Clinching The Deal
Why do some people struggle to find property development deals? It’s a question I hear from numerous new and aspiring developers, yet the reality is that it’s not particularly difficult, just laborious. You need to learn where to look and how to systemise your deal search. You also need to know how to work out your numbers accurately. Then, you simply rinse and repeat the process. Will you need to kiss a lot of frogs? Yes. Will your prince or princess arrive one day? Absolutely. It’s a numbers game, but if it were easy, everyone would be a successful property developer. The reality is that too many people either ‘give development a go’ without bothering to get trained first (which is a bit like Russian roulette, except with more bullets) and/or they simply give up when the first few deals they look at online don’t seem to work out.
However, it’s often the back end of a deal where people miss the biggest trick. They may have found a deal, done their due diligence, and crunched some numbers. But the wheels come off the bus when they try and make an offer. So, what can be done to enhance your chances of getting an offer accepted, assuming you’re up against some healthy competition?
The first thing to recognise is that there are three ingredients to the cake when it comes to the anatomy of an offer, and they can apply whether you’re buying as a developer or simply purchasing your next home. The first and most obvious of these is price. Money talks, and vendors will always be more inclined towards accepting a higher offer for obvious reasons. Yet there are situations where the highest offer doesn’t always win, which is where we come to the second ingredient, namely proceedability. No one can predict the future, but a vendor’s worst nightmare is when their flaky purchaser pulls out months down the line because they weren’t serious enough or didn’t know what they were doing. Because they must then go right back to square one, put the property back on the market, and start the sales process all over again. So, a high offer from a flaky-looking buyer can often be trumped by a lower offer from a buyer who inspires greater confidence.
The third ingredient is rapport. This is the weakest element of the three, but buyers ignore it at their peril. The vendor ultimately chooses who they sell to, and property is very much a people business. So if you can make the vendor or their agent fall in love with you (ok, that may be a bit strong, but you know what I mean), you could still be the preferred bidder even if you haven’t made the highest offer.
Let’s now look at how you could influence the outcome in your favour, and we’ll start with price because it’s the most influential. It’s also a definitive yardstick; your proceedability will necessarily be a subjective assessment by the agent, but there’s no subjectivity when it comes to an offer; either you’re the highest bidder or you’re not.
So, how do you get to offer the most cash? When it comes to development, the answer lies in what we call ‘sweating the asset’. Let me give you an example. Dave has an old commercial building on the market with a local commercial agent at £200k. Donna is interested as she’s looking to house her expanding local business and thinks that £200k is the right price for Dave’s unit based on the going rate for commercial space in the area. Derek is also in the frame; he’s a property developer and can see an opportunity to demolish Dave’s building, replace it with some new houses, and make a six-figure profit. And, because residential space carries a premium over commercial space, Derek can afford to pay up to £275k for Dave’s site while still making a tidy profit.
He’ll be able to outbid Donna by some margin, so he should win the deal. But then comes another bidder, Sam, who’s also a property developer but slightly more clued up than Derek. Sam’s worked out that there’s scope to use permitted development rights to convert the existing building into some nice apartments. With no demolition costs, less time on site, and more units to sell, Sam can afford to offer Dave up to £350k for his building, and she would still make a fair bit more profit than Derek.
What does this tell you? Firstly, development usually produces the highest offers because residential property carries a premium. Secondly, not all developers are created equal. Because Sam knew more than Derek, it meant that she could get more profit from the site and, therefore, offer more money for it. Sam didn’t need to be more experienced than Derek; she just needed to know what he didn’t know. Get educated on how to ‘sweat the asset’, and you will consistently be able to outbid most of your competitors. While you could technically offer more money by accepting less profit, that’s a race to the bottom if ever I heard one. Also, commercial lenders require developers to target a minimum 20% margin for themselves, so if you target less than 20%, you won’t get any funding.
Let’s now look at proceedability, which is much more subjective but still hugely important. Sam’s offer is worthless if she can’t get the deal across the line, and the critical question here is, how will the vendor and their agent perceive her? They can’t possibly know whether her deal will ultimately succeed; they can only judge Sam based on what they see at the outset. This is where a little investment on Sam’s part can go a long way. Let me share a little secret: this was Sam’s first development project. Derek had been doing new builds for years, but this would be Sam’s first rodeo. So what did she do to make herself look better than Derek? First of all, she had a brand. She’d created a business with an excellent, professional-looking website that had information about her and, critically, her professional team. This was a team that, between them, had built hundreds of projects locally, and she even had links to their websites on her own site’s ‘Team’ page. She’d also practiced her ‘pitch’ and could talk confidently and enthusiastically about her business and Dave’s site. In short, she sounded like she knew what she was talking about. Sam also provided the vendor with a pack of information about her business and a letter that confirmed that she had the requisite funding in place to proceed. She’d also called the agent regularly with updates and quickly responded to the agent’s own calls and emails.
On the other hand, Derek wasn’t that big on websites; he was a bit slow on emails, and while he had lots of experience, he didn’t come across as professional or enthusiastic as Sam. In essence, looking proceedable just requires a bit of upfront effort. You’re not able to change how much experience you have personally, but then it isn’t you who will be laying the bricks.
Let’s move on to our third and final ingredient, rapport. This is the softest and arguably weakest force of the three, but I’ve seen it repeatedly move mountains. Now, rapport in this context comes in various flavours, and it’s not a one-size-fits-all solution. Let me give you an example to whet your appetite, and we’ll stick with Sam because I’ve become rather fond of her over these last few paragraphs. Sam first learned the value of rapport when she and her husband, Simon, bought their current family home. The house was being sold by an older couple who were downsizing, and there was considerable interest since it was the first time it had been on the market in thirty years. The two of them viewed the property with the agent and fell in love with it instantly. It would be perfect for them and their two young daughters. But it looked like it would be going down to sealed bids, which meant they wouldn’t know what other people would offer. So, how could they enhance their chances of securing the property? Sam decided that the best approach would be to mount a charm offensive.
The first thing she did was give the agent, Yvonne, a letter from her accountant stating that she and Simon had the required deposit funds sitting in their account and a letter from their mortgage broker confirming a decision in principle from their lender. She did this without being asked, which immediately placed her a rung or two up the ladder compared to those other bidders who hadn’t. Rather than email these documents, she rang the estate agency to find out when Yvonne would be in the office and then dropped them off. This allowed her to chat briefly with Yvonne and start building some rapport.
She was tempted to ask Yvonne for coffee but didn’t want to push her luck. What she did do, however, was ask if they could do a second viewing. And she also asked whether it would be possible to meet the vendor.
Now, many estate agents are reluctant to introduce buyers to sellers because they want to make the process less intrusive for their client, plus they don’t want to run the risk of the vendor and buyer doing a sneaky deal and cutting the agent out. Stand your ground, however, and you’ll find that most will capitulate, even if the agent insists on being there too. Also, there’s no harm in asking for a third viewing by which time the agent may be happy not to have to traipse around the property again.
For the second viewing, Sam did something a little different. She and Simon brought their two young daughters and took along a small bunch of flowers to give to the vendors. When they looked delighted but a little surprised, Sam had said she’d appreciated what a pain it must be to keep having people round to view their home, and that she and Simon really appreciated it. Having shown their daughters around, they then had a cup of tea in the kitchen, where Sam asked about the house’s history and learned more about why they were selling. Simon was given strict instructions to keep the girls occupied, and Sam showed interest in learning about the owners’ story and asked lots of questions. It turned out, as Sam already knew from Yvonne, the agent, that they had raised their own family there and were now retiring to the coast, since they didn’t need such a big house now the children had flown the coop.
A week later, Yvonne called a rather anxious Sam to tell her the good news: their offer had been accepted. Yvonne even confided that Sam’s hadn’t been the highest bid, but the owners had been so taken with Sam and her family and could see how her young family could enjoy the house as much as they had; it had been an easy decision for them.
It was a happy ending for Sam, but she now wanted to buy Dave’s old commercial building, which was a different kettle of fish. How could she use rapport to her advantage? The first thing she did was woo the agent. She made an appointment to see him and simply asked whether he’d be free for coffee or lunch instead of meeting at the office. During lunch, she started building rapport, saying all the right things without pushing her luck. She didn’t want to be seen to be pumping him for inside information. But what it did do was create a good relationship. So much so that in a conversation two weeks later, the agent not only told Sam that they had received an above-asking price offer (that would be Derek), but he also hinted at where Sam would need to be to be competitive.
Next on Sam’s list was a meeting with Dave, which she duly managed to arrange through the agent. After viewing the unit again, she invited Dave for a coffee. She asked him about his connection with the building (it was originally his grandfather’s business, which had been handed down to his father and then to Dave) and why he was looking to sell (the company had relocated, and he needed the money from the sale to fund his mother’s healthcare). It even turned out that Dave’s mum and Sam’s grandmother had been teachers at the same local school, albeit years apart. More importantly, Dave shared that he needed to sell quickly because his mum’s healthcare bills needed to be paid soon.
Rather than emailing her offer to the agent, Sam dropped by to deliver it in person and followed it up by email. This allowed her to gauge the agent’s reaction to her offer – body language can say a lot (even if we wish it didn’t). Sam also told the agent two things. Firstly, she recognised that Dave needed cash quickly, so she’d agree to an early exchange of contracts, at which point she would pay a non-returnable deposit of £30k. In return, she would want a delayed completion of 3 months. This would give her more time to prepare for the works while ensuring that Dave got the cash he needed as early as possible.
Secondly, she told the agent that she would be happy to name the apartment building after Dave’s grandfather’s business and would put a plaque on the wall to celebrate the building’s history. A week later, Sam learned that her offer had been accepted. She also discovered she’d been the only potential buyer to have met Dave face-to-face.
I know I’ve thrown quite a few things into the mix to show you the art of the possible, but hopefully, you can see how rapport can help. And who knows what other opportunities might crop up just by taking the time to engage with people. The other point to note is that Sam didn’t just do one thing to win Dave’s deal. She a) sweated the asset better than anyone else, b) looked eminently proceedable, and c) built rapport with the buyer and their agent. As combinations go, it was pretty unbeatable. Yet, most people don’t do this stuff and then wonder why they’re not successful.
The lesson here is to think outside the box and do things differently from your competitors. Be better trained and better prepared. And, of course, don’t forget to practice that personal touch. Yes, it’s possible to buy properties via email, but you’ll be missing a big trick if you do.