Poker Tips For Property Developers
The late Jimmy Greaves famously described football as a ‘funny old game’, and as someone who’s not particularly partial to our national sport, I’d probably have to agree with him. Grown men and women chasing around a muddy pitch after a leather ball in all weathers does, on paper, sound like a hobby to avoid, both as a participant and a spectator. But I fully appreciate that I’m in the minority, and that to many it is indeed the beautiful game, beauty being, as ever and quite fortunately, in the eye of the beholder.
An even funnier game can be found in more temperate climes, namely the baize-topped splendour of your local casino. Here you can participate in the singularly unique game of strategy and chance known as poker.
I’m not a proponent of that game either, but I must admit to a certain amount of fascination with its concept. Like football, the basic facts don’t nearly do it justice. Get dealt some cards along with a few other people, and then the person with the best hand usually wins – it doesn’t sound that exciting. But of course, it’s not as straightforward or fortuitous as that. And that’s because you have a more organic variable to deal with, namely the people holding the cards. You don’t get to see other people’s hands when you bet, so you must try and judge whether they’re holding a good hand or a bad one. And the only things you have to go on are the lie of the visible cards, your competitors’ betting patterns, and their body language. Bluff and counterbluff; it’s all going on in poker. Or at least it might be. You’ll have to watch very closely to find out. Some players even wear sunglasses to stop themselves from revealing subconscious tell-tale expressions of jubilation or disappointment on receiving their cards. So, if you’re a habitual fist-pumper who can’t keep your emotions in check, poker might not be your thing (although I suspect you’d be welcomed into the poker community with open arms).
So, what can be done to avoid this rather challenging situation? The answer is to legitimately try and dodge as much of the planning system as possible. To that end, the government has given us a rather nifty tool for the job called Permitted Development Rights (PDRs). These rights allow us to change the use of a wide variety of commercial buildings into residential use without having to apply for planning permission. In most cases, we’ll need council approval; however, there’s a short and prescriptive list of things they can object to. So, you already know what boxes you need to tick before you apply, plus the council must determine the application within eight weeks, which means you can move relatively quickly.
You still need to get full planning permission if you’re changing the elevations of the building, but that shouldn’t be contentious – the change of use is the biggie, and with PDRs, the council’s hands are effectively tied. Not all PDRs are equally attractive; my favourite is class MA which allows us to convert most commercial property types (offices, shops, light industrial, etc.). Why do these PDRs exist? Well, the government has worked out that we have around four years’ worth of new homes that could be built on redundant brownfield sites. And given that most voters won’t object to developers turning unused commercial buildings into much-needed accommodation, they’ve been quick to encourage it. In summary, if you’re looking to de-risk your first project, I would strongly advise you to go down the Permitted Development route as it’s likely to be quicker and more certain.
On a related point, could you buy a project that already has planning permission granted and so avoid the planning risk? The problem with this approach is that the vendor will have already built the planning uplift into their asking price, meaning there’s less profit for you. As a result, the successful buyer will either be the person who can build it the cheapest or for the least profit. Or they’ve got their numbers wrong. None of these options should be attractive to you, and if you think they’ve missed a trick with their planning application (e.g., you believe there’s scope to squeeze in another bedroom), then you’re back to square one – having to submit a new planning application.
Poker, like football, has spawned several idioms that have made it into common parlance. ‘Keeping your cards close to your chest’ and ‘wearing a poker face’ immediately come to mind. And here, the humble property developer could learn from their sunglass-toting counterparts at the card table. All too often, the novice property speculator can give a little too much away when going about their business. The most common example I hear about occurs during discussions with commercial agents, often while out on viewings. The inexperienced developer, keen to prove their credibility, decides to regale the agent with the exact details of what they intend to do to the property being viewed. They’ll be knocking through here, adding an extra bit there, and using two different permitted development rights to create some rather wonderful apartments.
Presumably, this outpouring is designed to convince the agent that they’re dealing with a developer who, while inexperienced, certainly sounds like they know their stuff. However, if I’m allowed to revert to sporting idioms once more, the harsh reality is that the developer has just scored a spectacular own goal.
Developers need to work with agents, and the best way of doing that is to build rapport. Indeed, good developers can get very friendly with agents, but they should never forget that it isn’t the developer who’s paying the agent’s fees. At the end of the day, the agent’s job is to sell the property on the vendor’s behalf at the highest possible price to a reliable buyer who’s not likely to pull out three months down the line because they didn’t know what they were doing. So, if you tell them how you intend to maximise the property’s value once you own it, then the agent is almost certain to share that information with all the other developers viewing the property. So, just when you thought you had an edge, the agent has effectively removed it by sharing it with your competitors in an effort to talk up the value of the property and possibly the size and velocity of their commission cheque.
So, the trick, then, is to play your cards close to your chest. If the agent asks what you intend to do with the property, be non-committal. Tell them that you’re looking at several different options. You’re under no obligation to share, and instead, why don’t you try and turn the tables? See if you can get them to reveal what they see as the big opportunities with the building. You never know; you might even learn what your competitors plan to do. The same rule applies when talking directly to a vendor about an off-market opportunity. They may be interested in your development plans, but at the end of the day, you don’t want them to speculate about how much profit you’ll be making. You’re looking to acquire their property for a fair price, and sharing your ideas is only ever likely to increase the property’s value in the vendor’s eyes and potentially push up the asking price. And while it’s highly unlikely that the owner will suddenly decide to develop the property themselves, you don’t want them to contact your competitors to see whether they can get a better price elsewhere.
So, a poker face is often required as a developer. But while hiding the strength of your position is a big part of successful poker playing, it’s only one half of the deal. You’ll also need to be good at reading your opponents to judge whether their hand is likely to be a ‘royal flush’ or maybe an ‘ace high’. To do this, you’ll be surreptitiously studying every gesture, body movement, and facial tick looking for their ‘tell’. Now, for those of you who saw the 2006 Bond film Casino Royale, you may recall that reading the ‘tell’ of Mads Mikkelsen’s villainous poker-playing character, Le Chiffre, was a critical part of the subplot. And while you’re (hopefully) unlikely to encounter any blood-weeping villains on your development journey, it can still pay big dividends to be able to read the lie of the land.
This is never truer than when it comes to finding off-market deals. This is where you locate a property or piece of land with development potential and then try and purchase it from the existing owner. On paper, this sounds like a tough ask – if a commercial property isn’t currently on the market, why would the owner be prepared to sell it to you? The reason is that, as a developer, you can potentially pay a significant premium over and above the property’s current value. And just like any property owner, if you’re faced with a one-off opportunity to make a substantial windfall by selling out to a developer, you’ll likely consider it. It doesn’t guarantee a sale, but there are certainly enough cash-strapped business owners and commercial landlords out there who will have their interest piqued.
So, why do you need to ‘read’ these people? The key reason is that it can pay to be discerning. As you may be aware, many businesses target residential property owners looking for a quick sale, usually offering a cash purchase in return for a discount. These businesses tend to message indiscriminately, placing newspaper ads or leafleting entire towns. For them, it’s a numbers game. They don’t care which property they buy at a discount, and they’ve no way of gauging the propensity of any given homeowner to sell. Consequently, mass marketing is the only real option for them. As a developer, you’ll typically be looking for one deal at a time, and that deal is likely to net you a six-figure profit. So rather than take a shotgun approach by sending out leaflets, we want to target specific properties of interest and craft a more personalised approach to their owners. Put yourself in the recipient’s position – would you pay more attention to a flyer posted through every door in the street or to an individual, personalised approach from a serious developer?
Having identified a building whose owner you’d like to contact, we’ll be using those poker skills to ‘read’ our quarry and work out exactly who we’ll be dealing with. The good news is that you can do this armchair detective work in your pyjamas on a Sunday morning from the comfort of your own home (in fact, you can do it 24 hours a day if you wish, with or without pyjamas). So, what information would be on my shopping list? The first stop is the Land Registry to get hold of the title information and the title plan for a modest fee. This not only tells me who the owner is – the building itself may be tenanted, and you really don’t want to alert the tenant about your intentions – but also confirms what’s included in the title and whether there are any rights of way or covenants that could affect my development plans. If a private individual owns it, I’ll hit Google to see what I can find out about them.
If the building is owned by a business, my next stop will be a company search on the Companies House website. This free search will elicit a raft of details that will be useful to me. Is it a sole trader, a large corporation, or somewhere in between? An informal approach may be more appropriate for the former, whereas a corporate setup may suggest a more formal approach is needed. How old are the directors? A sole trader nearing retirement age might be quite interested in a cash windfall. Do they share the same name, with the birth dates revealing a generational age gap? Then it’s almost certainly a family firm. What’s the state of their accounts? A small unprofitable business may react differently to your approach than a larger, more profitable one. What line of business are they in, and what other companies do the directors own? If they’re in property development, you’ve probably missed the boat. Is it a business that you could visit as a customer? If so, you certainly wouldn’t be the first developer who has posed as a customer to start a conversation about a freehold purchase. Do they have a website? Again, a Google search can be pretty revealing and helps you build a picture of the people involved in deciding whether to sell you the property.
Google Maps can be another rich vein of information. You’ve already had a good look at the building you’re interested in, but why not look at the owner’s other properties? It can prove quite telling; I recall one case where not only was the owner’s property, a large shop, looking very tired, which suggests money might be tight, there was also ample scope to convert its uppers to residential, which would make for an even bigger opportunity. Just be mindful that Google Maps’ data is historical – you might get very excited about a conversion opportunity on Google only to find that someone else has beaten you to it when you eventually drive by for a first-hand look.
When it comes to contacting a building’s owner, there’s a real advantage in having what I call a warm connection. This is where there’s a ‘bridge’ of people between you and the owner made up of personal connections. The perfect warm connection is where you know (or have met) the building’s owner personally, i.e., you have a direct relationship. The next best is where it’s a ‘friend of a friend’, i.e., you have a mutual connection where you can ask that connection for an introduction. Even a ‘friend of a friend of a friend’ can work. In each case, the communication is between people – there’s no reliance on a ‘cold’ connection, e.g., where we’re sending a letter or email to someone we don’t know. Warm connections work better because you’re far more likely to get a response than you will from a cold approach. It certainly doesn’t mean you’re odds-on to acquire the building, but first base in the process is getting a response, and with a warm connection, it’s a lot more likely.
If I can’t see a ‘friend of a friend’ route in, then my favourite warm connection approach is to try and engage with a building’s owner through their accountants. How do you find out their accountants’ name? They’ll usually have it stated on the company accounts filed on Companies House (again, another useful piece of pyjama-clad research that you can do out of hours). While you may not have a connection to their accountants, your own accountant may have. Even if there is no direct acquaintance between them, it would be a matter of professional courtesy for the owner’s accountants to respond to a letter from your own accountants. This letter would be along the lines of ‘my client is interested in purchasing a building owned by your client…’, and you’ll have a good chance of getting a response.
So, there you have it – a few cases where some basic poker skills can pay dividends when it comes to property development. Keeping your cards close to your chest is always likely to be good advice as a developer, but taking the time to understand your quarry can also go a long way to achieving a successful result when seeking out those off-market deals.