The Early Bird Gets The Worm
30th April 2016
Currently we are in the midst of getting a deal over the line. We have been working on this over the weekend; disrupting the weekend of many lawyers, one of whom was preparing for the marathon on Sunday.
The deal has changed and metamorphosed whilst we have been handling it, from being just a lucrative deal it has become an extremely lucrative deal.
First we managed to delay completion of the deal from one where the whole price was being paid upfront to one where only one third of the price would be handed over upfront with completion being agreed for a two-year period; and then miraculously we managed to get that extended for another year.
This means two things, one less money is required in the deal and the second is there is more return for all the investors who come into the deal.
___________________________________________________________________________________________________ I have never done a land deal, this is the first; however our partners in the deal do have the knowledge and experience as well as a few local connections on the ground. To do this alone is possible, but it is wiser to execute this with a strong team around you, who have the same goal. Note just having a team around you does not make it stronger, if you have the wrong team you may have a bunch of busy fools at best and even certain individuals may be detrimental to the deal.
We have managed to hold on to this deal despite many odds against us and the deal looked like it was going to slip on many occasions. However, we have managed to hold on to it by a thread and now are crossing the T’s and dotting the I’s. There just seems to be a lot of them to cross and dot; as well as having four sets of lawyers to contend with and control.
The deal is this, a piece of land about 20 miles from Cambridge, with a GDV touching £30m. The land has been earmarked for a residential led development scheme which constitutes part of East Cambridgeshire County Council’s Masterplan. They are keen to have this piece of land developed.
Through doing this deal my understanding of property has been refreshed on a basic level. In London you deal with properties and these rise in value and you trade them and money is made – mostly. In London and especially central London there is very little land if any, therefore your focus is on the property. However, when you analyse the situation it is not the property which increases in value but the land upon which it rests which has the real value and scarcity.
The property is made from bricks and mortar which you can make more of and they can be transported around the country.
Land cannot, it is scarce and fixed. This is what has value and rises in price, not what’s on top.
___________________________________________________________________________________________________ And entering into a deal where it is unadulterated land without any planning in place is the earliest point you can enter a deal. This point of entry assures the investor the highest growth in value and that they are coming in at the cheapest point.
It is for this reason we left the shackles of the London property market in pursuit of this deal. The structure whereby only one third of the payment has been made now with the two thirds to be paid at the end of the three years or on planning sweetens the deal. Our connection with the sellers was vital in being able to structure the deal in this way.
The easiest way to make money on a deal with the least effort is by getting planning. By doing this you have not got your hands dirty and its mostly all paperwork.
Saying that there have also been times where we have made money without even adding any value by flipping the contract prior to completion. This is reliant upon on purchasing well below what the market price is and selling the deal with some meat on the bone before completion.
We have discarded this scenario which is a hit and miss type dependent on deal flow and market conditions. As a business proposition a land deal is where it is, and entering prior to the granting of planning for a serious uplift in price is the best time to enter a deal. In this situation because of the way we have structured the deal the investors should come out with their money doubled, within a twelve-month period.
Time will tell if this manifests. Our analysis of the deal tells us it will.
___________________________________________________________________________________________________ Actually executing a building project of this magnitude has many variables attached to it, and the profit does not match the effort. Not from our perspective anyhow. The rule of thumb is a developer normally works on a one third profit margin. The formula is one third for the land, one third for the construction and one third for the profit. There will be variations to this formula but this is the basic rule of thumb. By us getting the planning we make about 100% without the need to build, fund the build, worry about resells etc.
With land deals the old adage of the early bird gets the worm really does hold true.
The deal will be executed later today – or not as the case may be. If we do all our energy will move straight on to the planning for this deal. If we do not, we will be left with several large lawyers’ bills. Time will tell.
This is the nature of the beast, however we are confident if the deal is done later today we have the team in place who can execute this to maximise the return for our investors in the shortest possible time period.
The Real Deal
John’s Wood, London, NW8 Purchase Price: £750,000
- A bright and spacious three bedroom top floor apartment
- Long lease
- Large balcony
- Close to Regent’s Park
- Close to the restaurants, boutiques and cafes of St John’s Wood High Street
- We expect value of this property to be around £825k
Call us now to reserve!!
!Tips of the Week
When renovating a Buy To Let property always ask the question: How much more will I get in terms of rent for doing this work? Many investors get carried away with developing properties as if they were their own homes.
When investing, most of the money will be invested by the bank not you, remember they will always do a valuation to check their investment is secure, this is an additional check for you, the investor.