Or, from the property world, what about; ‘all property developers are rich?’ I have an inside track on this because I teach both new and existing property developers as part of my day job. And I can share two particularly relevant insights. Firstly, most people who engage with developers act as though this statement is true. And secondly, first-time developers are usually not particularly wealthy. Okay, they may not be on their uppers, but it’s not a big stretch to guess why they want to develop property, and it’s not usually because they already have the riches of Croesus. Unfortunately, that doesn’t stop the rest of the world from thinking and acting as if they have; call yourself a property developer, and you’ll find that most people will assume that the shiny new Range Rover in the car park is yours.
There are two key reasons why this perception exists. First, most successful developers ARE wealthy, so everyone tends to get tarred by the same brush. Second, it takes a fair amount of cash to develop property, and many people wrongly assume that this money comes from the developer’s own pocket. Let’s debunk this myth first because the reality is very different. Development finance is hugely leveraged from the developer’s perspective. Where a landlord might typically need to put down a 25% deposit to acquire a property, a developer can secure the bulk of their deposit for their land or property purchase from private investors, meaning that their personal cash investment requirement is significantly reduced. It’s just one of the reasons why property development is so attractive. Whether it’s landlords looking to get the cash to grow their portfolios, architects and other industry professionals or tradespeople looking to leverage their industry knowledge, business owners looking for extra profits, or simply everyday folk looking to create a decent pension or improve their financial situation; the amount of cash they need to invest in a development project can be surprisingly small. But while the returns can be significant, they are not risk-free. There are many pitfalls that that can seriously derail the unwary traveller financially, which need to be considered. Because one of the key features of development is that the developer not only gets paid last, they only get paid whatever is left in the pot. In theory, this should be the largest slice of the pie, but in practice, this is where the risk comes in. It’s critical that the developer is on top of costs throughout every project stage because every penny of overspending ultimately comes out of their own pocket as reduced profits.
There are several stages in the development cycle where costs are a major consideration, and one of these is the tendering process, where you’re looking to get contractors to quote for your project. If we look at the project sequentially, you, as the developer, will have done significant due diligence before reaching the tendering stage. Not only will you have run some detailed numbers on the deal to make sure that it stacks in principle, but you’ll also have put together a shortlist of contractors you want to invite to quote for the job. To do this, you will also have put together a detailed specification with the help of your project manager and cost consultant so that the contractors who are quoting know precisely what they are quoting for, right down to the last widget. So, what could possibly go wrong, you may think? Well, in the world of property development, the answer is almost anything, which is why most experienced developers have grey hair and long holidays. And the tendering process is certainly not immune to unexpected hiccups. Create the perfect tender document, and you can expect several things to happen. Some contractors you send it to won’t bother to respond. That’s because tender responses involve a lot of work on a contractor’s part, and if they’re already busy or think their chances of winning the tender are remote, then some may decide it’s not worth the effort. Also, the quotes that you do get can vary wildly. You’ll get one quote that looks like you’ve commissioned the Burj Khalifa and another that looks tantalisingly (and, if you’re being honest, suspiciously) cheap. In the former, the contractor probably doesn’t need your work, but if you’re prepared to pay a premium, they’d be happy to oblige. In the latter, the contractor is desperate for your work and is quoting low, hoping they can claw themselves back into profit by claiming extras along the way. Neither is a good look, but you should also receive quotes that fall into the middle ground and will align more with your expectations.