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How to become a (really good) property developer
Starting out in the property development game for the first time can be a tough gauntlet to run, especially when it comes to securing finance. It’s by far the riskiest of all property loans for lenders, despite the potentially big returns, so borrowing opportunities can be difficult to find and even harder to land.
Experience is key, but if you can’t secure finance, you can’t accrue experience, and looking to crack this chicken and egg scenario isn’t for the faint-hearted or the thin-skinned.
So, what are the essential skills you need, and how can you convince a lender you’ve got the right experience to make a development scheme a success? Good questions. Here’s what we think.
Like most projects, managing a property development has multiple strands, and different skills are needed to nail each stage. If you’re a champion builder or a seasoned QS, it doesn’t mean you’ll naturally be a good developer, and so on.
In our opinion, the big three skills you need to make a mark in the property development world, are risk management, people management and decision making. Ask yourself some hard questions, and if you think you’re lacking in one (or more), you may need to bring in others to boost your skill-base.
These key skills transcend the critical phases of a development project, along with a large dose of business acumen. Essentially, you need to be able to:
Buy the land at the right price or work the planning to ensure you haven’t overpaid.
Build a product that people want to buy and at the right price.
Sell the site quickly and at the best price to maximise your profits.
If you’re someone that can do all of these, you probably don’t need to be reading this blog. But it’s pretty rare, which is why the majority of development deals involve more than one stakeholder. For instance, if you have a DM or PM background, you’ll probably be able to manage a scheme to delivery, but it’s unlikely you’ll have the same follow-through when it comes to the planning or sales processes.
Similarly, if you’re from an estate agency or property valuation background, you’ll no doubt nail the site acquisition and sales parts, but you may need a wingman for the building bit in the middle. And as a QS, you can probably budget a scheme and draw up a timeline to the nearest day, but may lack the people management skills to motivate a team to deliver the project on time.
Lenders like lending to experienced property developers. It normally takes three relevant schemes to be classed as ‘experienced’ by a lender. Most appreciate that previous projects might be smaller in size and value as you gradually build up to bigger schemes, but it’s relevance that’s really the key. So, if you’ve done a loft conversion, a side return and split a house into two flats, don’t expect finding funding to build 20 new-build houses to be a walk in the park.
You also need to consider whether your development involves specialist areas such as basement digs or a listed building. Even if your previous experience aligns with your proposed project, if it includes specialist areas such as these, a lender will almost always want to see direct experience from either yourself or an associated contractor.
They of course prefer experience to be in your own name, but if you’ve worked on similar schemes under others, as a project manager or in an advisory capacity for example, these may also qualify too. Related industry experience also counts for a lot, so if you’re a builder, a QS, architect, PM or DM that has worked on or managed multiple development schemes for other developers, it’s all worth building into your case.
If you still don’t think you’ve got enough relevant experience, nor will a lender, so what can you do?
Like most things, property development often works best as a collaborative effort. Start by considering the skills and experience you do have. You might not have direct development industry experience, but if you’re an established estate agent, planner or valuer, it’s likely that you’ll have a good nose for sniffing out the best sites at the right price, or the knowhow to exploit the planning process to your advantage.
Then the hard bit. Be honest and realistic about your weaknesses and identify the areas where you need some help. You may have the experience within your family, close friends or wider network. If you don’t, look outside to bring the right people in.
As well as making a stronger case for a lender, working with partners with skills and experience you don’t personally have allows you to grow, meaning once you’ve done a few schemes together, you can work on bigger sites sooner, have more equity between you and eventually go out on your own (if you want to).
Lenders actually quite like a partnership if stakeholders are incentivised. For example, you purchase a site or an option but don’t have the experience to secure funding, so bring in a PM as a contractor. He takes a 20% share of the scheme, so is incentivised to deliver on time and to budget, making for a happy lender.
When you do bring in others, make sure you discuss Personal Guarantees (PG) early on. This is basically the legal promise from all stakeholders to repay loans. If a partner doesn’t stand behind the PG it’s not necessarily game over, it just means that despite their experience, their value should be weighted slightly lower than perhaps another partner willing to commit to a PG.