seem overflowing and easily obtainable

For some, one project at a time will suffice and proivide substantial mental stress in the early years. How and if this is grown is the choice of the developer but learning from one scheme to the next is vital. The foremost skill that the Candy’s had is marketing their brand in order to attract prestige and investment.

Succesful property development requires the mastery very few skills but an intense focus  and ability on those skills. These are primarily sales experience, accounting and to a certain extent, construction understanding. In that order.

My sales experience, where my teeth were cut, is still one of my proudest involvements that will turn many a stern constitution to projectile vomit – I was a sales negotiatior at Foxtons. I loved it. I don’t think any of my “jobs” (I’ve worked for myself since the age of 26) ever taught me nearly as much as the invaluable time at the helm of my branded mini. I had 2 of the most inspirational and still best salesman I have ever met as my mentors, namley Jon Hunt and Peter Rollings.

This experince, above all else taught me how and why people make such massive investments in static objects, and that is mostly passion. An effective property sale does not require the agent to say a word – they must listen to the motivations of the buyer, and open the proverbial door. If understood succesfully, the buyer will gladly sell the home to themselves, despite being well beyond their initial budget – becase it creates a connection with their heart. They want to live there. Translating this into property developement, instead of trying to create something beautiful while disregardinfg a budget, we must identify what most people want. And offer something a little better.

Accountancy is not something I have ever trainined in and the thought alone is soporiphic dynamite. “Accountancy” generates connotations of actions with names like records, payable, receivable and depreciation. Snooooooooore. The relevant accountancy required in property development is costs and sales – ultimatley and hopefully, yielding profit. We need to be able to clearly demonstrate how costs accrue, which costs to allow for (and over allow for) and a summary of them – to be shown against our projected sales. Once this is done effectively, a developer will likely find borrowing money becomes considerably easier as the investing party can see your clear demonstration of financial understanding and contingent prediction.

If the previous paragraph is off-putting – it must be simplified and justified. I have never taken any form of training in accountancy but, over the last 10-12 years, I have built a spreadsheet model that started with “purchase price, architect, build cost, sales costs and value”.  It has developed over time to show a little more depth of undertsanind and specifications such as CIL allowance, Enlosement Costs and Bank LTV % on GDV – but this has just come through time and experience. A basic ability to show an understanding of costs that build up our acquisition, development, finance, disposal and Gross Development Value are the basics in accounting. The success or total failure of a project however can be entirely determined on a simple spreadsheet though so seek advice wherever possible.

Finally, in terms of construction knowledge, I was foolish enough to set up a consntruction company at the age of about 26 – in about Octoebr 2008, just as the financial world was teetering on collapse. This did teach the value of understanding accounting – I have no shame in admitting that, coming from a decent 6-figure salary into entrepreneurship, I struggled to grasp the concept of requiring money to come in before it goes out or into our pockets. I blame the fact that my previous highly paid existance was selling people. Not those seeking asylum or careers in sexual slavery but financial experts to banks  – for astronomical fees as the credit bubble grew beyond anyone’s conceptual limits. So with my over-priced English shoes, Swiss watches and numerous other accoutrements that we adorn ourselves in to remind us of our short-lived luck – I set up a construction company to overhaul an insutry that I thought out-dated and inefficient. My gold-plated idea was that the same bankers I had been placing on 7-figure salaries did not wish to engage with tattooed tradesman and their waitline-over-flowing arses but rather someone well spoken in a suit. With fine english shoes.

Running this business for about 6 years, I learned that clients don’t like paying and contractors like being paid – and the middle ground is no fairground. This aside, I had to learn the basics of construction, the relevant trades and thier values and importance. I leave construciton experience until last and the reason I got out of it, as within property development – contractors are interchangeable. The value is not in the build – it is in the costs and sales and management thereof. To a developer, two words during a build are the only ones that will ensure a profit – timescale and budget.

Case Studies in build processes

When modelling a deal, we are always in a rush to compile our build costs. We once had a project that involved extending a tired old house on a relatively good terrace, by means of a loft conversion and ground floor extension, before splitting the house into three flats – knowing their collective value would be greater than a house. Sadly, when delivering our under-prepared plans to a preferred and capable contractor, all the while pushing for a contract price, we started a project only to see costs elevate by 20%. While a build cost growing from £200,000 to £240,000 was manageable – it all came off the bottom line, being our profit, and required further equity investment. Not a pleasant conversation to have. The project ended up drawing even despite a dropping market which meant we had thankfully allowed sufficient profit projections to not lose money – but this was an awakening and novice experience. From that project on, we have always used a professional quantity surveyor and gone through line by line (multiple 3 hour meetings), each cost and what we believed was allowed for versus what we expected.

Summarily, when a capable Q.S. costs a project, it will always come in with a price comfortably over your budgeted amount. This is not a time to spoil your underwear but an opportunity to understand why such costs have been allowed and where you can economise (get to know that word). Only after multiple, thorough fine-toothing excercises will you arrive at a build sum you understand and are confident in delivering.

The above example was not the fault of the contractor – it was entirely our fault in pushing for a price instead of building up a value. Contratcors do not work for you until a contract is signed – and when it comes to signing a contract, they will always double check the prices that you rushed to extracate from them – and at this stage, they will commonly find holes.

Budget and timescale. Budget and timescale.

3 tips for young developers

  1. From the above example, hopefully I have illustrated the value of a QS. Their cost at the start of a project will bear a huge weight, but their value at reconcilliation time will far outweigh this. Working with a QS from one project to the next will ensure their understanding in your methods, finishes and preferred materials. Finally, always question a QS on his costsing – not because he could make errors but his understanding of your expectations cannot possibly be aligned with yours without detailed discussions.
  2. Thorougly analyse your contractors from their experience in specific similar projects, thier permanant staff (many are not “on the books” and so not dependable), their cashflow capability (lenders will always pay out in arrears, not up front – a very important point to stress to a contractor) and their time schedule. One month overun at 1% per month of the borrowings adds up extremely quickly.
  3. When a build starts, keep your main focus on budget and timescale. Avoid escalating costs as much as humanly possible by locking them down before works start with a good JCT contract and each week, discuss where progress is relative to the planned schedule. If delays start appearing, stress the need to catch up on these and do not ignore them as they will only multiply if unchecked.

 

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

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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