How to become a property developer
Gary McCausland, presenter of Channel Five's 'How To Be A Property Developer', provides his top 10 tips on how to maximise your chances in the property developing game.
1. Location, location, location... the myth
Although everyone thinks they know what this means, they don't. A good location doesn't mean the best area in town when you are a developer. If you buy in the centre of the best area then you are going to pay the highest price and that doesn't leave you any room to make a profit. A good location, for me, means somewhere on the fringes of a good area that, in time, can become part of that good area.
Being near schools, public transport and green areas is essential when it comes to selling a property, but being in the nicest street with the smartest postcode isn't. Some of the richest property developers in the world specialise in buying in what most people would consider the worst possible locations, when in fact they are great locations for developing property, making tons of profit. The trick is learning to spot these areas, because often the only way is up.
2. You make your money when you buy, not when you sell
You make money when you buy a property rather than when you sell it. Thus, it is essential to pay the right price for a property. Every pound you can knock off the asking price is money straight in your pocket. If you pay top dollar for something, however good it may seem, you are not going to be able to make a decent profit because the margins are so slim. Look out for properties that have planning applications in with the local authority. They might accept a good offer subject to planning permission, and if they eventually get planning permission, you get the upside.
3. Going, going, gone
Buying at auction is a good way to pick up a bargain, provided you don't get carried away with the emotion of the auction itself. Set yourself a limit and stick to it and don't get carried away with winning at any cost. An auction is like a game of poker, only in this case, you can see everyone's hand before you place a bet.
Don't even bid until you have seen what everyone else is doing and put your first bid in at going twice. Only the last bidder ever wins at an auction. If the bidding doesn't reach the reserve price, try and negotiate with the seller afterwards. The property wouldn't be at an auction in the first place if they weren't very keen to sell.
4. Do your homework
Property development is a risky business. You could make a fortune, or you could lose everything and end up in debt for the rest your life. You have to do your research thoroughly before you buy. Find out how much other properties go for in that area, how much stamp duty, searches and fees will be. Are there any restrictive covenants and what is the cost of any refurbishment? When you have done your sums, work out exactly who you will be trying to sell to, how much you will realistically get and whether the profit margin is worthwhile. Property development is very capital intensive and you have to get your sums right. If it was easy, we would all be millionaires.
5. The right seller
When you are looking to buy a property you need to find a motivated seller, someone who will give you a good price because they really need to sell. Estate agents will have background information about why someone is selling. Anyone moving abroad, getting divorced or going bankrupt will need a quick sale, which is when you will get a good price. Check out the tiny ads in newspapers and on the internet as motivated sellers often try to sell the property themselves. Remember, the more desperate they are, the better deal you will get.
6. Target the ideal buyer
Always have in mind who you are aiming to sell to once you have refurbished your property. If you plan to rent or sell to students, there is no point in spending a fortune on the highest quality fittings, but a professional couple may expect more. If it is a family home, think about the décor. And importantly, it isn't about your taste, it is about what would appeal to the type of person who is going to buy it.
7. Keep looking
Just get in your car and drive about. I found my first house, which got me started, driving through Richmond. I came across this rundown, dilapidated old house and knocked on the door. An elderly gentleman answered and I told him I was interested in buying his house. He said he'd been thinking of selling up and we did a deal privately. I gave him a good price and avoided paying the fees. Lots of properties ripe for development can be found just by driving around. If they are derelict, the Land Registry will help you trace the owner.
8. Avoid the most common mistakes made by amateurs
Remember, property developing isn't like cooking a recipe from a Jamie Oliver book. It's much, much more important and difficult, and if you get it wrong, it could potentially leave you broke for the rest of your life, or even bankrupt. Dabble in this game at your peril.
Everyone seems to think they are property developers these days just because their house has (until recently) gone up almost automatically in value in a rising market. My advice - get real. Property developing means adding value and developing value, not just sitting back and waiting for the market to rise. There are so many pitfalls.
9. Don't pay over the odds and think you will make it back in the long run
You make your money when you buy, not when you sell. Always protect yourself against the downside, which means, in a worst case scenario, can you still come out with the shirt on your back? If not, stay away. Someone once said to me, "You never regret the deals that you don't do". They are right. There is always another better deal just around the corner, so never be in a rush to buy. 'Buy at haste, repent at leisure', and in property, if you get it wrong, it becomes a headache and a money pit that can last for years.
Also, be careful of buying anything with structural issues, HAC, asbestos.
Always be sure of the area you are buying in, especially noisy neighbours. They can ruin a sale. Make sure the legals are OK. Are there any restrictive covenants, is the garden included?
Loads of property experts bang on about adding value, but the truth is there's a limit to how much value you can add to a property with a refurbishment. And because you can never know what will happen to your development, or the market, in the months it takes you to get your property back in estate agents' windows, it's imperative that you build in your best chance of making a profit by buying below the market price in the first place.
The way to swing things in your favour is to find someone who needs to sell more than you need to buy. One of the most valuable lessons I have ever learnt is to be always on the look out for a motivated seller. Typically, motivated sellers are people going through divorces, people in financial difficulties, or the families of the recently deceased, who want a quick and painless sale.
Whatever your situation, the fact is, if you can find a motivated seller, you can usually find a bargain. And the more motivated the seller, the better the price - and every penny saved at the front end is money in your pocket at the back end.
10. Watch the market
Ultimately, the property market depends on five key criteria - interest rates (which may peak at 6 per cent, but these are still historically quite low), low unemployment, low inflation, demand and supply, and the very important 'feel good factor'. The market is starting to slow up again. However, the last few years have been pretty good. London has a great story for the future. The Olympic Games should ensure that property values remain buoyant, together with a strong City, tourism, the new Wembley Stadium and Terminal 5 Heathrow, to name but a few huge projects. The rest of the country will come off the boil in my opinion and struggle to maintain past property price increases.