Land Buying Exposed: Anonymous interview with an established property developer
“An ex-employee of a major house builder confirmed to me that the strategy is to come in bullish and slowly chip away the price using justification such as soil contamination"
Land Buying Exposed: Discover some of the lays and lies of the land with some honest insights from this highly experienced unnamed developer, who we shall call Mr M.
Mr. M., what would you say are the main barriers to sourcing viable land?
In my experience I have found that the major house builders (such as Persimmon and Berkley Homes) come in bullish giving landowners a strong price to start, thus scaring away any other potential offers. They then proceed to cut the price. It is known in the industry that these major house builder buyers come in 25% stronger but end up cutting the price by 35%.
They initially give the landowners false hope with their unrealistic offers. They then carefully dampen expectations and cut the price.
Landowners often don’t walk away because:
- The other buyers have invested elsewhere
- They feel they are too far down the process
- They are too embarrassed
- They feel that other buyers will raise the same issues
- They believe larger house builders have the financial security to see the deal through
An ex-employee of a major house builder confirmed to me that the strategy is to come in bullish and slowly chip away the price using justification such as soil contamination – often restrictions that were already aware of when the offer was placed.
What has been your most challenging land buying experience (with a landowner or closing a deal generally)?
Buying a football club. The previous buyer was receiving death threats from unhappy fans and the Club was unable to meet its rent. I came in as the ‘golden boy’ and the purchase was more than just a transaction. It required using my people skills to negotiate a deal that appeased the Club and its fans. This made the transaction go smoothly.
With respect to planning, again the planners were amenable to our development proposal and did not want any social housing on the 10.5 acre site because the city had sufficient social housing at the time.
A downturn in the economy can sometime put transactions on hold as people become more cautious. All of a sudden land becomes not saleable and banks stop lending. In my opinion a downturn is when you can make real money and you can acquire property cheaply. I have been in the industry since 1970 and have seen slumps in the economy in 1973, 1980, 1988, 2008. I found that this has been the best buying in my career (if you are cash rich).
The trick is to study the industry and understand why a downturn comes. London is always the first to go up in value and the first to collapse. Scotland and Northern Ireland are the last to respond.
How do you feel agents can add more value to a land purchase?
I would like to see agents acting more than just sales people (typically the car and double glazing sales types). I would like them to be sufficiently qualified to study the land, restricted covenants, land condition, soil issues, floodplains, historic interest etc. I believe agents just don’t do enough to inform sellers and buyers. Their role is superficial with not enough due diligence.
How many deals do you review per month or per year?
During peak times I had 12 agents bringing me 2-3 deals a month so 24 – 36 deals a month. I would typically put an offer on 30% of the deals presented to me. Of that 10% would typically be accepted.
What do you believe can be done between buyers and sellers to improve the land buying process?
I have been on both sides of the fence buying and selling land. I have found many sellers are uninformed and very often I am presented with opportunities from people seeking advice. They do not want to spend money on planning and prefer for me to take on the risk.
At other times (90% of the time) I identify land and approach the landowner directly. This requires a lot of tactic and good psychology to know how to deal with people and understand what makes them tick.
I have found greed is often what makes landowners tick with some try to get away with selling land with little value. There is also the challenge of dealing with inflated prices by sellers trying their luck.
I keep a good filing system which I go back to 9 months to a year later. What I have found is that the irrational, over-optimistic seller is more willing to sell at market value by this point having had a period to ‘cool off’ and explore the market.
I have found that inexperienced and uninformed buyers get stuck with ‘bad’ sites that they are unable to get rid off. Not doing a good due diligence and sellers withholding information could result in buyers acquiring sites with restricted covenants where they cannot build anything on the land.
Buyers need to do more than just a local authority search. Historical search, contamination, landfill sites etc. are all imperative to know more about. It is the duty of both the seller and buyer to identify this information.
Is there anything else you would like to contribute?
The best way to buy land is before it goes on the open market without planning at a price that is affordable. My strategy is to buy with an unconditional offer and sell conditionally. I complete about 6-8 deals a year and hope that 3 (50%) turn out ok. I will at least get my money back on the other 50%.
Do you ever go in bullish on your offer?
I often go in 10% below market value. If my offer is unconditional I will go 25% below market value because I am taking the risk. I have found that you need to create trust and confidence with the buyer and show him that you mean business. Image plays a big part of this. A well-presented buyer gives the seller confidence that the buyer is professional and capable.