The Virtue Of Patience
When it comes to property development, Ben Pauley has some key advice.
1 August 2019
We are living in a world that is more interconnected and fast paced than ever before, and I often see this leading to impatience with many borrowers. I aim to provide some context around why the old adage “patience is a virtue” is as important as any other advice you’ll receive – particularly when it comes to property development.
Property development carries with it many risks and currently it’s perhaps the most difficult market to find finance. Often, I find clients who haven’t exercised much patience and as a result can find themselves in a pickle.
Doing Due Diligence
Getting good advice early on and then taking the time to do your due diligence is key. Most people are eager to get things started and will go full steam ahead to get a project ready, only to find themselves halfway down a rabbit hole.
Understanding the full picture from start to finish is very important. Don’t take anything at face value. Do seek second opinions for anything you’re unsure of. I’m often surprised at how many developers overlook simple things like finance costs when they are reviewing a development, and find that after incurring these, things tend to look worse. They’ll have spent hundreds of thousands getting the development to the state it is in (finance is considered last) to find they can’t go ahead.
Take the time to assess all aspects of the development. This may mean speaking to a couple of different builders, exploring finance options and working with an independent party to assess the feasibility of a development. All of that will cost time and money, and it may even mean you miss out on securing a property. This is however, a much more enviable position than finding yourself committed to a property having incurred a lot of cost and unable to proceed.
Working with clients who do the above, I often find myself recommending they don’t proceed, or even perhaps they sell the asset as it is, as that is worth more to them than completing the development. Sometimes a “no” is more valuable than a “yes”.
The other aspect of property development that I find myself in lengthy discussions with clients about is around pre-sales. These are a hot topic at the moment as all banks now require a certain level of pre-sales (most often full) before they go ahead with lending. There are a number of non-bank financiers that will take the risk without pre-sales, however, and considering these is well worth your time. Currently the property market, particularly in Auckland, is reasonably flat if not softening slightly. Starting a development now and expecting an uplift in price over the next 12 months isn’t necessarily assured, and a much greater risk than three to five years ago when the market was moving rapidly. What is more likely (and is being seen across Auckland) is that values may in fact fall, and you may be left taking home less than you had budgeted on if selling at the end of the development. (Some properties in Auckland have fallen in value 15–20% over 12-24 month periods.)
The consideration is holding the asset for three to six months before beginning development whilst you seek pre-sales. This is a lot cheaper than holding them after the development once you have taken on debt.
If some of the pre-sales fall over and you have to re-sell the properties, at the very least you should be holding a 10% deposit, which will possibly offset the fall in value, and cost of looking to re-sell.
Patience Can Pay Dividends
Overall, seek advice early when you are considering entering into a development and take your time to assess things properly. A little cost and time now can save you big time further down the line.
It costs nothing to sit down and chat with a Squirrel adviser to go through your plan.