Choosing a Property to Develop for Profit – The Reality!

In my last post I talked about the Purchase Decision Framework – a set of criteria that would help identify which properties had the potential for development by looking at approximate figures for key factors. These included purchase price, buying and selling costs, renovation costs, selling price and desired profit. On paper at least, it all looked very clear and easy.

Having searched probably hundreds of properties, using that framework my business partner and I short-listed three to view. Admittedly the profit margins weren’t as good as we’d hoped for (at around £20k instead of £30k), but they were still worth a punt.

We found ourselves an expert (friendly local builder) and arranged our viewings. This is what we found…

Property 1 – auction sale, full renovation required:

The guide price for this property is £58k plus. Buying and selling costs are fixed at £6k. Renovation is estimated at around £25k. Therefore the total cost would be approximately £89k. The house is in a very saleable area and there is good evidence that it would fetch a minimum of £95k. The big BUT is that it would only provide £6k of profit and that’s assuming you could actually get the property for £58k. I suspect it will go for around £70k which would lead to an overall loss – but I’ll let you know what happens as the auction is taking place soon.

Property 2 – repossession, redecoration required:

This property is for sale at £60k. Buying and selling costs are fixed at £6k. The house is in very good condition, so to bring it up to tip-top condition it would only take around £7k of work. This means the total cost is around £73k. It looks like it would sell for around £70k, so if purchased for the asking price it would leave a loss of £3k! However, with it being a repossession property it looks like £50k would be a realistic purchase price – which leaves a £7k profit.

This would be an easy project, where the purchase and redecoration could easily be completed within 4 weeks. However, there’s a question as to how quickly it would sell. The story behind this property is that the previous owner tried to sell it before it was repossessed for £75k – this was more than 9 months ago. Obviously you then have to ask why a nice house hasn’t sold. Is it the small second bedroom? Is it the area (a nice estate, but an estate never-the-less … not everyone wants to live on an estate)? Is the price unrealistic in the current climate?

Property 3 – repossession, full renovation required:

This is for sale at £65k. Buying and selling costs are fixed at £6k. Renovation is estimated at around £25k. Therefore the total cost is approximately £96k. It appears that it would fetch around £85k once complete – meaning a £11k loss. That said, the asking price is massively inflated and I think it could realistically be bought for around £45k which, if correct, would mean a profit of around £9k. The concern with this property is that it is also situated in an estate so has limited appeal to purchasers.

Keeping up the search

As you can see, three very different properties that looked good on paper turned out to have little or no profit in them once we’d been given estimates from our builder. Since viewing those properties I’ve looked at another two, and the story seems similar…

Property 4 – repossession, full renovation required:

This is for sale at £100k. It is a two bedroom property in a very popular area which should make it saleable. Buying and selling costs are fixed at £6k and my own (non-expert) estimate at renovation (based on previous expert advice) would be £15k. This brings the total cost to £121k. However, the bathroom and second bedroom are very, very tiny. With a loft conversion (at about £10k), this property would fetch around £120k – but the costs would then be at £131k, an £11k loss! It’s possible that because it is a repossession it could be bought for £85k – which would leave a £4k profit.

Property 5 – private assisted sale, full renovation required:

For sale near property number 4 is this house, also for sale at £100k. The house is being sold privately, but not by the vendor – which means there is a possibility that they might want a quick sale, which would be good for negotiations. It is similar to property 4 but already has the loft conversion (which means a third bedroom and bigger second bedroom and bathroom) and requires a little less work. So, buying and selling costs are fixed at £6k. I estimate renovation costs to be around £21k. This brings the total cost to £127k. Realistically it would sell for a minimum of £115k, which would mean a loss of £12k. That said, if the vendor wanted a quick sale, they might take £80k – which would turn that into an £8k profit. I happen to know that several months ago an offer of £80k was turned down, but that was some time ago with no offers since – so maybe they’d reconsider now?

What’s interesting about this property when compared to property number 4 is that it has so much more to offer but is on at the same price. This is the kind of difference that 1 mile will make in terms of areas and asking prices. Also interesting was speaking to friends who live on the next road (they paid £122k for their house a couple of years ago). Things that made their house more expensive were a small off-shot kitchen (meaning there are two distinct reception rooms) and also a private garden. These are terraces and residents gain access from the back, which means that you generally cross other people’s properties to access your – unless yours is the end property, which theirs is (and that adds value).

Disappointing

Obviously this was hugely disappointing, and whilst it seems there is money to be made, reaching our goal of £100,000 in a year wasn’t going to happen if we pursued any of these. Worse than that, realistically we’d be looking at making around £20k which, after being split between us, would render this a venture that isn’t worth pursuing!

Lessons Learned

From our work so far, we’ve found…

• Finding suitable properties is far more difficult than we expected – certainly at this level in the market. What I mean by that is that, if these houses were worth twice as much, the renovation costs would pretty much be the same, but the profit margins would be higher.
• You can’t rely on past sale prices (from the Land Registry) to work out what a property will be worth now, especially at this point in the boom/bust cycle we’re in. Estate agents have a much better idea of the market.
• Estate agents are very good for finding out about the history of the property which is hugely helpful in terms of knowing where to start negotiations. They also know about the area. Make friends with your local estate agents – if all goes well you could be doing a lot of business with them (selling as well as buying).
• Local knowledge of what affects property prices (as described with property 5 above) is absolutely crucial when doing the sums and assessing viability.
• The most worrying factor, one that is outside our control, is when the property would sell and how much for (and how quickly it would sell). This will have a huge impact on the outcome of the business for us.

Options and Future Plans

Clearly we need to seriously consider where to go from here. We’ve found properties that have a few thousand £ profit in them, but not the kind of profit we wanted, and not enough to make a business for two people. Therefore we need to work out how to increase this profit. I’m happy to keep our sale price estimates conservative – that’s sensible. The costs of buying and selling are fairly fixed. We could sell privately to avoid estate agent fees, but that only gains us about £1,500 which is nice, but not game-changing.

That leaves us two areas to save costs. The first is the purchase price. I think we’re doing a pretty good job of identifying properties that can be bought for below-market value and that have plenty of room for negotiation. The just leaves us the second area – renovation costs. At the moment we’ve found a great ‘builder’ who actually manages the whole project for us – and all of the trades involved. He’ll sort out building work, plumbing, electricity, decoration and even gardens. Whilst this is hugely beneficial for novices like us who don’t already have a good list of trusted contacts, it comes at a cost. This might be one area to save money – find cheaper tradespeople and project manage them ourselves. We might also have to look at the amount of work we’re doing – i.e. do we really need to re-wire the whole house to make it ‘perfect’ when ensuring it meets current safety standards is enough?

As well as saving costs, we can also look at increasing profits. There are different ways to do this and I won’t go into detail now. They include things like increasing the initial investment a lot (maybe doubling it) to move up a stamp duty bracket. This would put more profit in each property and works because there is a limited amount of value you can add to a £100k property (it will never be worth £135k), but a £150k property could be worth £200k with the right work. Another option is to increase the initial investment a small amount and develop two properties concurrently. Both have the same small profit margins, but you’re doing twice as many in the same time and are spreading the risk. This doubles profit, but doesn’t really double the work or the risk (as it is spread).

Coming soon

I’ll let you know where we end up going from here – i.e. the solutions to these problems. We’ve also put in an offer on one property and are attending an auction very soon. More on this next time – be sure to sign up for the free updates so you don’t miss it (top-right of this page).

Your feedback, comments and suggestions will be gratefully received below.