Are you a potential property investor at the beginning of your investment journey? Or are you a seasoned real estate investor or landlord considering buying a property direct from a developer?
Either way, this could feel rather different to a straightforward property purchase for a number of reasons.
- The property you are buying is not built yet. It’s either off-plan or part-way through construction.
- It’s one of many units in a complex – not a stand-alone property.
- The property is part of a mixed-use or purpose-built student development.
- The development has facilities and amenities and you’re concerned how much these will affect annual fees.
- You are unsure about annual fees the developer is looking to charge, like: ground rent, service charge and management fees.
- The developer is guaranteeing a fixed annual rental return for a fixed number of years.
- The development company has its own management company or has appointed an affiliate management company that operates on the owners’ behalf.
- The developer can only offer you the guaranteed rental period, if you use their assigned management company.
- Because the property is off-plan, the developer has asked for a higher deposit (over 10%) so you’re worried your money is at risk.
- You are not sure about purchasing a new-build property that is partly buyer-funded by your stage payments to a developer.
- You’ve heard horror stories about developers going bust and investors not receiving their deposit monies back.
Why should YOU know how to identify a good property development company?
Shrewd investors want to know and trust the development company they are buying from. It’s an essential part of their due diligence process. Along with an understanding of the structure and the financials of the specific project.
With majority of Mixed-use and PBSA property investments purchased off-plan, or at least early on in construction, carrying out due diligence is fundamental.
In the list above I’ve cover a few aspects on why some potential investors think and feel differently about buying directly from a developer, particularly off-plan. There’s a lot more to get your head around, compared to just buying a house or flat to rent out.
Having a developer due diligence check-list to fulfil, it’ll soon become transparent to whether the development company ticks the right boxes and ‘has you covered’.
What is a property development company?
A property developer or property development company specialises in new build property and renovations of an existing building, for example, renovating an office block into residential apartments.
The property developer will be involved in finding funding, buying land, seeking planning permission approval, appointing the architect and construction company, funding the build of the project and appointing the property investment company that will sell the individual units.
Also, depending if experts in mixed-use or PBSA, they will partner with a specialist management company to ensure maximum returns for their investors, along with a specialist legal team to ensure contracts are airtight for both parties – themselves and their investors.
What you should look for to know a property development company is good?
It goes without saying that a well-established development company with a proven track record and projects already brought to fruition will give investors some instant peace of mind. Therefore, the developers track-record and history of the company is important: land ownership, projects already completed, Companies House check – relating to the projects SPV. Plus, who’s the Contractor and management company affiliating on the project.
- Track-record, how long has the company been around, and the history of not just the company, but each director. The company might be new, however, if well-regarded developers, architects, QS’s or builders in the industry have joined forces, it’s looking at their individual track-records as the people behind the company. For instance, how many projects, particularly the same type of projects, have the company or individuals brought to fruition?
- Check out different review platforms, such as Trustpilot, Google, etc. Like you would with any product or service, developers will, or should, have a company page for customers to comment. See what other like-minded investors have to say about their experiences, this will give you a feel for the company, its delivery and customer service. However, be mindful, delays in construction are common and often unavoidable, so it’s worth checking out the reason why there was a delay.
- It’s become so easy for us to research and look for news stories online. Carry out a search online to see if there is some good press on the development company, new or current developments. Don’t be put off by a lack of press coverage, however if you find negative news stories about the company or individuals in the company, be particularly cautious. Ask questions and maybe stay clear of that investment if you cannot get satisfactory answers on any negative news or accusations.
- Check who owns the land on the specific project you are looking at. Do a Companies House check relating to the projects SPV and ensure the directors names correlate? If they don’t, then simply find out the reason and ownership structure of the project.
- Request and check all the project details. Every project a developer launches may have a slightly different structure to the previous one. This may be due to, the way it is funded, the local council or even due to a JV partnership with the build contractor or a property investment company. The basic questions are, when will the project start construction? And is the start date subject to anything e.g.: build funding? Find out how well your deposit is covered and how your deposit monies or stage payments are ring-fenced. Ask how project-cost management is controlled and if there is a contingency plan by the developer for any shortfall of any kind?
- Look carefully at who the developer is choosing to collaborate with on the project you are considering investing in to. Look at the track-record and reviews of the management and lettings agent, especially if the developer is offering a guaranteed rental return for the first few years – this is common with PBSA developments. Ensure they are established and have offered appraisals on projected rental forecasts, service charge, management fees and letting fees.
- You can even be extra thorough and find out or ask questions about who is contracted to build the development, and simply do a similar check online and on Companies House. That said, if the contractor does let the developer down and does not meet its build milestones, the developer would have a strict contract in place and simply replace the build contractor with another.