If you are interested in making money from property development, you may wonder how easy it is. There are so many stories of people making millions from property development. Yet you also hear of terrible disasters.
Well, of course, in some ways both of these are true. There are people who make a very good income from property development, and there are also people who have lost all their money. If you are interested in being part of the first group rather than the second, the secret is to know what mistakes to avoid.
So here are some of the pitfalls to avoid:
Getting the market wrong! One of the most common mistakes in all areas of buying and selling. However good your product may be, if there isn’t a market nobody will buy it. So don’t do ANYTHING until you have analysed the market.
Buying a property without having a survey carried out. This is easily done if you want to snap up an apparently suitable property before other people, or if you spot a property at auction. But if the property turns out to have major structural faults or other problems, you could find you lose your money before you have even started!
Not including a contingency fund in your overall finance bid. Property development projects are notorious for going over time or over budget or both. Most people reckon on a contingency fund of at least 10 per cent, some would go up to 30 per cent.
Going right up to your financial limit. As pointed out in point 3, unforeseen things can happen. So if you have nothing to fall back on, you could be in trouble.
Failing to ascertain what buyers actually want. If you spend money on fancy features that buyers don’t demand, like ceiling cornices, your expenditure won’t be recouped. It’s an idea to talk to estate agents about what features buyers in that area look for most. Concentrate on these and save on everything else.
Jumping at the first property you see. Don’t forget – in property development, you make your money when you BUY, not when you sell. When you are looking for a suitable property, find a motivated seller – e.g. someone who needs a quick sale because they are emigrating. The more motivated the seller, the better deal you will get. Remember, if you pay over the odds and think you will get it back – you won’t.
Choosing the wrong builders. Builders can make or break your project. Your best plan is to appoint a project manager – if you get a good one, he/she will know where to find good builders. Otherwise, check with the Federation of Master Builders.
Grabbing the first mortgage that is offered to you. You need a mortgage from a specialised lender who will understand the various issues involved in property development finance, and allow a certain amount of flexibility. The last thing you need is a mortgage problem right in the middle of the project. Assess the various products carefully and, ideally, talk to a broker.
Following on from point 8, underestimating the cost of the project. When requesting your mortgage, make absolutely sure you have taken everything into account. You may not receive 100 per cent of the project cost – in fact you almost certainly won’t if you are a newcomer – but at least you will have an accurate estimate of how much you need to find from elsewhere. Running out of money in mid-project could be disastrous and could even mean you lose all the money you have put in! A good project manager if you have one should be able to help you with making an accurate assessment of the cost.
Last but not least – confusing DIY with property development! If you have always enjoyed DIY, you may think you would be good at property development, but the two things are very different. Find out exactly what property development involves before getting into it.
If you fancy making money from property development, you may as well learn from other people’s experience! Avoid the mistakes other people have made, and you stand a much better chance of making a success of your project.
Please note that the FSA do not regulate commercial loans or commercial mortgages