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The TrustedLand Knowledge Bank

The TrustedLand Knowledge Bank provides advice pieces, interviews and videos that address key questions and steps around the process of buying and selling Land for residential property development in the UK.

The importance of being realistic when buying and selling (Part 1)

While we build rapport [with the seller], we still carry out research and due diligence. This puts us in a strong position to be able to secure the site, know exactly what we are doing, and gives the seller absolute certainty that we will perform. I believe that’s how the best deals are done.
— Dan Hillman, Hillnic LTD.

We discuss managing expectations, being realistic and having patience with Dan Hillman in a three part interview.

Part One: Managing Expectations

What are the main barriers to sourcing viable land?

Unrealistic expectations and land prices are driven up by the landowners and the agents. The moment a vendor has a figure that they believe the land is worth is the moment managing expectations becomes challenging. One of the key strategies we use is to approach landowners before they consider selling so that we are able to set a realistic value level from day one.

Landowners who own vacant buildings or land and have no intention to sell restricts sites from being developed. This means we are not seeing the benefit of housing being created on some sites. The recent budget announcement means that over the coming years we should see more landowners giving up their vacant sites due to compulsory purchases.

If you are approaching the landowner direct and they have no intention in selling, it is important to understand their motivations: it could be monetary, it could be timings. We've had one case where a vendor was interested in selling their site to us (their own occupied offices), but they had relocation issues to consider. In this case their reluctance to sell wasn't about cost, it was about the feasibility of relocating. Sometimes sellers needs go beyond what we may or may not be able to help with.

There are multiple ways we source deals. There will be deals on the market with high expectations on price. I think this is partly because of agents hiking up the values for board monopoly - where one agent is going to say this is worth £2 million to secure the site if everyone else is saying £1.6 million. They get the business and then over a period of time it would be managing expectations for reducing the price. The main thing for them is they got the business.

Sometimes the market adjusts the price, but it's made harder when there are inexperienced buyers bidding on land and going into contract at a higher price. Say for example there is an office building we are looking at and it went on the market at £2 million, then it went under offer at £1.9 million, but fell out of bed about 6-7 months later. The biggest challenge with that is managing expectations because at the back of the vendors mind is the inflated price.

The buyer couldn’t perform, couldn’t get the valuation done, couldn’t raise the finance. That doesn’t matter to the vendors. In their mind, someone was prepared to pay £1.9 million, and they want £1.9 million, not it’s actual worth of £1.6 million.

If we were to pay £1.6 million and the agents try to encourage it and there is an offer on the table of £1.9 million, the vendor is going to go with the £1.9 million and depending on their situation it’s only once they have got their fingers burnt through going to the higher bidder. If they don’t perform then in some cases, they then tend to focus on certainty and performance. And actually, performance and certainty are far greater than a high price. It is much better to have £1 million of something than £1.2million of nothing.


Are these high prices coming from inexperienced developers or the bigger developers as well?


A mixture. There are experienced developers who know their numbers to every last penny and therefore is willing to pay more for a site. Equally, there are inexperienced developers who aren't aware of all the involved costs. There are also inexperienced developers who overcompensate for all their costs, which means their offers can be too low and therefore not competitive. It is as about experience and qualification on your numbers, and knowing what the worst case is on the GDV’s (if you have to sell each unit at a 5% to 10% hit should the market continue falling).

In some cases, large volume house builders will overbid based on a site allowing for delivery of their allocation. In this case the premium is justified, but most of the time it’s inexperienced companies and individuals who are paying over the odds. Sometimes this works, and best of luck to them, but most of the time these are developers who do not know what they are doing; they are just not allowing for costs that experienced developers are allowing for - including bank valuations.

We have been there many times before. We have been stung. The valuations dictate the biggest hurdle. If you are using cash to buy something it doesn’t matter as much, but if you relying on funding and the valuation is undervalued, then you will get a lower loan to value. This means there is going to be a bigger shortfall then you expected to complete the purchase.