Property development can feel like real-life Monopoly. But it's a fine line between succeeding and a metaphoric "Go Straight To Jail, Do not Pass Go, Do not collect £200".
Many developers, often small and medium enterprise (or SMEDs) can be low-budget and well, amateur. They tend to make the same mistakes in their investment journey. And while I agree we learn some of the best lessons from our mistakes, at nReal, we try and help you learn from others' mistakes. It's better for your sanity and the bottom line.
Some mistakes are likely to result in massive financial losses and wasted time. These errors affect the quality of the development, as well as how it is seen in the market. Here are seven of them which you should avoid.
1) Location does matter
One of the biggest mistakes that developers make is developing in the wrong area. It is natural to be drawn by a cheap offer, but not all locations are created equal, and not all promise high returns.
Without a comprehensive market analysis and a consideration of other factors, rookie developers quickly end up developing in the wrong area simply because they jumped at an "irresistible" offer.
The saying "You make your profit when you buy a site, not when you sell it" is correct. But the price is just one consideration, and ignoring other variables may end up being a wrong decision.
As part of due diligence on a potential site, not only do you need to look at prices, you should also consider:
- Local demographics & economics;
- The Local Authority's housing strategy and infrastructure plan; &
- Recent planning decisions
Do as much research as possible, but note there's still a gut-feeling element that only experience will bring. And the only way to get experience is to give it a go.
2) Building to taste, not to demand
Failing to develop within your means and instead opting to go for more expensive options is another mistake that newbie developers make. Before embarking on a project, know your budget and try to plan within it as much as possible.
Developers who go over the top and 'gild the lily' usually end up eating into their profit margin and end up seeking more funds to finish the project. As a developer, you should avoid this problem and remove personal whims from the design process. There's a careful balance between offering an enticing and saleable product and overspending.
Research, i.e. plenty of 'secret shopping' of competitors schemes is the best way to see what the local market expects and on what buyers will spend money.
3) Not shopping around for the best finance
When securing financing, evaluate what all available lenders are offering; not just the ones you know, had used before or 'did a good deal for a mate'.
The non-traditional sector accounted for 54% of lending in the Commercial Real Estate market in 2019 that's a big chunk of the UK's development loan book. With the alternative lender sector becoming better known, property developers need to get to grips with precisely what the lenders are looking for in a potential borrower.
Luckily, the market is growing intrinsically, and post-Covid and rates are low at the moment. But with so many ways put your development stack together, conduct your research to ensure you land the best deal.
4) Having unrealistic timelines
Failing to plan a realistic and detailed timeline is another mistake that developers make. At nReal, we refer to the 'Map', and as a map in the real world, it's a guide, not the territory itself. What we mean by this is that this map or timeline needs to be flexible, as a developer, you need to adapt. But ultimately know that you want to get from Point 'A' to Point 'B' and have an approximate idea of the route and how long it'll take.
Development or investment projects have many stages and processes from the identification of sites, sourcing of funding, identifying, tendering and securing contractors, the planning process, the pre-development and development phase, and sale and or handover.
When faced with the potential of a project running late, some opt to go fast, but in doing so, cut corners and compromise what's delivered. You must have realistic timescales for each stage to completion to avoid such rushes.
5) Not having a procurement plan in place
Procurement is one of the most critical aspects of development. Many developers begin without deciding on what to procure, the quality, and from which supplier, among other considerations. They look to save costs and wing it, rather than sitting down with their architect or project manager and optimise economies of scale to deliver the vision.
It's tempting to cut costs by purchasing cheaper materials or furnishings, but this can end up affecting the value of the construction. Late procurement (not accounting for lead times) can jeopardise a project's timelines too.
We've said it before (and will repeat it) - "Fail to plan, plan to fail".
6) Not having a network
A network of trustworthy contacts & professionals helps you realise success. Let's face it; the development market is hugely problematic, involving many different parties.
Not having a 'black book' of professionals like financial advisors and providers, contractors, architects, suppliers, builders, electricians, interior designers, and plumbers will make it hard for you.
Developers who think they can do it alone are committing to a huge gamble and risking both time and monetary losses. You are likely to be overcharged, or supplied with substandard service and materials without trusted contacts. It is worthwhile to develop your network well ahead of commencing development.
7) Look at the broader landscape
You develop a property to sell (or add to your investment portfolio). What happens when you can't achieve the desired outcome? Many SMEDs and Investors fail to consider the broader market and its conditions when developing.
Firstly, many do not decide who their target market is. It is impossible to develop for all real estate markets, and doing so is just gambling. In the words of Bob Marley "You can please some people sometimes, but you can't please all the people all the time".
You must conduct proper due diligence of the market and tailor your development to the prevailing market needs. Doing so increases your chances of selling from Day One with off-plan sales or reservations.
Having a clear exit strategy (which you should decide at the beginning) is imperative. Having a Plan 'B' and Plan 'C' is not a bad idea either. Remembering the map is not the landscape; real life could get in the way of your best-laid plans. There's a need to be flexible, and it's always nice to choose alternatives than have them forced upon you.
Knowing your market is one of the essential requirements that the developer should focus on when working on their projects.
Work with like-minded people
It is worth noting that no development process is seamless; you'll always catch a curveball or two. Equally, while it's key to have processes and systems to work to, it's important to remember you can't cookie-cutter every project. There will be differences, quirks and foibles. But having an overall vision and map to work to can ensure that you optimise your opportunities in the broader landscape.
These seven mistakes are some of the biggest that any developer can make, and it is pertinent that you avoid them. One of the fallacies that many developers find themselves in is the notion that they can do it all on their own. At nReal, we have built synergies and competencies in all these areas, and we seek to help you in getting the most out of your investing opportunities.
Very often, our clients run lean operations, perhaps alongside another business. They have so many balls in the air; the chance of dropping one is high. There is too much for a one-person or small company to handle, and the downside - be it opportunity cost or actual loss - is painful.
nReal helps small-scale property developers (SMEDs) and property investors leverage their existing resources and make the most of their opportunities.