Archive for April, 2010

Property Development Due Diligence – Steps To Doing It Right

19.04.2010
21:53
0
By Bart S Pair





Property Development due diligence involves many steps. When done correctly the risk involved with land development are greatly reduced and the odds for profit are increased considerably.

The first step before signing your contract with the Seller is to clearly negotiate all terms that you require. If you and the seller understand all that is expected of both parties, in particular during the due diligence period, you will avoid potential problems down the road. This is where your attorney comes into place. I highly recommend hiring an experienced real estate attorney that is familiar with negotiating land purchase contracts and working with developers. Purchasing land is risky and it is best to minimize your risk from the onset. Typically land purchase contracts go through numerous negotiations and revisions. It is much more difficult after the contract has been signed to get the parties to agree to contract amendments, although contract amendments and addendum are prepared quite frequently based upon inspection report findings and other events that occur during the due diligence period.

Requesting in the contract that the seller provide inspection reports or other documents you require during the due diligence period is crucial in evaluating whether you are able to achieve your development goals with this particular piece of property. Be sure to provide a time period for the due diligence that all parties must comply with. 30 to 60 days is the minimum due diligence period for the buyer to conduct his due diligence but 120 days or longer is not uncommon with complicated acquisitions or parcels that require rezoning or are contingent on permit approvals.

There are many factors that you should consider which influence purchasing unimproved land. Since purchasing raw land has risks, I suggest you keep in mind the following (Please Note: Much of this information was gathered from the website Property Development Source):

1. Title Issues.

Are there any clouds on the title? In other words, does the seller have clear title to the property? Review of all title reports and underlying documents affecting the property is crucial. Having a real estate attorney review the documentation on your behalf is recommended whether you are a novice or experienced investor/developer. However, you should review the documents yourself too. Ask questions if you do not understand something or it looks odd to you. The main concern is to make sure the seller does in fact have legal and clear title so that you will not have any legal issues later on. Title insurance protects you in this regard, but you do not want to have to be litigating title issues when they can be discovered early on before you close the deal.

2. Survey Issues.

Are there any encroachments from adjoining properties on your land or vice a versa? Encroachments could be neighbouring buildings, utilities, easements, fences, water, etc. Are the property boundaries clearly marked and surveyed? If there are encroachments, you and the seller will need to be able to resolve the issues prior to closing. Some issues may not be able to be resolved or resolved in a timely manner and you must decide if you still want to purchase the land despite the unresolved issue. You may need the seller to obtain what is called an easement from an adjoining property. An easement is a written document allowing one party use of another party’s water, road, utility lines, parking spaces, driveway, etc. An easement is typically drawn up by the seller’s attorney and reviewed by your attorney. Title companies will exclude encroachment issues from your coverage so it is important to resolve these issues immediately.

3. Land Use Approvals.

Zoning regulations, site plan approvals, building permit and approvals, lot size, setback issues, fire safety issues, environmental and health issues such as sewer, septic disposal, storm water management, streams, rivers, wetlands, etc. Recommend obtaining an environmental report to determine if there are any problems with chemicals, pesticides, pollution, etc.

4. Availability and Access of Utilities.

Access to utilities, water, electricity, gas and sewer/septic systems, telephone, cable and internet is another concern that needs to be investigated. If access is not readily available, it can be costly to get basic utilities to the site.

5. Accessibility of roads.

Are there roads already in place or will you need to build them? You also need to consider the cost of maintaining the roads.

6. Topography, drainage and flood zones.

Recommend obtaining a soils report and geology report. Is the property in a flood zone? There are designations of flood zones areas and insurance availability is conditioned upon what flood or fire zone properties are located in. Slope issues, stability.

During the due diligence period, the seller must provide you with certain past or current reports that he has in his possession such as geology, soils reports, environmental reports. It is best to request these in your contract so that all parties are clear about what they need to deliver to each other. Depending on how old the reports are you can then decide if you want to rely on the seller’s reports or obtain new ones. Also, be sure your contract states the seller will assist with any permitting or regulatory actions that may be required during due diligence. (Often local permitting agencies won’t release information or accept rezoning or permit applications without the present owner’s signature. This clause in the contract states the seller will sign these type of documents as needed.)

It is also important to remember that the seller cannot legally sell the land to someone else. He can take back-up offers, however. A back-up offer is another offer contingent upon the first offering not going through and the first buyer cancelling the deal. It is totally legal and ethical for a seller to take backup offers and this practice is done frequently in a seller’s market [where demand is high and inventory of available properties is low]. The seller cannot legally disclose to the second backup buyer the purchase price or terms of your offer unless all parties agree to the disclosure nor can he disclose to you the amount of the backup offer and terms without the other party’s consent.

By doing your due diligence you minimize your risk. It is impossible to anticipate every source of delay or risk. Conducting due diligence will cost you money and time. The customary way of conducting due diligence is to hire professionals to assist you. Attorneys, surveyors, engineers, environmental experts, zoning and land use specialists who will review documents, do inspections and make inquiries on your behalf during the due diligence inspection periods negotiated between you and the seller in your purchase contract.

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Real Estate Development Marketing

07.04.2010
22:08
0
By Colm Dillon




When do you start?

As soon as you open your ‘baby blue eyes’ every morning!

“The Easy Part of Property Development is Spending Money” … “Marketing Is What Gets It Back + A Bit More For Profit.”

Anyone can spend money. It takes a good manager to spend it at a predetermined rate in line with a planned ‘cash flow.’

So this topic is very important. People think Development Marketing is all about putting an advert in the paper, designing a brochure and following up the agents … I don’t think so folks!!

Marketing starts before you buy the land.

The location of the land impacts on marketing. Is it a desirable address? Is it in a prestige location? What market sector of the buying public are you aiming for? Does the site have local prominence? Does the land have quality houses around it?

All of these questions impact on your marketing plan, the home designs you select, the costings and ultimate sales prices.

So if marketing starts with the land selection, it logically then goes on to the
design stage. Assuming you don’t want to just copy something you’ve seen another developer has done, you need market knowledge.

You need market knowledge of the exact standard of product you are competing against in the market now. Remember you won’t be producing yours for another 12 months or so and you’ll want to improve on what is being produced today, so you have a market difference. An ‘Edge.’

Marketing is no more than the presentation of your finished product to the
buying public in the most favourable light, highlighting all the benefits
your home has over the competition.

One kind of marketing style that is a failure as far as I am concerned is the one that is based on the “Numbers Comparison.” I am sure you’ve seen the on site project boards.

Our house has 5 of these, and 6 of those … when that guy’s house only
has 4 of these and 3 of those.

The potential buyer will eventually want to know these things, but “Right Now” they want to know “How They Feel” about living in the place, on your Road, in this neighbourhood.

Understand this: People SELL for Money … People BUY with Emotion.

If they don’t feel good in your place, it does not matter if you give then 12 of these and 20 of those … OK?

I have always DEVELOPED and MARKETED on the basis of appealing to the human senses of See – Feel – Touch – Smell & Sound.

I transfer all those into my designs, because I am designing and building for
‘Humans Beings’ and human beings buy with emotions … and if I do my work well, I’ll make a profit.

So as a buyer, if a house looks good when I drive up to inspect it, I am favourable disposed to buy before I open the garden gate.

When my feet touch the pathway/ entrance foyer and see the lovely landscaping my desire to buy is enhanced.

As I enter the house and feel the ambience of the house envelop me I
respond in a positive way to buy, if I feel emotionally comfortable in the space.

When I smell all the new house smells, it translates into ‘fresh’ ‘clean’ ‘new’ and who doesn’t want to buy fresh new things.

When I close the door of the house I enjoy hearing the sound of silence, which is conducive to rest and recuperation after a hard days work.

Think about how you respond to each house you inspect as you go about gaining market knowledge. Do you see, it does not matter how many ‘bibs & bobs’ the place has … if they don’t feel emotionally comfortable in the place, they won’t BUY!

Can you see why this is my number one topic?

So naturally I write about it a great deal in Residential Development
Made Easy.

So now you have some idea why marketing starts as soon as you open your ‘baby blue eyes’ every morning … marketing is a direct reflection of who you are and how you express yourself in creating beautiful liveable space FOR HUMAN BEINGS.

The ‘by-product’ happens to be ‘money.’ And if you do it very well,
it happens to be ‘Lots of Money.


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Obtaining Property Development Finance

06.04.2010
20:59
0

By Sean Horton

Whether undertaking a small-scale refurbishment or building a new multi-million pound complex, if the developer does not have all the money to fund the project, then the balance required could be obtained through one or more lenders. Traditionally, high street banks were used but invariably would only agree 50/50 deals (50% acquisition 50% build costs), increasing this to 70/70 deals for the experienced developer. This type of loan is usually referred to as ‘senior (bank) debt’ but still meant that at least a 30% deposit was required.

Should 100% funding be desired, then Property Development finance could be the answer which is a mixture of short and long term loans covering both the acquisition of the site and the associated building costs. Often with all the interest payments aggregated at the project’s conclusion when the properties are either refinanced or sold.

Property development finance can comprise of a mixture of elements including debt and equity finance (share capital where the investors receive a share in the ownership and dividend payments depending on the profit made, this is also known as risk capital). It can also include mezzanine finance which has the characteristics of both debt and equity finance, has higher interest and is payable after a term of 7 to 10 years. All these elements can be combined with primary lending sources to form the deal. Although no deposit is required, it does mean that the developer could have to pay over double the interest rate to that offered by traditional sources. Therefore, it would be prudent to assess accurately if the development will yield a good profit before proceeding.

When constructing a proposal, using terms and a format preferred by the potential lenders, could greatly enhance its chances of being successful. All figures ought to be realistic, with at least a 10% tolerance to allow for a downward trend in the property market. The inclusion of a contingency cost of 5% to 25% to cope with any escalation in costs or unexpected problems is also likely to be favourably received. In addition, having all the valuations within the proposal confirmed by an independent surveyor could be seen as a sensible practice. If the thought of assembling a proposal and the task of searching the marketplace to locate the best property development finance seems quite daunting, then using a commercial mortgage broker could resolve this predicament.

A commercial mortgage broker is more likely to have a greater knowledge of the complex options involved with property development finance and enjoy easier access to the marketplace. The developer could also benefit from their experience when creating a proposal, ensuring that the opportunity is attractively presented and in a language easily understood by prospective lenders. For example, having the developer show financial commitment to the venture by covering the associated professional and legal costs involved could be deemed more tempting.

Even if the developer is inexperienced or does not have a good record of accomplishment, a commercial mortgage broker could negotiate with a quicker delivery a better property development finance deal that could increase the profit, and give support in areas such as project management and offer alternatives and strategies should problems manifest during the project.

They can often provide guidance to help ensure that the final debt to GDV (Gross Development Value – the forecasted sale value after the building phase is completed) is no greater than 75-80%, thus making the proposal more appealing and with the prospect of yielding a feasible profit. After all, at the end of the day, making a profit is normally the driving force behind any project and an important factor when choosing property development finance to realise such a scheme.

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