Real-world Development with propertyCEO – Part 5

Small-scale property development projects that use permitted development rights can be done in your spare time, boast six-figure returns, and have a lower cost of entry than buy-to-lets. It all sounds great on paper, but what’s it REALLY like to convert a property?

Join Ritchie Clapson CEng MIStructE, veteran developer, author, commentator, and co-founder of development training company propertyCEO, as he guides us through a real-life commercial conversion project from start to finish. Witness the highs and the lows, and learn the critical takeaways in this eye-opening, warts-and-all look at what REALLY happens where property development theory stops and the practice begins…

You can watch a video of Ritchie walking around the project. Click HERE for exclusive video content.

The story so far…

With the finance now in place and the contractor’s costs looking reasonable, the project seemed to be on a much firmer footing. But the next visitor to the site would be the residential agent whom Ritchie had appointed to sell the finished flats. If his valuations were lower than expected, it could reduce the scheme’s project margins and potentially scupper the deal altogether. Another issue Ritchie needed to sort out was the utilities. Gas, electricity, and water supplies should be near the top of every developer’s to-do list, and once again, Ritchie was faced with some unexpected challenges…

Having had numerous agents give me a steer on desktop values before I committed to the project, I’d decided to go with one whom I’d worked with before. He ran a small but successful chain of agencies on the South Coast, and while his patch was a large one, I believed his proactive approach to sales set him apart from his competitors. I had my fingers crossed that he could do the same here.

* Top Tip: You’ll speak to several residential agents initially to get a steer on values, but the one you choose as your appointed agent will depend on the strength of their local knowledge, their recent sales record, your rapport, and the proactivity of their ideas and approach to marketing your finished units.

So far, the agent had given me a valuation in his office based on the location, my description of the building and what I was looking to build. Now, he’d be seeing the site in person, which would allow him to get a feel for the location and, critically, be able to visualise the flats in situ. This is where a good estate agent earns their crust.

He could look at how the flats were positioned to gauge their outlook and think about the internal layouts, e.g., where the bedrooms and kitchen would be located, etc. I’d also removed part of the false ceiling in the warehouse, where three of the flats would be located. The agent immediately saw an opportunity to open up the ceilings to expose the roof void, giving us vaulted ceilings throughout these flats. This would immediately add value and saleability to the units at minimal extra cost, and I made a note to obtain the contractor’s thoughts to make sure there were no downsides. The agent also told me to consider allocating some of the internal courtyard space to one of the flats, as this would add greater value – a neat idea we’d have cause to revisit later in the project.

* Top Tip: Shared internal courtyards add little value. If you can demise a courtyard to one of the flats, this will improve its saleability and may also increase its value.

The agent also gave me an assessment of the type of customer we should be targeting, as well as the finish and specification we should be aiming for. This covered all the key areas, such as kitchens, bathrooms, lighting, doors, skirting and extras, and it’s fair to say I took copious notes.

* Top Tip: Be sure to grill your agent thoroughly – be armed with a comprehensive list of questions before you show them around and take lots of notes.

Before long, the moment of truth had arrived. Had his site inspection affected his view of the overall sales values? Fortunately, he was happy to keep the valuations the same, and I breathed a small sigh of relief.

My next step was to get the architect back on site, this time armed with brochures galore. Because I’d nailed the specification with the estate agent, I could now choose the specific kitchens, bathrooms, doors, etc., we’d be putting in. Having a balance of cost versus quality would ensure we didn’t overspend. Once I’d nailed the spec, I updated the Finishes Schedule and asked the contractor to update his quote to reflect the specific kitchens etc. I’d chosen. This allowed me to revisit my numbers quickly to ensure things still stacked – which they did.

* Top Tip: Always revisit ALL your numbers as your costs and specifications become known. Not only might your spec have improved and your costs increased, but selling prices may also have moved.

My next job was to tackle utilities, namely electricity, gas and water. My first decision was relatively easy, namely abandoning gas in favour of electricity for the flats. Although I had a gas supply in the building, routing gas pipes between flats can be notoriously difficult, since they require ventilation, so it was really a no-brainer to cut the gas supply off – a relatively simple process, albeit it took the gas board many weeks to physically come and do it!

* Top Tip: Start the dialogue with utility companies as early as possible because they are notoriously slow. Too many projects get held up because the developer thought that utilities would be a formality, only to find that they weren’t!

I knew sorting the electricity would be trickier, but I still had some aces up my sleeve. The two-storey building at the front of the site already had two separate electricity supplies coming into it, which was good news, as this was all I needed for the two flats I’d be building there. Things were more challenging in the warehouse at the back, however. We currently had a three-phase supply – reasonably common in light industrial units – and my mechanical and electrical consultant was confident that this could be split into three separate meters, one for each of the three flats. The electricity company would just need to run some underground cables – what could be easier?

Unfortunately, the electricity company had other ideas. They said they weren’t prepared to reroute the cabling underground to accommodate the split. Instead, we’d need to run cabling to our building from a supply point on the other side of the road. Worse still, they wanted to charge me £7,000 for the privilege, which was around ten times the budgeted cost. I jumped on the phone and did my best to appeal to their better nature (they didn’t have one) and then to haggle (I got a small reduction). Was it worth doing? Yes, but you also need to know when you’re flogging a dead horse and should move on. Luckily, we were still on schedule, as we’d started the utility discussions so early.

* Top Tip: If you don’t ask, you won’t get, so it’s always worth having a haggle. Just don’t lose sight of the fact that time is money, and sometimes you’ll just need to bite the bullet…

This is precisely the kind of scenario that our contingency fund was for, so we had it covered. I just hoped we wouldn’t get too many more expensive surprises.

* Top Tip: Never remove your contingency funding to make a deal stack – you need to think of it as a direct cost, albeit you won’t know at the outset exactly what you’ll be paying for.

The final utility we needed to deal with was water, and this is where we also hit a snag. The water company’s admin centre was just outside Glasgow, so we called them to find out exactly where the water supply entered the building as it wasn’t obvious. The good news was that they were lovely people; the bad news was that they had no records of our building and couldn’t help. We went backwards and forwards over several months and got precisely nowhere.

* Top Tip: Staying on top of utilities is a dull, repetitive job that involves almost daily phone chasing. Make sure you give that job to someone other than yourself!

As luck would have it, a member of my contractor’s team accidentally cut through one of the internal water pipes, causing a small flood in the warehouse area. There was minimal damage as the flooring and kitchens weren’t in yet, but it did mean that our Scottish friends suddenly needed to send a real, local person to come and sort things out pronto. Sure enough, within an hour, we were greeted by a local engineer, who turned out to be our new best friend. Not only did he know where the supply came into the building, but he also gave us his phone number and told us to contact him directly if we had any other questions.

* Top Tip: Befriend the local utility engineers if you can find them – they’re a font of knowledge compared to the head office team and are often very helpful.

As it turned out, we had a little extra cost and delay sorting the water supply, but it was nothing critical. My contractor could easily have charged me some additional fees for the disruption we experienced on the utility side, but in the end, he waived most of them, deciding to look at the bigger picture of our broader relationship.

* Top Tip: Always maintain a good relationship with your contractor, and ensure they’re paid promptly. That way, you’ll find they’re more likely to be accommodating when a few curve balls come your way – and they almost certainly will!

As ever, sorting out the utilities is a saga that starts early in the project and goes on for several months, often in the background. But it’s a necessary evil, and while we did experience some additional costs and delays, our early start meant that they didn’t cause us a major headache.

 Next month, things get very real as the opening-up works begin, allowing the contractor, architect, and structural engineer to see exactly what they will be dealing with from a structural perspective. With all the building’s flaws exposed, what additional costs will Ritchie be on the hook for – and will the scheme still be able to turn a profit?