Frazer Fearnhead, founder and chief executive of The House Crowd, explains the five key factors that add up to a successful property development…
Property development can be full of risk, unless you know exactly what you are doing. Frazer Fearnhead, founder and chief executive of property-backed lender The House Crowd and House Crowd Developments, its associated development arm, has revealed the five non-negotiable rules that add up to a successful development…
Buy land at the right price
“If you don’t get the land at the right price, you will only make a profit if the market rises during the build,” says Fearnhead. “And that is highly speculative.”
House Crowd Developments does a huge amount of research before purchasing land – Fearnhead’s team will survey the area, examine the build costs and other potential expenses such as finance, and speak to local estate agents to get a sense of the final value of the site.
Appoint the right team
House Crowd Developments’ extended team includes planning consultants, contractors and award-winning architects as well as the in-house team of surveyors and underwriters. The expertise of everyone involved in the build is of paramount importance to Fearnhead, “especially when it comes to your contractors,” he says.
“You need to check out their track record and reputation, their experience of this sort of development, how many other sites they are running, as well as their credit history and balance sheet.”
Thoroughly identify and mitigate risks
Risk mitigation on property developments goes far beyond simple credit checks. Fearnhead remembers a site where contractors incurred more than £500,000 of unexpected costs because of problems with the ground. “The ground was so muddy – it literally turned into mudslides,” he says.
“Luckily they were a big company so they could absorb the costs, but a smaller company may have gone under.” Likewise, Fearnhead says that its “mind boggling” how many days have been lost to bad weather. And then there is the coronavirus pandemic, which has shuttered many building sites and slowed work on the others.
“You can’t predict the future, but you can prioritise the right thing and you can be aware of some underlying risks and be as well prepared as possible for acts of God even if you can’t predict them,” says Fearnhead. “You’ve just got to do what you can to protect yourself from every eventuality.”
Control expenses and manage budget
The safest way to control costs is to make sure the contractor is on a fixed-price design and build contract, Fearnhead says. While this might cost a bit more than a flexible contract, it places the burden on the contractor then to deliver – and to incur any higher-than expected costs of materials which frequently change.
It is also essential to have strict financial controls, says Fearnhead, adding that The House Crowd has a policy of doing fortnightly drawdowns which mean the developer must prove that any subcontractors have been paid before more money is released.
Know what the market wants and how much it is prepared to pay
“There is no point in building a four-storey town house if your target market wants two-bed apartments,” says Fearnhead. “To find out what the market wants, you need to talk to the local estate agents who deal with property buyers day-in day-out.”
It is also worth remembering that there could be 18 months to two years between the start of the construction and the first property sale, so it is important to be aware of any events which might impact the final sale price during this time. This is where risk management and appointing the right team will really pay off.