The importance of being realistic when buying and selling–Part Two
We discuss managing expectations, being realistic and having patience with Dan Hillman in a three part interview.
Part Two: Having Patience
Is it more difficult to source land in the current climate?
It’s easy to source the land; it is harder to do the deals. We have been building out most of our stuff and our most recent deal (at the time of this interview) was agreed 9-10 months ago.
Over the past 1-2 years, there has often been someone that outbids you. One of the strategies that we implemented was to put our offer forward and intentionally become the under-bidder. Often we had no intention of winning the site, we wanted to be the under-bidder. The position of the under-bidder based on the residual of what it’s worth and what its worth to us - then we will be in good stead; certainly now and next year. Let me give you an example: we had some superseded deals over the past year and a half that probably amalgamated to about 80 deals that we were interested in. Some with planning, some without, and some with direction from the vendor.
I called 43 of the seller and found that 23 had not sold, were still on the market, or still being dragged through legal. These are opportunities that range from three months old to one and a half years old. From this, I learnt that although you can understand a lot from the media and market surveys, the most valuable exercise was talking to the sellers.
Based on Daniels research of 40 deals, 50% did not go through. This is mainly due to overbidding.
The main thing for us is time. If you are pushed to do a deal then you are always going to pay over the odds. However, if you are patient - and it takes a lot of patience - and you want the good deals, you wait.
I have a friend who is one of the top five house builders in the UK, and one of their main strategies is the 'long game'. When they are interested in a site, they will get it for what they think it is worth - whether it takes them one year or three years. There are people who pay over the odds and secure the deal and best of luck to them, but we do not understand what their appraisal is or what their numbers are.
We concentrate on ourselves and don't worry about how our competition appraise because there are too many factors - we don't know whether they have missed something out or their finance situation, we don't know what level they can build at or whether they can sell the units for a higher price. We concentrate on our numbers, on what works for us now and what might work for us in the future.
One of the main things is that as soon as a shiny opportunity is presented, the person who lost out on the previous opportunity, moves on. For example, when there is a site that a group of developers bid on, and it goes under offer, the common consensus is still 'I can't believe it went for so much' - all of those developers move on to the next shiny opportunity.
They move on to the next thing, and they often forget. They think - ‘ok that’s done and move on to the next thing.’ That’s the cycle I believe most inexperienced developers use. We will spend more focus and concentration on the old stuff, the superseded opportunities, whether it takes six months, one year or two years.
We have one site we are close to doing a deal on that was on the scene about one and a half years ago, but since then the vendor has not been able to get the right money. He had someone fall out of bed on the purchase and so he went back to the underbidder, but the underbidder had disappeared. We are in a position now where we can secure a really good deal for a site that would have gone for silly money a year and a half ago - now we are buying it at a realistic level.
There are approximately 20 opportunities that we have at any one time where we are liaising with the vendors, and it may be that we had to liaise and follow up for a year and a half. I have been having a bi-weekly phone call for the past year with a potential seller. For him, it's not about price, it's about expectation and a reassurance that Resi are on the scene! He knows that we are interested in buying his property for a price that he is happy with. Over a year I have shown that I have gone through all the planning due diligence, the feasibility and I've shown that we will perform.
While we are building rapport, we still carry out research and due diligence. It puts us in a strong position to be able to secure the site, know exactly what we are doing, gives the seller absolute belief that we can perform. I believe that's how the best deals are done.
What has been your most challenging land buying experience (with a landowner or closing a deal generally)?
It would have to be a particular site where we agreed to a deal over 1.5 years ago, for many reasons! Inexperience at the time and naivety - we exchanged contracts based on an overall value (approximately 15% more than the value of the site) just to secure it. We then faced numerous challenges along the way securing funding, making the numbers stack following further due diligence and softening in the market on the punchy GDV's set. After a five month period of trying everything to get the deal to work, we walked away and lost our deposit and pre-construction fees - it wasn't easy.
Emotionally detaching ourselves from the deal meant we were able to concentrate on our other opportunities. The site was marketed in the summer of that year (worst time to market as you don't always have full exposure) and we continued to follow up. We re-evaluated the deal, arrived at a residual value, got all our funding in place and eventually managed to secure it one year after having initially secured it - this time for 20% less than what the site was worth.
I was very pleased with the outcome given the rollercoaster ride we had with it over the 12 month period. We learnt a lot and that has prevented the same thing happening again. The biggest lesson was to get everything in order before commitment - funding, certainty on build costs, GDV and timescales.