How to Source Property Investment and Development Deals: An Advanced Guide

13 Mar How to Source Property Investment and Development Deals: An Advanced Guide

How to source properties guide Avamore Capital

We kicked off our learning and development series with a beginner’s guide on how to source property investment and development deals. Now we’re ready to take a step up, looking into the more industry specific and niche avenues you can go down to find the right opportunity.

If you have any questions or comments about what you’ve read, please get in touch with the team.

  1. Runners/Introducers/Buying agents

This is a breed of property agent that acts for the buyer. If they are doing their job properly, they will be seeking out the best opportunities for the best prices they can secure the asset for. The quality of a “runner” can vary and so it can be useful to go to a professional buying agent who works on retainer plus a further success fee on completion (e.g.  Tracey Kellett or Henry Pryor). Although badly delivered or presented deals are better than no deals.

Pros of Buying Agents

  • Deals come to you – they do the legwork including booking the inspections or appointments.
  • In some cases, (i.e. the more professional buying agents) they will do some upfront analysis.
  • An element of filtering will be applied
  • They may have a relationship with the seller or the seller’s estate agent which may give an advantage in the form of inside information or preferential treatment in competitive bidding situations.
  • A good buying agent will negotiate the deal points.

Cons of Buying Agents

  • Many “runners” will “punt” a deal to everyone in their contact book, you may not be the only person that has had the deal introduced to them and therefore do not be surprised to find you are competing with other buyers introduced by your introducer.
  • Information can be misleading or limited. Many runners provide misleading information in their “summaries” and often over-egg the asking price to either secure a cut of the upside from the vendor or increase the odds of having the successful bidder.
  • Beware fees – some introducing agents receive introductions from more than 1 other introducing agent on what is known as a “runner chain”. If all the “runners” want 1% for their introduction, beware being demanded a 5% fee on the purchase price. Limit the fee to 2% to your introducer direct.

Summary: The most valuable thing an introducer can do is send you a deal. If that deal is something you would want to buy and would not have otherwise known about it, then their introduction is invaluable regardless of the amount of hand-holding they do with you.

Ease of access/User-friendliness: 4/10

Effectiveness: depends on who – can be anywhere between 4/10 and 8/10

  1. Commercial Agents (& auctions)

Commercial agents are slightly different to residential agents. Many commercial agents are also RICS qualified Chartered Surveyors, which is important to deal with the more specialised nature of commercial property.

Commercial agents can act as both selling and buying agents, although unlike “runners” RICS members have to adhere to ethical rules that ensure they do not act with a conflict of interest. Many commercial agents also have their own auction departments, although these do not boast the depth of stock of the residential auction houses. Accordingly, competition and/or risk can be much higher than for residential and prior due diligence is essential.

Pros of Commercial Agents

  • Generally, professionally qualified.
  • Transparent and honest (usually).
  • Can act for buyers as well as sellers (although not at the same time).
  • Can be a good source of opportunities, particularly for change of use deals (e.g. office to residential).
  • Many commercial buyers are very particular about what they buy, and have targeted criteria (single-let, long-let, multi-let or short income only). Being flexible can be advantageous.
  • Will have commercial development land opportunities (some of which may be suitable for residential) – sites without planning may sell for £10,000 per acre but secure planning for that site and you can sell for £1m an acre.
  • They are able to provide detailed advice and carry out appraisals and valuations
  • They can do ongoing management post-purchase including L&T, property management, lettings, surrenders.
  • They may also have a planning department which can evaluate the planning potential of a target site and assist with applications for change of use or redevelopment.
  • They may have a fixed charge receivership team which sells commercial properties that have been repossessed (i.e. potential for good value deals).

Cons of Commercial Agents

  • Commercial agents do not have the same “flow” of opportunities as their residential counterparts. You may need to spread the net wider geographically to find a steady stream of deals and foster strong relationships with the agents.
  • Commercial agents still have a deep well of buyers in the current climate so competition will be strong for certain deals (e.g. offices with PD rights).
  • Selling commercial Agents are more likely to recommend buyers that can offer them repeat or follow-on business, (i.e. lettings, sales, management etc) and so you must be aware that your overall goal could both enhance and worsen your chances.
  • Commercial investments are generally far more complex and difficult than residential properties. Initial yields that look attractive on paper can quickly become negative once the properties fall vacant and business rates become due. You cannot seek to buy a commercial property without paying for local market advice from a commercial surveyor unless you are willing to take a serious financial risk or know your market intimately.

Summary: The risks of commercial property are greater because there is a smaller pool of buyers and tenants for commercial assets. However, once you understand the market then commercial can be a good hunting ground for buying good opportunities, particularly if you want to convert to a higher value use in the future. As with most things property-related, relationships are key so take the time and effort to build up.

Ease of access: 3/10

Effectiveness: 7/10

  1. Subscription-Based Trade press & websites

Trade magazines/websites such as Lonres, Estates Gazette/EGI, My SPD and Property Week are good sources of information about current or upcoming sales. They also provide insights into who is buying and who is selling in the professional investment and development world. It can be a source of intelligence that your average “doer-upper” would not know about.

Pros

  • Sources of market intelligence.
  • Not freely available, so a more restricted user base.
  • Steady & ready stream of properties marketed for sale each week.
  • Properties marketed are often nationwide – so you can “spread your net” wider.
  • Opportunity to establish trends and strategies for buying. For example, if an investor is rumoured to need to sell properties to repay debts and they own an asset you might like to buy (that is not currently marketed), you could then make an off-market approach to them to buy that property.
  • Great source of ancillary information including finance companies and potential equity JV partners.

Cons

  • Subscriptions can be expensive.
  • Accuracy of information imperfect (only as good as the inputs).
  • Still a wide database of registered users, i.e. it is a narrower marketplace than free-to-access portals and subscriptions but still widely accessed/
  • Not really suitable for smaller investors (sub £0.5m deal tickets).

Summary: Subscription based services can provide a great supplementary source of leads and market intel (including case law) for a property investor and developer. However, they are not for everyone and may not necessarily be worthwhile for smaller investors. The likelihood of picking up bargains will be limited.

Ease of access: 5/10

Effectiveness: 4/10

  1. Professional Referrals i.e. Solicitors, Accountants and Architects

Direct referrals from a solicitor, accountant or architect can be an excellent way to source leads. Particularly off-market opportunities. Getting to know local solicitors can be extremely useful as they may act for local land owners looking to sell their properties or specialise in probate and so offer unique opportunities for sale

Accountants/Tax Advisors can be a useful particularly if they represent a client looking to raise funds quickly due to some sort of financial distress. Even better, they cannot accept introductory fees as this is not permitted by their professional regulator.

Architects/Planning are helpful because they may have secured planning permission for a client on a property, but the client may not wish to build the scheme out. The architect, will seek out a developer who will instruct them on the development phase of a project). They also may have a client who has instructed them to do a planning feasibility study on an off-market project, but for some reason the previous client chose not to proceed with the purchase. In this instance the architect/planner may wish to put their original work to good use introduce the deal to another client.

We summarise the positives and negatives of professional referrals as follows:

Pros

  • Genuine opportunity to pick up bargains off-market.
  • Introductions being made by professionals with genuine value-add (e.g. planner/architect).
  • Introducer generally has direct access to a seller.

Cons of Professional Referrals

  • Referrals from professionals can be sporadic. You will need to have a wide network of professionals to benefit on a regular basis.
  • To benefit from a professional referral, you need to be a client of one of them to make the most from an introduction.
  • The referral may come at a cost, even if you are not successful with the purchase. An introducing lawyer may want you to use their services (and possibly pay an intro fee too) as will an architect.
  • You also must be wary of paying introductory fees to solicitors instructed on probate sales. Aside from being a conflict of interest, this can be construed as bribery, which is not good news.

Summary: Professional referrals can be an exceptional means of securing excellent deals with favourable terms. However, it is important to break into the referring professional’s “circle of trust” which is challenging. If you can do that, you will prosper.

Ease of access: 3/10

Effectiveness: 8/10

  1. Planning searches

Although not perhaps ideal for the first-time investor/developer, planning searches represent an incredible source of sites either applying for planning permissions or having already received planning permissions. Usually applicant details are listed on the local authority’s planning portal or failing that their “agent” who is usually their architect or planning consultant. This means you have a means of contacting the owner of the land directly or indirectly to enquire about purchasing their site (you can also search the title on Land Registry for £3 if you want to find the owner’s details).

Pros

  • Planning portals are free to access.
  • Present off-market deals many times.
  • Property owners or representatives are registered (i.e. you have a phone number to call).
  • Sites with fresh planning offer “oven-ready” sites to start building out.
  • Refused planning sites offer potential bargains if the vendor is willing to sell.

Cons

  • Many owners plan to deliver out schemes themselves.
  • Most owners who are refused planning will want to resubmit rather than sell.
  • Planning consents often listed on subscription based portals (designed for builders and contractors) which means that you will not be looking at the deals exclusively.
  • Often schemes that are consented will be sold in the open market to the highest bidder, so there is no guarantee your early approach can be successful.
  • Requires a lot of legwork.

Summary: This can be an effective source of potential development options, off-market. It is more suited to more established developers but even smaller developers will find the occasional opportunity. The upsides can be large if you pick up a site cheaply from a vendor who is keen to sell under-value. However, a lot of work needs to go into the process to make it effective and you may need to “kiss a lot of frogs” before you find your proverbial prince.

Ease of access: 2/10

Effectiveness: 7/10 (but only through perseverance)

  1. “Shoe Leather”

Last on the list is the method we call “shoe leather”. So called because you have to wear a lot of it out before you finally make a deal stick. The premise is fairly simple: you identify a site (independently) that you think has planning potential. You enquire with the owner about a sale, prepare an offer, work up a planning consent, develop and sell for profit. Except this is much easier said than done.

We highlight the upsides and the downsides below:

Pros

  • Off-market situations.
  • Deal terms can be tailored to the situation (subject to planning, delayed completion, deferred payments, overages).
  • Potential to acquire below market value.
  • Potentially very profitable.

Cons

  • Labour intensive and time consuming to find and negotiate sites.
  • No guarantee vendors will sell to you.
  • Vendor may steal ideas and run with your business plan.
  • Can be difficult to agree deal terms.
  • Planning may be tricky to achieve on some sites (so purchase does not go ahead on STP deal or deal underperforms if STC).

Summary: This is a method for full-time investors and developers in property, no doubt. As methods go, it is exceptionally speculative and can take a long time to yield results. And even when you find the right site, there’s no guarantee the vendor will sell to you. Keep your ideas close to your chest in relation to sites, the vendor might try to steal them too! But, should one of these options deliver, the pay-off can be handsome if you get them right.

Ease of access: 1/10

Effectiveness: 10/10

Avamore Capital

Dedicated to driving your portfolio #letsgrow

Avamore Capital is a special situations lender that provides loans to property traders, property developers, property investors, and other property entrepreneurs. Loan sizes are between £0.5m and £5m with larger loans possible in conjunction with its partners. Avamore Capital provides a flexible approach, quick feedback and very fast drawdown, subject to due diligence.

Nickolay Petkov
np@avamorecapital.com