I get excited when I walk past a house like this! This, to me, oozes opportunity, but as ever, it needs to come back to ‘how much?’ I took this picture as I went to a site visit in September 2019. This is an opportunity we missed and understand it was due to go to auction.
For me, the trick with finding new development opportunities is to not follow the crowd. As this site was going to auction it would have been advertised with lots of eyeballs on it and stiff competition.
Not that competition is to be frowned upon, but in a situation such as this, the competitors are bidding from different angles, one with their heart and another with their head. To me, that is a situation to be avoided at all costs.
When an opportunity like this arises, developers will establish the value of the house in its current state, then calculate what price they can pay ensuring there is a 20% margin on their investment. 20% is a generally recognised metric in the industry for the level of risk that is being taken, but of course, everyone may have different views on this.
The main challenge in this situation as a developer is competing against someone who simply loves the area and wants a new home. They will see the tardy look of the property as an opportunity too, but will not build in a margin. In most circumstances, they will also miscalculate the costs to bring the property back to life – I have been in that position myself.
So, when you find yourself in a head (developer) versus heart (home buyer) situation, I put forward the idea of stepping away and moving onto the next opportunity as vital. The odds on who will be the purchaser is likely to be the home buyer as they would be willing to pay more the majority of the time. That 1% of the time when a developer’s ego/excitement/lack of experience takes over is a time when money will most likely be lost, but of course lessons are learnt. Some could say that in its self, is money well spent.
Either way, I hope this house finds its way to a family who has made it home. I’ll be checking the next time I pass.
To hear more stories like this, come along to next month’s webinar: Property Development Finance: To what extent has development finance increased to 70% LTV? Join us Tuesday 5th October at 08:30 BST by registering here.