Don’t Feed The Sharks

A few years ago, I was asked to speak at a particular networking event that had been organised by one of the nationwide property training companies. The host was lovely, the event was well organised, and the audience engaged. They even laid on some nibbles. So, as those sorts of gig go, it ticked all the right boxes. But, nibbles aside, the main reason it’s remained lodged in my memory was down to a brief but mildly surprising conversation I’d had immediately after my talk. A lady had approached me, wanting to know the ins and outs of small-scale property development, which I was pleased to share.

Afterwards, she thanked me for my advice and told me how wonderful it was that everyone in the property community was so helpful and lovely. She’d recently started taking an interest in property and was amazed at how caring and sharing the people were.

Now, I’ve worked in the property industry for around forty years, and it’s fair to say that I’ve seen all sides of it, both the good and the bad. But one of the sweeping statements you won’t catch me making any time soon is that all property people are lovely. Yes, I’ve met some truly amazing people, but I’ve also encountered my fair share of property people who I’d use very different words to describe, but for brevity and printability, let’s call them ‘unlovely’. So, I was somewhat intrigued by what had prompted her comment. It turns out that the lady in question had decided to get into property six months previously and so had signed up for the various property networking events in her area. And it was her experience in these groups that helped forge her glowing perception of the property community.

And herein lies a reality check that many property people should make a point of experiencing. Some do it the easy way by being warned beforehand and taking all necessary precautions. Others find out the hard way by getting royally shafted by someone who saw an opportunity to take advantage of them. And no matter whether you’re a new investor or a new developer, the lesson is the same. Namely, some people will happily throw you under a bus despite their benign appearance. Where there’s muck, there’s brass, as the saying has it, but in property, unfortunately, the opposite is also true. Wherever there are sizeable chunks of cash involved, plenty of operators are happy to leave their morals, fair play, and business etiquette at the door. Sharks swim in these waters, but they usually come disguised as dolphins, making them difficult to spot until you’re minus a limb.

In my experience, these sharper operators don’t usually frequent property networking meetings looking for victims, which is why, just like thousands of people, I’ve found these networking events full of very nice individuals and a culture fully geared towards helping others. The problem arises when people start thinking that life outside the networking nursery pool will be the same as life inside it. In my experience, one can encounter two main types of shark on one’s travels. The first is arguably the less common, which is the professional shark. These characters are always out to take advantage of almost everyone they come into contact with, and they’ve, for some reason, just accepted that it’s an acceptable way of doing business. They recognise that they have to look unsharklike at the outset to find their prey, but it isn’t long before the unwary developer discovers their true colours. And it’s not that these people will necessarily be doing anything illegal. In most cases, they’re simply taking advantage of someone’s lack of knowledge or experience, or their innocence/lack of cynicism. Inexperienced developers often assume that everyone will play with a straight bat when it comes to doing business, and to the shark, this makes them fair game.

The second type of shark is the accidental one. These people are usually nice enough to do business with, but they can also be a little inept. Usually, their sharky tendencies materialise when they manage to screw something up and then fail spectacularly to take ownership of it. Instead, they’ll deny all culpability and pass the buck onto someone else, usually the developer. A situation that can sometimes occur with contractors is that they fail to price accurately for a project. Not surprisingly, their tender response is the cheapest, so they win the contract only to discover that they’ve failed to price in something often fairly fundamental.

Since they’re obliged to deliver what’s in their contract, they’re left in a place where they either take their mistake on the chin or do whatever they can to recoup costs from the developer. There will be all sorts of extras suddenly finding their way into the invoicing and all kinds of shortcuts taken to reduce their costs, all in an effort not to lose money. And, of course, it’s not just contractors who can frequent the shark pool. Wherever a significant amount of cash is involved, you’ll find sharks of both varieties from all different disciplines swimming around.

If this sounds a bit doom and gloom, please don’t be discouraged. Property development is an excellent way of creating wealth, and if you know there are sharks about, it’s relatively easy to protect yourself from being bitten by one. So, how exactly should you go about it? There are three things, in my opinion, that you need to do as a first-time developer. The first is to get yourself educated. If you know what’s supposed to happen and you’ve been warned about any situations where you could be exposed, then it won’t surprise you to learn that people in that situation are less likely to suffer from shark attacks. Prevention is better than cure, and a crucial part of prevention is making sure you take steps to dodge those situations where people can take advantage of you. But if you don’t know where these situations exist, you won’t be able to take any preventative or evasive action. So make sure you get genned up from the outset.

The second thing you should do is make sure that you hire a professional construction project manager to manage your project. I often come across people who say that they quite fancy managing their own development projects, presumably because they think it represents some form of on-the-job training or maybe they already do a bit of project management as part of their day job, and therefore, they’ll naturally be superb at it. Unfortunately, they usually find out quite quickly that they’re miles out of their depth, and people are pulling fast ones over them left, right, and centre. A self-managed development project is the equivalent of Shark Christmas, whereas a professionally managed project is a different prospect altogether. A professional project manager is your eyes and ears. They act exclusively for you, the developer, and of course, the huge benefit they bring to the table is that they’ve seen it all before. Your contractor says he wants to charge you more money? Let’s see what your project manager has to say about it. You probably won’t have a clue, but your PM will have seen every trick in the book and will call out when someone is pulling a fast one. There should be a natural tension between your contractor and project manager for obvious reasons, so make sure they’re not too chummy when hiring them. The other massive advantage is that you don’t have to go through that baptism of fire, where you face off to a whole band of professionals and subcontractors on site. Many new developers understandably worry about being the boss, recognising that they lack any real experience. How on earth will they know if someone’s taking advantage of them? Well, once you’ve got a decent PM, you won’t have to worry about it. They’ll be bossing the project and simply reporting back to you.

The third and final piece of the jigsaw puzzle is not something that other people teach or advocate, but for me, it’s an essential ingredient in the first-time developer’s armoury. In fact, it can be so powerful that many developers I’ve trained go on to adopt this approach with their subsequent projects, too. And that is to go out there and find yourself a non-executive advisor (otherwise known as an NEA). There’s often some misunderstanding about exactly what an NEA is, so let me start with the basic premise before I drill down into the details. Essentially, a non-executive advisor is someone who has 20+ years of experience in the property development sector who you will appoint to advise you on your project. The first distinction to make is that the NEA’s job is to advise you as the business-owning decision-maker. While you’ll already have a whole team advising you on specific areas such as design, planning, and construction, the NEA’s job is to help you make the right business decisions as a developer and avoid any pitfalls (and sharks). The reason they can do this is because they have the experience. They’ve been there, got the t-shirt, spilled chocolate on the t-shirt, and then managed to get the t-shirt clean again. If you can find someone with 30 or 40 years’ experience, then even better. They could be a developer (active or retired) or a professional in the industry, such as an architect or project manager. But the point is that they have the experience you lack and quite a lot of it. To be clear, 5-10 years’ experience is not enough to qualify as your NEA.

An NEA brings three key things to your development party. Firstly, they can help you make good decisions because they know stuff you don’t. Experience goes a long way in any business, and property development is no exception. Running decisions by your NEA first and getting their input along the journey can be invaluable and could make all the difference in getting your first project to fruition. Secondly, an NEA brings with them massive credibility. Imagine you’d decided to launch your first airline business and were trying to get funding. Now, imagine how much easier that funding would be to come by if you had Richard Branson on board as your non-executive advisor. Now, I’m not suggesting that you need to recruit a world-famous billionaire as your NEA, but the principle is the same. No matter how skilful the entrepreneur is, people always attach great value to experience. And if you have a seasoned professional guiding you as your NEA, you’ll find that doors will open more easily for you. The final advantage that an NEA can bring is contacts. They will have connections in the industry that could make it a lot easier for you to build your professional team. They can facilitate warm introductions and let you know who’s good and, just as importantly, who’s not.

Hopefully, the benefits of appointing an NEA are self-evident, so now, let me answer some of the more obvious questions. Firstly, I should clarify that a non-executive advisor differs from a non-executive director. An NED has a formal position on a company’s board and has legal responsibilities as a result. An NEA is simply a consultant who advises you. Make sure that you (and they) don’t confuse the two, as you’ll find absolutely no one wants to be your NED, but you should get many more takers for the NEA role. The next obvious question is, why on earth would an NEA want to work with you? The answer is because you’ll pay them handsomely for their trouble. How much should you pay them? There’s no right answer – it depends on the project size, the profit you expect to make, and how often you need your NEA’s input. But expect it to be a five-figure sum that will be somewhere between 10% and 30% of the project’s profits. The critical point is that you should pay them at the end of the project rather than give them a monthly fee. You want their success to be directly linked to yours. That way, if you encounter any eleventh-hour project wobbles, you know that your NEA will have a vested interest in helping you drag things across the finishing line. And in those situations, you can often have no better ally.

Where can you find your perfect NEA? You need to ask around and always have an eye out for potential candidates. Get yourself into situations where you can meet other developers and professionals. While many different types of people could qualify for the job, the NEA role is not an established industry position. People know what an architect does, but they won’t have a scooby what an NEA does, so you’ll need to explain it to them. In many respects, it’s a perfect win-win. The good news from their perspective is that you’re simply looking to leverage things that cost the NEA nothing to give you. You get their experience (which they already have), their contacts (ditto), and their credibility (ditto again).

In fact, the only cost to them is their time in having a regular coffee with you (yes, you’ll even pay for that). Yet their experience, credibility, and contacts are truly money-can’t-buy benefits as far as you’re concerned.

In my experience, people like being an NEA. We’re all teachers at heart, and how nice it is to give the benefit of your experience to someone on the first rung of the ladder. Not only do NEAs get well-remunerated for their trouble, but they’re also not taking any risk or getting involved in the day-to-day minutiae of your business. They just have a regular catch-up with your good self and get plied with coffee and, if you’re feeling generous, cake. What’s not to like? And when it comes to dodging the sharks, they can be worth their weight in gold. Not only can they usually spot one a mile off, but the mere presence of a professional project manager and a highly experienced NEA will usually be enough to deter even the hungriest of sharks from taking a nibble. There are, after all, plenty more fish in the sea and easier pickings for them elsewhere.