Last week I had a potential client who came to see me regarding developing some common ground to try and do some business together. He was also in the business of purchasing properties, on behalf of some friends. He put a proposal on the table which was a flat in Knightsbridge, the property required development. After development you would make roughly 20% on the deal.
This seems to be the standard return developers expect when doing a development.
I mentioned to him not to go for mediocre deals, we have something on the burner for £2.625m which is worth in excess of £3m without lifting a finger. If the property is developed at a cost of £350k the end value would be conservatively £4.2m. Therefore he would have a much better return on this project and it is currently open for investment.
There are two numbers which justify this deal, both right next door to this property so you cannot find any closer comparisons. One of them is a historical sale price and the other is a property which is about to come onto the market shortly.
The property next door sold for £3.9m in August 2014, the other property is coming onto the market at £4.5m. The property we have is bigger than both of these, therefore assuming a resell of £4.2m is being conservative.
This gentleman came with two objectives, one to see what stock we had and the returns attached to them, the other to see if we would co-invest. We have no issues with co-investing but the deal needs to stack up and offer more returns than we have. I advised him to withdraw from his deal and come into ours, not because the deal is ours but the numbers in our opinion speak for themselves; and needless to say we won’t be investing in his deal. He is currently reviewing the deal we presented.
One issue is the deal itself, the other major issue is trust. There needs to be trust between the parties for them to engage with each other. Having a contract is no substitute, and in my opinion is more of a psychological deterrent. The main purpose of a contract is as a means to clarifying the agreement and giving it proper definition, rather than being a substitute for trust.
Whatever eventualities the contract covers, if someone wants to be clever they will always find a way to do so. For example a contract doesn’t stop a person from point blank lying.
In one situation a few years ago there was a clever jeweler from Kenya, I thought we had some trust and honesty between us. He never signed a contract despite the numerous transactions we had done together. Unfortunately he had a bad habit of continually lying in his dealings with us and when confronted he spoke more lies to cover the same lies up; and then he got annoyed when we brought these issues up, to the point where he cut off communication still owing us several hundred thousands of pounds.
Clearly this man is in desperate need of money, more so than us. Therefore my view was he should keep the whole lot and choke on it; ill earned money will never do any good in the long term.
In any transaction two individuals will have different viewpoints, a contract serves to merely clarify specified eventualities. It is no substitute for someone’s character.
It is of course wise to have terms of business spelled out in writing which we have, through painful lessons, seen the importance of, and have checks and balances entwined in the transaction. For example none of the funds are handled by us, they are channeled either through a lawyer’s account or an FCA registered administrator who is authorised to hold monies. This gives the investors some layers of comfort.
This is one issue the potential client brought up, that he has been authorised to handle other people’s money and how can he be justified to hand this trust over to someone else? A fair and open question.
Trust is not built up by reading articles, or talking, it is ultimately built up by transacting together. And not just transacting, as it is easy to have good times and be fair weather friends when both parties are making money, the real test of someone’s character is what happens when things don’t go quite to plan… Does one party run the other way and cover their behinds or do they hang through the deal and weather the storm no matter what.
There is a saving grace with property, given time it will always bounce back. Why does this principal hold true for property as opposed to many other investments? Looking at the basics you have a finite commodity – land – with something even more finite – property – on it, versus money. Money is not finite it is potentially infinite, it has been continually printed in greater and greater quantities especially in recent years by the central banks. Therefore as time goes on you will require more and more of it to buy the same amount of property. This is as simple and basic as it gets.
So within this scenario I proposed that the client suggests a means to look after the money being a majority investor – subject to due diligence. We are not attached to managing the money as long as it is kept safe and we can use it in a timely manner. Or he takes the complete deal from us, both of which he was open too.
The deal is not important, but the relationships it creates is. If you can develop a good working relationship with someone you can transact easily and comfortably for life. Many people, especially in the property industry, continually chase the deal – they are missing the point – a valuable relationship is worth hundreds of deals.
A Property Investment Company
!Tips of the Week
The money you invest in property will grow in direct proportion with the location you invest in.
When purchasing and developing always keep the buyer in mind, not your own preferences.