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Developing Legacy through Land

Knowledge Bank for Buying and Selling Land for Development in the UK

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 Three

 
The vendor almost always goes with the highest bid despite the agent’s recommendation and so we are seeing many sites unsold and going to underbidders as a result.
— Dan Hillman, Hillnic LTD.
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We discuss managing expectations, being realistic and having patience with Dan Hillman in a three part interview.

Part Three: Being Realistic

 

How do you feel agents can add more value to a land purchase?

The good agents out there can certainly help add more value by providing more transparency on the vendors situation and history of the site (if known). Providing enough relevant information in time for potential bidders to carry out sufficient due diligence and be upfront about issues that you will only find out anyway (this can't always be helped).

Agents must be realistic with their values when taking a particular site to market. However, I know this can be difficult when the agent is working for their client - who always want to drive prices. Agents are often put in difficult positions by putting forward the top bidders offer while recommending a balance of performance and value. The vendor almost always goes with the highest bid despite the agent's recommendation and so we are seeing many sites unsold and going to underbidders as a result.

I think agents have an important role. It just needs more at higher land level buying, that's not to say every agent is doing it wrong - we work with some amazing agents that get it right, Savilles in particular. However, there are some that are terrible and managing that process and managing expectations of the vendor is hugely important.

I expect agents to stay throughout the deal and manage it. I realise that they are working on behalf of the vendor, but they are also trying to make the deal happen - it’s challenging. Take a deal we are working on currently, the agent is standing by the price the vendor wants, and we are fine with that. We present the purchase level that we are at and if someone comes and buys it at the level the vendor wants that’s great and if not here’s an offer we can perform to, turn it around quickly - and in that we may have to wait 2 months, we may have to wait two years - it may never happen, but often it’s worth the time. Some deals are overinflated, and we want to pay realistic land values.

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What do you believe can be done between buyers and sellers to improve the land buying process?

Sellers need to bear in mind the performance of the individual who is buying. Most of us, myself included, if you have a valuer come round to value your site, and someone gives you a price of £200k, someone gives you a price of £250k, and someone gives you a price of £300k - you're going to go for the person that has offered £300k, not only because it is the highest but because you want to test the market.

If it doesn’t work at £300k, you can always reduce it to £250k and if that doesn’t work, reduce it to £200k. Sellers want to test the market and see if there is someone who is prepared to pay more, and that is the biggest problem. It's great for the agent because they get the monopoly on it, they can put their board up and they can secure the business. They then start managing expectations. If it then sells for £300k great; if it doesn’t then it will be a slower process and eventually it will sell for a lower price.

From a sellers point of view we need to be completely aware of the certainty and deliverability. For example, once we developed our site and sell off each of the units, we want to make sure that the buyers are certain. Knowing your buyer and doing your due diligence on them is key. In the same way as an agent will if you make an offer on a flat for £250k. The agent will ensure the mortgage is in place, make sure they are vetted and they can deliver. Developers get absolute certainty from that. We have a site at the moment that is 50% reserved - we are a quarter of the way through the build and we aim to get it completely reserved before we finish. From every single buyer that’s reserved a unit which we have vetted via the agent to make sure they can deliver - they got their mortgage in principle in place; everything is lined up. They have got their deposit etc. - gives us absolute certainty. Can learn and adapt from the house buying process.

I think commercially for sites between £1m-£15m - when we put an offer forward or carry out a bid or tender process the agent will get all the offers, lay them all out, carry out their due diligence and present them to a landowner. And that’s where I believe a lot can go wrong. They should put forward their preferred buyer and say these guys can perform. Yes, they may not be paying as much as the other person but these guys are going to perform and they are going to complete, and we have worked with them before, or there is a track record.

I know based on the follow-ups we are doing on our superseded deals that is not happening because they are telling me. They are putting the bid tenders forward and if you have someone that can perform that is paying £200k less than someone who may be new on the scene, don’t know anything about them and the certainty of performing is a lot lower - the vendor would rather take the extra £200k. That’s not every landowner.

That’s just ones that we are experiencing. The great thing with that is that as soon as we know that that’s gone under offer, we start tracking it – there’s a high chance it would come back to us - and the £200k difference in a years’ time or year and a half’s time, that £200k is no longer relevant. Vendor thinks - Look I need to sell this site, and if I wasn’t motivated when I tendered for the purchase I am potentially more motivated now to get a deal over the line.

Red Book Valuation: There is a large number of other factors that come into play but typically the residual value that we put on a site - if we believe there is some hope value then we are prepared that we have to fund the difference on what we may get on our profit. If we are very confident we are going to get planning on something and we have carried out our appropriate due diligence, we know the red book valuation is going to be a million say, and we are prepared to pay £1.4 million for the site we overpaying on a red book valuation point of view.

But there is less risk - there is more calculated risk based on carrying out enough due diligence on the planning to know we are going to get planning, and therefore the premium of £200-£300k is going be worthwhile, but we have prepared for that increase. And as long as we prepared for that I think that makes a big difference.

When the less experienced developers are bidding for sites, and I’ve been there, and we have made a mistake ourselves before is, right we’ve got the deal, and it works for us at this number, all good, go to the purchase, get the red book valuation after you have agreed to the deal once you have the offer down, and the red book valuation comes through and its £400k difference than what you are prepared to pay.

Suddenly you have to find £400k, and if you have not prepared for it, got your funding in place before you put your offer forward, or the arrangement of how you are going to set up your funding, then it becomes very dangerous. Then you are on the back foot to make up for a particular deal pride, and you are working to a timescale of typically 4-5 weeks to exchange. A very dangerous place to be.

From a buyer’s perspective, the recommendation is to do everything beforehand before you put the offer in.

One of the other challenges in the marketplace that I see is that people will overbid for a site - there may be five individuals that are offering on the site, and one of them puts in a high price, gets it secured at that higher price and then chips away the price. That’s the game some developers play, but I believe it creates a bad reputation for yourself. It may work for one deal but go back for a second with the same agent or same vendor and its reputation risk.

 

Anything else?

My best deals that we have done have been direct with the vendor. Not always but the majority of the deals we have done just happen to be direct with the vendor. Our experience is that whenever we have been liaising with the landowner direct there is often no miscommunication and it makes things a lot easier. We have done incredible deals. In fact, our last deal we did earlier this year was done over a weekend, and it was a very good deal, very good price, purely on the basis that we were liaising directly with the vendor.

 

How do you reach out direct?

We first try to establish who owns the particular site by downloading the titles from the land registry, construct a letter that is bespoke to that particular site and circumstance. No one likes a generic letter; we can send out 20 bespoke letters and expect 1-5 calls back at the most while generic letters/leaflets tend to have a 1/300 ratio…if that.

We also track and monitor planning approvals/refusals and appeals.

The local plan for your area of development is also a very useful resource, not only from a sourcing of land standpoint.

 

How many deals do you review per month or per year?

Approximately 15-20 per month that fit our criteria.