Friday, November 2, 2007

No margin for error

No margin for error
Desperate to become a developer? It’s not as easy as it looks on television

Lucy Denyer
Back in 1992, Andrew Murray left university with a degree in economics, a bit of experience of painting and decorating, and heaps of confidence. In the absence of anything else to do, he persuaded an architect friend to let him do up a house – “a £500,000 job”.

“I literally did it with a DIY Collins manual, and I rewired the whole thing,” says Murray, 36. “I met some quite interesting people along the way. That was a kind of baptism of fire.”

Today, Murray is the director of Morpheus, a top-end development company that creates luxurious eco-pads for the extremely wealthy in London’s most desirable enclaves. His latest project is the multimillion-pound redevelopment of two penthouses in Mayfair, which, despite estimated price tags of £15m or more, are already attracting interest. Murray drives a rather nice car and lives comfortably in Fulham, southwest London, in a house to which he is about to add even more value by redeveloping it himself.

In short, he is the man every would-be property developer dreams of becoming. And there are plenty of dreamers out there. A YouGov poll last year put “property developer” at number seven in the list of the top 10 jobs people would like to have – above zoo-keeper, doctor and even, in our Beckham-obsessed nation, footballer.

No margin for error
A bit on the side
Improve, not move
Tread carefully on big projects
It is not just the fault of all those television programmes that feature people – often with little more than basic DIY skills – making a profit out of doing up their homes. In the current market, with prices slowing and rental yields declining, “adding value” can be the only way to make a buy-to-let project work.

But is it as easy as these programmes would have it seem? Only if you get the right deal, says Gary McCausland, another self-made property profes-sional.McCausland knows his stuff: the head of the Richland Group, a luxury developer, he is acting as adviser to How to Be a Property Developer, the third series of which begins next month on Five. The programme gives two teams – one male, one female – £300,000 to buy, develop and sell four properties in a year.

The women, Paula Ketterer, 41, and Lynsey Jackson, 30, start by buying and sprucing up a one-bed flat in Edinburgh for a final profit of £15,000. They go on to purchase an old church in Clack-mannanshire, which they sell on with permission to convert into a house, then buy a one-bed flat at the top of the Royal Mile, in Edinburgh, which they turn into a two-bedder. Their final project is doing up a one-bed flat in the best street in Perth. Despite some setbacks (their first project went over time and budget, while they had to spend £10,000 digging under the church to prove there was no mine shaft there), they emerge the winners, making about £100,000 profit.

Their rivals, “the Dans” – best friends Daniel Errill and Dan Abbott, both 35 – get off to a far less auspicious start. Their first project – buying a house in Margate, Kent, and turning it into two luxury flats – cost them £15,000. Their next, equally disastrous buy is a plot of land in Portugal. They hope to get planning permission to build three flats and a villa – and sell it on for profit. They fail, and end up offloading it for another loss.

Their last two projects – doing up two flats in Hastings, East Sussex – yield a modest profit, but the men never recover from their shaky start and lose about £20,000. Undaunted, they intend to work on future projects – using their own money.

During filming, the pair found an old chapel in Pembrokeshire for £85,000, which they plan to turn into five luxury duplexes, aiming to sell them on for at least £200,000 each. They are also buying the one-bed flat Errill had been renting in Chelsea for £575,000. By renovating it and adding an extra bedroom, they hope to sell it on for £1.5m.

“The biggest nightmare of the programme is that you can be forced into a deal,” Abbott says. “There was so much pressure. Ordinarily, we wouldn’t have touched that property [the Margate house] with our own money.”

So, back in the real world, how can you actually make a profit? “You make money when you buy, not when you sell,” McCausland says. “You’ve got to find something you can add value to.”

This means choosing the location and type of property carefully. Work out who’s going to buy or rent the finished product, and how much they will be prepared to pay. And, once you have settled on an area, don’t head straight for a part that is already booming.

“A lot of people don’t understand location,” says McCausland. “There’s no point buying in the best areas. It’s about finding somewhere that’s up and coming. There’ll be transport links opening, great little coffee shops and new schools. Look for skips on streets.”

Finding such a property may not be easy. Last December, Nigel Rosser quit his job as a journalist, convinced he could follow the example of all those people “tarting up old houses on television”. More than six months later, he has yet to find a suitable wreck in London or within commuting distance.

“The market has been largely sewn up by the professionals,” he says. “I’m sure I was naive, but I had no idea how few properties in the right area are actually available to the amateur.”

Once you’ve found somewhere, do your homework. “Always make sure you legally check out a property, to ensure that you’ve got the title and that there aren’t any restrictive covenants that might detract from the value,” warns McCausland. “And get a survey done – not doing so is a false economy.”

When you’ve negotiated on price (don’t forget stamp duty and Vat), budget carefully. Plan exactly how much you’re going to spend on each room – and factor in a 10% contingency sum on the whole project for the inevitable overruns. Keep the target market in mind throughout the process: the finished spec needs to be high, but there’s no point installing the latest high-tech wizardry if you’re aiming at first-time buyers on a limited budget.

You should also think green. “It’s something most people should look at now,” McCausland advises. He puts in solar panels, but just installing a dual flush on toilets can make a difference.

You can save money on a project by moving into it while you are doing it up, reducing living costs and saving tax when you sell. But be warned: HM Revenue & Customs will crack down if it thinks you’re acting as a business.

Above all, don’t be tempted to rush into anything. You get only one chance if you’re in this for the long haul, says McCausland. “Make a cockup and you can lose tens of thousands. If you screw up, you don’t really get another go.”

Unless, of course, you take part in a property programme on television and the money’s not yours in the first place.

How to Be a Property Developer starts on Five on July 4 at 8pm

So how do you find your project?

The first rule of developing is that you make your money when you buy – not when you sell. But don’t expect to march into your local estate agency and be handed a list of potential money-making projects.

Try these tricks:

- Watch out for the “three Ds” – death, divorce and debt – which can help you to get a property for less than the market price. Get hold of auction catalogues and, rather than fighting it out with other budding developers, make an offer well before sale day. “Make them feel they won’t do better in the ring,” advises John Weatherall, head auctioneer at Andrews & Robertson, which runs sales in London and the southeast.

- Build up a rapport with local estate agents and let them know what you’re looking for. As a further incentive, indicate that you will sell the property through them when you’ve done it up. In return for a fee (usually 1%), they will keep you notified of properties not on their books. But beware of offering them a backhander to tip you off about their own properties – they would be committing an offence.

- Look around the neighbourhood for rundown houses, vacant plots or properties you could extend. “I once knocked on a door in Richmond and asked the old guy who answered whether he’d think about selling,” Gary McCausland says. “He said he’d been thinking about it, so I offered to buy it straight off him.” You should also let people know you’re looking – word will soon get around.

- Search on Google Earth for little pieces of vacant land in built-up areas, then find out if you can buy the land to develop.

- Look in newspapers and magazines such as Estates Gazette, Property Weekly, even Loot. Sellers who have cut out estate agents may be ready to sell for less – giving you the margin you need.

- Approach developers. “I can’t do every deal that comes across my desk,” says McCausland, who has set up a property-finding arm to offload smaller developments to people looking for projects.

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