Land is at the centre of any deal that property traders and developers are looking at. The deal is the land, and all the potential profit and success of any deal stems from what can be achieved from a particular parcel of land. When considering a purchase they intend to construct upon, whether the site is an open field, or has previously developed buildings on it, the purchase of this deal includes the acquisition of the land that falls within the property boundaries.
Even if a developer is looking to buy a building and convert its use to an alternative class, and in doing so extract more value within the parameters of the existing buildings, it is still the land that is the basis of the project. Buildings can be moved and changed, but land generally is something that remains a constant. The property term of “location location location” is something that is attached to the land, and this alone causes significant price fluctuations. This value is linked to the land in which a property/building sits.
In this piece, we will be exploring the different avenues a developer could explore to try and secure the best possible land and site deals to become their next project. We will be exploring the areas of land agents and sourcers, the direct to vendor approach, and some of the best practices to implement in order to find and secure these opportunities.
Network, Branding, and Presence
One of the biggest challenges that SME developers face, comparative to their larger housebuilding counterparts, is the lack of resources and in-house teams able to focus all their time and effort in sourcing the best deal. Larger house builders have specialist land buying teams whose sole job is to go out into the market place and find the best possible deals. Unfortunately, SME developers do not have the luxury of a land team, and have to be creative in ways to fill their deal-flow.
Having a strong network around you is a key aspect to finding your next project. Building and maintaining strong relationships with good quality land agents and land sourcers is one way in which to identify the best land opportunities. Strong relationships with the best agents and sourcers can prove to be the differentiating factor between getting the OK deals, and getting the best deals they may have. Being able to prove your ability to perform to a select few agents and sourcers on a continual basis will keep them coming back to you with better deals.
The idea of moving within an agent’s inner circle of preferred clients is very real, and often the deals that have come from agents and sourcers that you don’t have a continual dialogue with aren’t the best deals to be transacting upon. Whilst there are many chancers in this industry that simply repackage other people’s deals, or will present opportunities without an idea as to whether or not the asking price the vendor has given them is ridiculously overvalued or not, there are several very good individuals and firms out there that transact professionally and well.
Getting to know these people well and also for them to learn about the ways in which you work, and the types of deals you are comfortable to transact in, is a system that takes a long time to develop, but has the ability to snowball into a strong pipeline of opportunities. When you come across these individuals, it is fair to suggest they should be kept close, and regular contact should continue to be maintained.
For a relatively new developer, it can be tricky to build these sorts of relationships. In this scenario, branding and online profile building can be of paramount importance to making this happen. There are several developers out there who are unable to prove their track record and have no online presence about them. This often leads agents and sourcers to be nervous in dealing with them for the first time, as they have failed to showcase their ability to act. Also, in this day and age, a lack of online presence is a big red flag to agents, sourcers and vendors alike. Having a clean online presence is a sign that you are wearing your reputation on your sleeve, rather than having anything untoward to hide. Following a stronger online presence, the idea is to transform this into meaningful offline relationships with those who have access to land deals, such as the land agents and sourcers outlined above.
Off-Market and Direct to Vendor
To those starting in the industry, the realms of off-market deals is made to sound like this magical place in which deals make lots of money and are falling from trees for developers to take their pick. In reality this is most definitely not the case. Outside of the world of make believe, off-market opportunities are ones which are very difficult to curate, and the chances of making them stack are all dependent upon how the developer can creatively come up with a solution that fits towards their bottom line, whilst also making the proposal attractive enough to the landowner.
It’s worth noting that, at times, these two avenues will not align, and developers are forced to walk away. In this scenario, this may be the best outcome rather than overpaying for a land opportunity and losing money later down the line. However, despite the fact that not everything stacks up, when compared to opportunities that come through “on the market” avenues, the very best land deals tend to be dealt with in an off-market capacity.
Whilst many agents and sourcers claim they have their deals off-market as they are only being shared with select developers, and staying away from the public email send-outs and property portals, there is a school of thought that a deal can only ever be truly off-market if it is sourced directly from the vendor. This would include the landowner and the developer engaging with one another, with no intermediaries between the two. Many believe this is the best way to secure the best possible land deals, as opportunities are not being sent to several other competing developers who may all bid against one another to drive up the price. Often this can lead to an offer from a developer that is too high, and eventually fail to complete at this price level, but the landowner then has the belief that they’ve uncovered the fair market price that all developers should be paying for their land.
If a developer puts the time and effort into creating a direct-to-vender approach to source their deals, it has the potential to generate the best possible outcome for finding a great deal. The process to systemise this is often a barrier to entry for SME developers, but those who manage to put the effort into creating this can differentiate themselves between being a good developer, or a great one.
This may start with a developer identifying a particular locality to target. This may be an area that they know very well, or one they have identified as having a strong long-term growth potential. Following this, they may canvas the area either in person, or using online tools such as google maps/street view, to identify potential land opportunities. These may be run-down properties, or buildings with untapped potential along a street/in an area where the majority of other sites have recently been developed upon.
Following this, they may curate a long list of sites, and move forward to sending letters to enquire about the landowner’s willingness to negotiate the sale of their site or property. Landowner’s details are available for free from Land Registry if they are owned by a limited company, or if owned in a personal name a developer can obtain the name from title documents available from Land Registry for £3.00. Often the response rate to letters being sent out is less than 5%, and this stresses the importance of having a long list of opportunities and a constant funnel going into your pipeline. However, the individuals who respond to these represent a true opportunity, should they wish to discuss a sale/development partnership further.
Once engaged with a landowner, the best practice would be to take the time and effort to get to know the landowner and slowly understand their reason for sale. On the back of this, it’s important to work with the landowner to tailor a deal solution that works for them, rather than bulldozing your way in with a simple price you are willing to pay and a take it or leave it approach. The best land deals conducted directly with the vendor are those that take a pragmatic approach and help the landowner to fulfil the reason they are willing to sell in the first place. Sometimes this approach is best dealt with by negotiating on terms and structure, rather than price alone. When considering a creative structure, you may be able to find an outcome that satisfies the landowners needs, as well as achieve the best possible acquisition price for the developer. Communication and understanding between the developer and landowner is key to getting these types of deals done.
Whilst there is no exact science in finding the best possible land opportunity, and each developer will have a big difference in something that is perfect for them vs something that does not work for someone else, it is clear there are methods of best practice that a developer can adopt to help find their next project.
Do not manipulate the numbers to make it work
Once a site has been recognised as a potential opportunity, the next step is to ensure a full development appraisal is carried out. At this stage, it’s easy for developers to manipulate their spreadsheets to make it look like a deal could work. The optimism of hoping you can build slightly cheaper and sell for a small premium can be the undoing of a deal later down the line. The best land deals are acquired on the back of robust appraisals that consider worst-case scenarios and can be stressed tested through difficult periods.
Patience and perseverance
The art of finding the best land opportunity is arguably the most difficult aspect of a deal, and will always form the framework for future success, or failure. To be successful, the systems that have to be implemented require a lot of time and effort to trawl through perceived opportunities before finding something that works. There are plenty of “(non) deals” out there that do not stack up correctly. After reviewing many of these, it’s easy for a developer to decide to take a gamble on one that “could work” if everything goes entirely to plan. Rather than starting the deal of the back-foot, it’s always better to remain patient and find an opportunity that works. Finding the best land opportunity is very much a numbers game, and often you need to consider many sites before finding the diamond in the rough.
In summary, one of the biggest challenges that developers face is sourcing and identifying their next land opportunity. It is not something that will always fall into your lap, and more often than not it will take significant processes and time. However if conducted well, land opportunities are available and lead the way to creating fantastic homes and spaces.
Image credit: iStock.com/bjdisx