Part 5 of an eight-part series written by Ian and Ritchie for Property Investor News, featuring some of the key aspects of small-scale property development covered by propertyCEO’s ‘8-Pillars’ system. This article appeared in the December 2021 edition of the magazine.
In part 5, Ritchie shares some thoughts on how to go about finding development deals.
Property development has got to be one of the world’s most highly leveraged business models, however there are a few key elements that the part-time property developer will find difficult to outsource to someone else. Deal sourcing (a.k.a. finding development projects) certainly falls into that category. This month I want to tell you about the best places to find deals and the common mistakes that I see new and inexperienced developers make when it comes to bagging new projects. Let’s run through the key places where you should be looking, and I’ll mention the common mistakes as we go.
Online property portals:
One of the attractions of modern property development is that it can be a spare-time enterprise in the same way that owning rental property can. The arrival of the internet made a huge difference to the way we find deals, heralding the appearance of the property portals. The likes of Rightmove, Zoopla, Estates Gazette, and your local estate agents’ websites suddenly made it possible to look for deals twenty-four hours a day, seven days a week. Enter your search criteria and scan thousands of properties and plots from the comfort of your own laptop, tablet, or phone. Register for free, and you can save your searches and get email alerts when new deals arrive. For those already busy between nine and five – namely most of us – the portals are fantastic news. But while they’re hugely convenient, they’re also convenient for your competition. You’re going to be seeing the same opportunities as every other Tom, Dick, or Harold that has an internet connection. These portals have another downside; they’re not the first place agents would choose to sell properties. And if the portals were your only source of leads, you’d likely only see around half of what’s for sale and will almost certainly be missing out on the best opportunities, as I’ll explain shortly.
Commercial agents:
These are my favourite people from whom to source deals, and arguably represent your best bet for finding a good project. Let’s first understand why agents don’t always automatically put every property straight on Rightmove. Imagine you were looking for a commercial building to convert into flats and a nice lady called Donna was selling precisely the building you were looking for. As luck would have it, Donna is talking to her friendly local commercial estate agent and has agreed to put it on the market. Now, as you watch yourself sitting there in your pyjamas, glued to Rightmove, you might have thought it’s only a matter of hours before the agent’s team has measured up, taken photos, and listed it on the portals. Any time now, surely a Rightmove alert for Donna’s property will pop into your inbox? Unfortunately for you, that’s not what happens. Instead, much to your horror, Donna’s estate agent digs out her list of hot buyers (a.k.a. her ‘black book’) and calls a handful of people she knows that will almost certainly be interested; a list on which you’re conspicuous by your absence. She tells them that if they get their skates on, she can get them in to have a look at Donna’s property first thing in the morning before it’s gone on the open market. Of the six hot buyers she calls, four view the property, and two make offers, one of which is accepted. This is a great outcome for nearly everyone. Donna is happy because she sold her property within twenty-four hours. The agent’s happy because she earned her commission in record time and without spending any money on advertising (she didn’t even have to produce any particulars or measure up). And the developer who bought it is happy because they got to bag a deal that was effectively off-market. The only person for whom it’s not such a good result is your good self, as you sit at home waiting patiently for a Rightmove alert that will never come – you never even got a whiff. Here are the cold hard facts. Assume most agents will sell a property this way if they can. Only if they can’t, will they revert to the portals. Therefore, you need to learn how to create the right sort of relationships with agents so that you’re one of the hot buyers who gets an early call. We spend a lot of time teaching students how to build relationships with agents – it really is that important.
There are some common mistakes I see when new developers look to engage with commercial agents. Many new developers fail to systemise their engagement strategy. Some even think it’s a good idea to drop by the agent’s office unannounced on the way back from Sainsbury’s to introduce themselves. This is a terrible idea. You want to meet a senior member of the agency, and you want to have some quality time with them. You also want them to take you seriously. Imagine how you’d feel if someone dropped by your office for a meeting on the off-chance, completely unannounced, brandishing a bag of courgettes and heaven knows what else. You’re not going to think them particularly professional, and you probably weren’t twiddling your thumbs waiting for someone to turn up out of the blue either. So how much time would YOU feel like giving them? Two minutes? Less? Perhaps just enough time to make a mental note to swing by Sainsbury’s on the way home? Well, the same applies to agents. Make an appointment with the right person first and get some quality time in the diary. And leave the courgettes at home.
Getting on to an estate agent’s mailing list is easy (in fact, it’s probably easier than getting off it). But simply being on their database won’t nail you that black book phone call. The fact that you’re getting emails from an agent doesn’t mean that the agent remotely remembers who you are. You’ll need to build rapport to the extent that you’re front of mind when a suitable opportunity comes their way. You do this by having a comprehensive follow-up strategy, another area where developers can let themselves down. Not only do you need to stay in touch regularly, but you also need to find agents with whom you can build a great relationship. It won’t be all of them by any stretch, and in fact, many developers have special relationships with only a small number of agents. Luckily, you’re only looking for one deal, at least initially, so you don’t need to be in everyone’s black book. Rapport is your friend here; people prefer to do business with people they like and who are like them, so focus on building relationships rather than just finding deals.
Auctioneers:
You’ll undoubtedly have several auction houses covering your area, and it’s well worth getting yourself on their mailing list so that you receive a catalogue. Auctions offer a very different buying process, and you should familiarise yourself with it from the outset. All auctioneers have comprehensive guides on their websites. I’d also advise that you visit an auction house for a dry run to get familiar with the environment before you bid for real. The number one tip in all auctions is to stick to your budget. Many an over-excited buyer has been caught up in the moment and paid more than they could afford. You generally make your money when you buy, and the auction room is a good place to remember this. Sit on your hands if you must.
Networking:
The trick to good networking is proactivity. Most people are so bad at networking it’s easy to be relatively good at it. Sure, they’ll turn up, but then they’ll sit passively waiting for stuff to happen. This is like going to the gym and staying in the changing room. Did you go to the gym today? Yes. Did it do you any good? Not in the slightest. You want to grow your network, but to do this, you’ve got to put yourself out there. You may know fifty people, but you also want to tap into the fifty people they know. If you do this, your network effectively becomes 2,500 people. Make sure that your branding is in place so that it backs you up. And use your social capital. You may be the life and soul of the party, but those that are serious about working with you will still want to see your website to check there’s more to you than a sharp suit, a firm handshake, and a nailed-on elevator pitch.
There are some sizable advantages to adopting the simple rule of telling everyone what you do. If you are known as a developer (or perhaps a ‘property solutions provider’), then over time, opportunities will arrive at your door completely out of the blue. This applies not only to finding deals; many a developer has also found private investment opportunities simply by spreading the gospel.
Direct to vendor:
Arguably the hard yards of deal sourcing, direct to vendor involves buying a property that isn’t currently on the market. Why would someone sell you their property? Usually, it’s because you can offer them more than their property is worth on the open market in its current state. Conversions are a great example. A vendor might own an old commercial building that’s worth £100k to someone who’s looking for a building to house their business. But because you know how to convert it into flats using permitted development rights, you can afford to pay them £150k for it. From their perspective, it’s a one-off opportunity for a cash windfall. As you can imagine, there’s a knack to both finding such properties, engaging their owners, and persuading them to sell. But it can be well worth doing because you’ll have zero competition – it’s just you and the vendor, and you’re the only deal in town.
Deal sourcers:
These are people who find deals and bring them to developers. Sounds convenient, but this comes at a price, namely their fee. It’s effectively ‘direct to vendor’ but with the deal sourcer finding the vendor instead of you. A good sourcer will have ‘packaged’ the deal. They’ll have agreed on a price with the vendor and will have already done some due diligence on the opportunity. There’s no harm working with sourcers as you’ve no obligation to buy what they’re selling; however, I’d think of it as an extra string to your bow rather than a core strategy.
So, if those are the best places to find deals, what will it take to win one? There are two key boxes you need to tick. The first is to be proceedable; in other words, the vendor (or their agent) needs to believe that the sale will go through if they accept your offer. Many a good offer has been accepted by a vendor only for the deal to fall out of bed later, so make sure that you instil confidence from the start. The trick is to look professional in everything you do.
The second box to tick is offering more for a property than every other proceedable buyer who’s looking at it. As a strategy, this isn’t exactly rocket science, but how can you pay top dollar? You’ve three main options:
- Find an off-market deal where you have an exclusive (or nearly exclusive) relationship with the vendor. You’re not then competing with the whole market
- Know how to make more profit from developing a property than the other people looking at it. This allows you to pay more to secure the deal
- Find a way of developing the property as cheaply as possible or accept an embarrassingly small amount of profit. That way, you can outbid your competitors, albeit you run the risk that a small bump in the road could wipe out your profit and even leave you facing a loss
I’ll give you a big clue; two of these are excellent ways of securing deals, while the third is a race to the bottom and should be avoided at all costs (just in case you’re not yet firing on all cylinders, number three is the one to avoid). And if you can achieve both one and two in a single deal, then you’re on to a winner.
Off-market deals include direct to vendor and the estate agent’s black book, plus of course, any deals that come through your network. Working out how to make more profit from a deal than anyone else is simply a question of getting educated. The value of a commercial property or a plot of land is not fixed; it depends on who’s buying it. A small light industrial unit is worth one amount to someone looking to house their business and another amount to a developer who knows how to convert it into flats. It’s worth even more to a second developer who has worked out how to squeeze in an extra apartment and more again to a third who’s realised they can create a second storey within the existing frame, effectively doubling the number of flats they can build. Typically, the person who will secure the deal will be the one who can pay the most, assuming they’re proceedable/credible. Learning how to see the hidden opportunity in a site or how to chain together multiple permitted development rights to build a project quickly and without major planning risk – these are the areas you should exploit. In short, you need an ‘edge’. It’s why it’s perfectly possible to find deals on the portals even though the whole world can see them. You need to see an angle that others cannot, and to do that, you first need to learn what those angles are. The good news is that these aren’t difficult to learn or understand.
Finding deals involves hard work. I wish I could tell you that a couple of hours spent on Rightmove in your jim-jams on a Sunday morning will bag you a development bargain, and if you were extremely fortunate, it might. But the reality is that great deals aren’t ten a penny, which is ultimately a good thing since it deters a lot of have-a-go developers from, well, having a go. The best deals go to those that are proactive and well-organised and who know where the edges are.
Make an effort to systemise your approach to deal sourcing, build rapport with a few key agents, have a clinical follow-up strategy, and learn how to find direct-to-vendor opportunities. These are the keys to finding great deals, and because many new developers do this so poorly, it’s not difficult to gain a great advantage.
Next month, I’ll be looking at how to analyse deals and how you can be confident that your numbers stack up before you buy. And, I promise, not a courgette in sight.
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