5 Development Challenges From A Live Case Study
Estimated Read Time: 12 minutes
Editor: Shaun Callacher
5 Property Development Challenges From A Live Case Study
Mental resilience is a key ingredient if you want to be successful in property development, because with every project there are challenges – challenges that can make or break you.
In this post I thought I would share some challenges which my business partners and I came across in one of our latest property development projects. I will be sharing what the challenges were and how we overcame them. Hopefully sharing this story will give you guidance should you come across the same challenges on your own journey, as well as the confidence to overcome them - after all, knowledge is king.
The project I want to write about today is a piece of land we bought in Warrington (WA1) and which we're developing 4 x semi-detached houses on. During the purchasing phase there were many hurdles to overcome, as evidenced by this quote from our conveyancing solicitor, who has 20+ years of property conveyancing experience: 'This piece of land is like an exam question; there is so much going on, I feel as though I am being marked for my degree'.
So here are some of the challenges we encountered before we even bought the site...
1/ Land without planning being offered with full planning permission
The amount of times I have come across agents or vendors advertising a piece of land with full planning permission, when in reality it doesn't have it, is uncountable. Often agents say the land has full planning permission because it had received it in the past, but it has now lapsed.
Other times they just tell fibs because they know the land will get more interest if they state it has planning permission.
In this particular case on this particular site, however, the full planning permission was void because the plans ran over into the neighbour's land!
...Something you would think the local council would check before giving full planning permission, right? Something you'd think your solicitor would check, right? ...Unfortunately not! Not in this case, anyway.
This was due to the fact that the land registry had the neighbour's garage in the incorrect place. Therefore, going off the land registry plans, the back garden fence was blocking the neighbour's garage.
The only people who will pick this up are possibly your architect and/or building team. It is your job to ensure they check it.
Tip: Check that the title plans are accurate to the site you are buying, plus whether the site fits with the plans used to gain planning permission.
Fortunately we noticed this very early on as we like to get the architect and project manager involved very early. If this had been noticed after the purchase, it could have caused quite a panic!
As we had identified this in the negotiating stage, explaining to the vendor that their site was worth less than they believed because it didn't have planning permission was difficult. However once we supplied them with the evidence and showed them how it was their own incompetence that had caused it, they soon accepted a realistic offer subject to us gaining the planning permission.
Obviously putting our hands in our pockets and paying to gain the planning permission has a level of risk as there is no certainty the council will accept a re-submission. However, a brown belt piece of land which already has planning permission (even though it isn't buildable) has very high chances of getting planning re-passed especially when it is also for a better design - so it was a risk worth taking.
The previous planning permission the owners received was for 5 x 3-bedroom townhouses. We knew we had to lose a house to gain the planning so it didn't run into the neighbour's land, but we also knew by changing the units into semi-detached houses rather than townhouses we could uplift the value of each unit. This ensured the end values were similar (GDV).
Opportunity: The opportunity for us in this challenge was a redesign submission which allowed us to lower our build cost (cheaper materials & one less unit) and build semi-detached houses, which are more desirable in the area, so easier to sell.
2/ Freehold & leasehold titles
Owning the freehold of a piece of land is more desirable than owning the leasehold. With full freehold ownership you don't have to answer to the freehold owners who could potentially hold you to ransom in the future to renew your lease.
On this particular site, the land was part freehold and part leasehold - I told you this site had many challenges!
The leasehold land was owned by a wealthy freehold landowner who owned the majority of the town back in the early 1900s.
As the lease was drawn up so long ago, it meant a few things;
i/ The lease was in old style writing, so it might as well have been in hieroglyphics.
ii/ The freeholder is probably not around anymore.
iii/ With no idea where the freeholder is, we run the risk of building the site and then discovering the freeholder has come back.
Tip: Fortunately, to overcome all of the above we could take out insurance. The insurance will pay out in the unlikely event that the freeholder of the land turns up. This came at a cost of £1500 - a setback, but in the grand scheme of potential profit margins, this was nothing worth throwing the white towel in for. We just negotiated with the vendors to split the cost of it 50/50.
3/ Hidden in the ground
The thought of contaminated soil buried underneath a site makes developers shiver, and rightly so. The fact of the matter is, the majority of problems are predictable once out of the ground. But unfortunately, anything could be hidden underneath the ground. A good example of this is how a developer recently found Anglo-Saxon coffins underneath his site! It set him back £250k to get it removed! (You can see the full article here: http://www.bbc.co.uk/news/uk-england-norfolk-39106514 )
Now fortunately on our site this wasn't the case. We didn't find an ancient historical artefact, but we did find low level contamination from the geosurvey we carried out. Once again, this survey came at a cost, but it's worth paying if it can potentially save you thousands of pounds.
Tip: Always get a geosurvey carried out prior to purchasing a piece of land.
The solution to the contamination was to remove 600mm top layer off the whole site. This didn't increase the cost too much as we were planning on taking a lot off just to make the site clean and level anyway.
Many developers shy away from contaminated land. In most cases (but not all, like in the example above!) this can be mitigated with historical research of the land's previous use, geosurveys and a big enough contingency in place.
4/ Right of way
Back to that damn neighbour's garage.
Within the title of our land there was a right of way to allow the neighbour situated to the back of our plot access to his garage. Although the neighbour has access from his own garden, should the neighbour one day wish to walk through one of our gardens and jump over the fence to then get to his garage, he has a legal right do so. The likelihood of him doing this is very impractical and doubtful, but still it is in black and white and so therefore poses a problem for us.
It poses a problem because it is not something that can be insured against. Therefore any potential buyer of the house which has the garden with the right of way could decide they don't like the idea of a neighbour jumping over their fence and back again. It could ultimately put somebody off from buying the house.
The solution: Our solution for this was to negotiate with the neighbour to get his right of way removed. After a little convincing, he agreed to give up his right of way on our land.
5/ Brexit and the sky is falling
Just like the story of Chicken Little screaming 'the sky is falling', during the Brexit referendum the media pumped so much fear into the economy to make the public believe that disaster was imminent. The immediate effect of this was a massive decrease in the British pound sterling.
From a property development point of view, we saw lots of finance lenders tightening their belts and battening down the hatches in the weeks that followed. Unfortunately or fortunately, depending on how you look at it, we experienced this first-hand after having our primary finance lender pull out in the final hour. We were due to use their borrowed money to start the development works on site the following week. The day after the results of the Brexit referendum, they decided they didn't want to lend us the money.
This left us with no money to carry out the build... unless we acted fast. We had a choice: spend our time pissed off with how the finance lender treated us, or act and find a new lender. We opted for the latter.
A few calls later we had a great feeling about a crowdfunding website that wanted to see our project. Two weeks later the money was in our account. Their interest rate was slightly higher than the original lender's, but on the positive side they are more flexible about how and when the money is realised, making the project run a lot smoother.
The time frame to complete on this land from when the original offer went in took 12 months - double if not triple the time frame expected. This, however, is the reality of purchasing property or land; things come up and can delay the speed of the transaction. Be prepared for this.
I see many inspiring developers believe they will make a fortune in their first 12 months. Now, this is not impossible, but considering that the average time to sell a property (and therefore also buy) is probably 6 months, a 12 month project you are flipping on is highly unlikely. (If you are looking to replace your income fast, I highly suggest using another strategy such as lease options. I have wrote a book about lease options available for FREE if you signup to our newsletter).
Present outcome of this project:
We are currently on our final phase of building this project of 4 x semi-detached houses and have many people lined up wishing to buy once complete. From a profit perspective, this project will be very lucrative and net around £170k+, providing of course no expensive challenges come up in the final chapter. But if they do, remember that most if not all challenges can be overcome with the right team, knowledge and mind-set.
I will leave you with this quote I absolutely love: 'Choose to accept challengers so you can feel the exhilaration of victory'.
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