How to Avoid Potential Financial Pitfalls as a Property Developer
Becoming a property developer is an exciting venture that will give you the opportunity to renovate a property or build one from scratch, returning an attractive profit. Developing a property requires enormous commitment though, and financial stability, to ensure you reach a successful completion.
Having a strong plan in place before you start your project is essential to avoiding common financial pitfalls. The last thing you want is to halt your development project due to a lack of funding or unforeseen finance complications.
Be alert to the financial situation of your project from the outset in order to fulfil a lucrative investment.
Do Your Homework
Whilst the financial benefits can be rewarding, property development is also risky. There is a level of skill involved with choosing a property or plot of land – it is not just a blind selection. You might initially think you have found the perfect investment, but when it comes to completing the project and selling the property, you may meet difficulties.
Research the area thoroughly, thinking carefully about how attractive it will be for potential buyers, as well as any possible drawbacks. For example, if you plan to develop a property with a family buyer in mind, choosing a location far from any schools is a clear disadvantage. A lot can be learned about an area by the amount other properties sell for. Some of the best locations are those just on the fringes of expensive areas (you may want to avoid investing in areas that are very expensive as this can restrict your profit and narrow down your potential audience).
It is worth keeping in mind that areas with poor transport links, and properties that are on or nearby busy roads, are more likely to sell at discounted prices.
Ensure You Get Planning Permission
Before you properly think about getting your project off the ground, organising planning permission through the local council is paramount. Organising your finances only to find that you are not able to develop a property or build on the land will be very disappointing. This process can take time to finalise so it is important not to give yourself unrealistic timescales or commit to lenders and contractors before you have secured your planning permission.
Source Competitive Quotes
You may feel inclined to settle with the first lender and contractor you find, in order to speed up your development project, but it is crucial to take time to source competitive quotes and find the right people to work with.
When you are looking for contractors, research their previous projects and case studies, as well as reading through any testimonials. You will want to feel secure in the knowledge that you are investing in reliable contractors who will do a good job and help you complete a successful development. Ask a number of different contractors for quotes that fit your budget before making your decision, and always sign a fixed-price contract to prevent getting overcharged if the project continues for longer than expected.
Assess your options from lenders to find a plan that meets the criteria of your build. Be alert to interest rates but look at the overall cost. A lender with a higher interest rate may in fact be cheaper than a lender with a low interest rate, due to other fees which are or are not charged. Ensure you understand how monies will be released to you during the stages of your development project. Make sure these factors match the overall budget and timescale of your project.
Allow for Complications
As important as setting a strict budget is, you will also want to allow for financial and other complications. The cost of a development project can quickly pile up, so be sure to factor in any additional costs that may arise. This will mean that you are ready to respond without any nasty surprises. Consider adding a contingency of between 10-15% to your budget.
Additional costs that you may face include:
- Structural issues
- Fees for professionals
- Utility connection costs
- Increased materials costs
Consider How to Add Value
At the heart of any property development project is the process of giving or adding value to a property. One of the primary mistakes many property developers make is to think that more bedrooms equals a higher overall value. Whether you are new to property development or not, you should always focus on the layout of a project, ensuring that layout and space complement one another. For example, compromising on an additional small bedroom to allow for an en-suite or larger master bedroom may prove to be a better judgement.
When it comes to the final project, scrimping on quality in order to keep costs to a minimum and reach a quicker completion can be counter-productive in the long-run. As tempting as it might be to purchase cheaper furnishings and fixtures, potential buyers will be able to spot if you have cut corners.
Whilst you will want to make wise investments for the interiors of your property, you will also want to avoid going overboard and spending an unnecessary portion of your budget on lavish design. Look for both value and quality. It is important to also consider the exterior of the property, as many buyers will make an immediate judgement about a property before they even step over the threshold.
Kickstart Your Development Project
At Affirmative we understand the various stages involved in a development project, which is why we offer flexible development finance solutions to ensure your project runs smoothly. However ambitious your project, we can provide timely finance to suit your needs, from £10,000 up to £5 million.
Find out more about how we can help fund your project by speaking with a member of our team on 08000 44 84 84, or email us directly at firstname.lastname@example.org.