Making mistakes as a property developer can be devastating and can leave you bankrupt and broke for life. We all think we can make money from property when our houses have risen in value but wait. If you are serious about making profit from property there are some important lessons to learn.
Buy to add value
If you like property, then it’s easy to fall in love. Get homely and feel good about an area your buying into. But the simple truth is that buying a property to make profit requires more skill. You need foresight and you need to take risk. Zigg when others are zagging to coin a phrase.
Buying in an area that is already reached its potential won’t net you the growth you are looking for. Buying a well designed and wonderfully furnished show home means you’re buying the most expensive property available. You need to be looking at the neighbors street of the top places, the ones with the skips outside. You need to find the unloved properties the ones with potential. The ones you can add value to.
Buying for too much
When you find your opportunity you need to do your homework. Do your sums and work out ‘Best’ and ‘Worse’ case scenarios. What if properties prices fall by 2%? How much will the sales cost? what about stamp duty? You need to factor in every single penny into your equation. Once you’ve done this, you’ll know what this property is worth to you. Forget the asking price, forget the guide price, you need to know what you need to buy it for before you can turn a profit. When you kno this, you’ll know what sort of offer or auction limit you can set yourself. Don’t ever go above it, if you do, you’ll be eating into your profit.
We all have to borrow to get going and many mortgage advisers will tempt you with wonderful ways in which you can purchace the property with initial bridging loans with the promise to convert to a fixed rate mortgage after 3 moths. Whilst this might be your only option, refinancing comes at a cost that will hit you profit margin. Be aware of these financing and refinance costs from the outset. You must know how you will finance the project to a sale befire you commit to anything.
Spending too much on the development
Nothing sells a property like a well designed interior. A high spec kitchen and bathroom can make all the difference. But be careful, remember you’re selling this property to a specific client in mind. Will you see a return by putting in a SMEG fidge, or will your client be just at home with a wholesale brand? It’s easy to get carried away with the level of finish as well. Why buy taps and bathroom fittings from a high street retailer when you can get them from ebay at less than wholesale price, get hunting.
When it comes to larger structural decisions make sure you involve an Estate Agent. Ask them it’s it worth it, they’ll always want to offer advice especially if you’re a developer and they stand a chance of selling it once the project is completed. Understand the cost of any structual improvement like an extension or conversion. Try to find other properties in your area that have done the same and work out if they are valued higher. Any structural enhansement can soak up cash so you need to make sure you see a return before you do anything
Accepting too low an offer when selling
Every Property developer wants to see a return quickly. There’s a mortgage to pay and you need to probably pay off some debts. But be warned many buyers will see this as a developers weakness and offer low. Boy, will you be tempted. I seen a developer offer 20% less than an asking price because they got wind that the seller was in heavey debt. Can you imagine seeing your property back on the market with another agent for 20% more!
Things are always tight at the end of a development but stand your ground, always try to find enough cashflow to finance at leased 2 months post development to ensure you’re not in a position of having to accept a low offer. Worse case – get a tenant in to help you pay some debt. Only make sure you’re Estate agent knows you’re expectations when selling.