Over time we have uncovered a variety of ways that less scrupulous developers have come up with to have investors over a barrel, take your hard earned investment money with complete impunity, and leave you to find out that you hold all the liability for the problems.
Guaranteed yields and rentals
There is often a difference when comparing numbers on documents and spreadsheets to the reality of the cold light of day.
Make sure you do your homework and check what actual current rents are in the areas of you looking to buy into. One of the “tricks” that can be played when you are offered a guaranteed rent for a period of time. At the end of that time period, having been told you might have to stick a few pounds into top up the rents, you might find yourself putting in hundreds of pounds every month. So, carefully check the actual rents in the area, and if possible have a think about the impact of the number of units in the building. If they are all going to be rented, will this cause a softening of rents locally until they are all rented out?
Of course, it is possible that the guaranteed rent is an accurate reflection and it carries you nicely over the initial period. If not then downside of this fallout is very painful especially when multiplied over several properties.
Does the valuation make sense
We have no idea whether it would still be possible to arrange for “friendly” valuations for the developer. This certainly seemed to be the case back in 2005 through to 2007 when carefully chosen less ethical valuers were more open to receiving financial encouragement for the “right” valuation that made the deal work.
Whilst it can be difficult to get a feeling for accurate prices in some markets, it is worthwhile digging to make sure that the value being quoted is a reasonably close reflection to real current values.
The developer (who actually turned out not to be a developer, but more on that later) knew he could get away with the size differential of up to 10%. So in the plans, the square footage that was sold to the end user was 10% larger than the square footage that was actually delivered, increasing his profits by more than 10%.
One of the other tricks was to halve the size of the generous lounge kitchen diner and sneak an extra small bedroom behind the kitchen area thereby increasing the sales price dramatically and turning comfortable living spaces into rather more cramped, and thus harder to rent, affairs.
Many of the city centre apartments being sold included parking. However, at the time of completion on the property, there was no parking space delivered with the purchase, and this had been sold to another entity. So the developer got the value of the property with the parking space from the buyer, and then sold the parking space for even more profit, or kept for himself to gather rent every month.
You would think this is not possible. However, it has played out time and again.
So if you are buying parking with the property, make sure it’s in the contracts that you sign.
Quality of the build, fixtures and fittings
Nearly all of the developments we have been in recently appeared to be very well built and nice quality fixtures and fittings and top quality furniture packs.
Another trick that is decking out the show apartment to look absolutely fantastic. Yet the apartments themselves were not so well fitted out.
This certainly applied to the furniture packs that the developers were also making a profit on. The furniture was very poor quality and, bearing in mind that tenants are often much harder on rented furniture than they would be on their own, the furniture really did not last well and needed to be replaced which was the responsibility of the unsuspecting landlord. Good quality furniture will last longer.
So, to the best of your ability, get a good look at a furniture pack if you are buying one. Preferably do this direct with the supplier so that you can assess the quality of the furniture. Also, if possible, take a look at already completed property either within the building or other buildings by the same developer so you can get an accurate feel for the quality of the build, fixtures and fittings.
13 years on and some of the buildings that were sold by the “developer” we worked for are looking quite tatty.
Do they build true to plan and brochure?
It is worth taking a look at the track record of the developer and taking a look at and around other completed projects seeking to get a feel for where they came from and what they actually build.
If you can have a look at previous sales material and see how that compares to the development. Make sure that was has been recently completed is similar to what was being portrayed in the literature.
Will they actually build it?
If you are buying from an existing developer this might not be relevant. If you are looking at a brand-new developer with no track record perhaps erring on the side of caution would be appropriate encase the project never properly gets off the ground.
Is the project properly funded?
Most developers are happy to provide copies of funding letters together with details of how the development is being funded. If you cannot get sight of this, proceed with caution.
This full planning permission granted?
Make sure you have sight of the planning permission. You don’t want to be putting a reservation down on a project only to find later on that it cannot be built and then you have to go through the hassle of recovering your reservation and deposit.
Are they really the developer and is it theirs to sell?
In 2006 – 2007 a large prestigious development in a prime location in the North West was being promoted. The sales teams sold the entire development off plan in a very short space of time. What later transpired was that the “developer” had positioned himself to take a huge sum of money in deposits for development that he did not have the right to sell. We might presume he would have secured the right to purchase and re-sell the whole development on back to back contracts – which was how he gave the appearance of being the developer. By that time the cat was out of the bag and it was public knowledge that all was not as it appeared to be.
Whilst purporting to be a developer he was in fact just a sales organisation, a compulsive liar, and in that regard was extraordinarily effective and successful, and made a fortune at everyone’s expense.
Look at the people
A little scepticism about appearances might not be a bad thing. A pretty house, expensive watches and jewellery, very high-end cars and expensive clothes may or may not indicate wealth or character.People are sometimes in by very luxurious, flashy offices, the plethora of very expensive and exotic vehicles, very high-end watches and so on.We are not for one second suggesting that there’s anything wrong with this nor are we suggesting that the individuals who choose that path are wrong, and have no character.
It is usual when buying off plan that you are not dealing directly with the developer and that you are instead working through a sales and marketing organisation that is acting on behalf of the developer. Even in these cases is useful to meet not just the salespeople that you are buying from, and when possible the developer face-to-face. After all, you are about to hand over your hard earned money and you want to make sure, to the best of your ability, that you are comfortable and confident that you are putting it somewhere safe, secure and that you trust the individuals you are dealing with. You want to look at the site, and other completed sites of possible, and to get a feel for the developers.
Pretty much anyone can set up as a developer and time and again we have seen people come from nowhere, taking a bunch of reservations and all of a sudden they are driving round in very expensive cars and looking and behaving like millionaires. If this is after the properties have completed and the profits are in, then nothing wrong with this, and best of luck to them. You just want some reassurance that the money that you are handing over is being put to the intended use, and not to fund someone else’s lifestyle choices.
With all that said, you certainly want the developer to be making good profits and good returns so that what you’re buying into will be built and good quality and corners will not be cut.
Your gut feel
This is everything. Decisions are best made paying careful attention to your gut feelings. So even if all the numbers look great, and everything stacks up on paper, if you have any feeling that something isn’t right we would encourage you to walk away.
With all this said we hope you enjoy your journey as a landlord and property investor and we wish you every success.
Tsveta van Son is part of Invezz’s journalist team. She has a BA degree in European Studies and a MA degree in Nordic Studies from Sofia University and has also attended the University of Iceland. While she covers a variety of investment news, she is particularly interested in developments in the field of renewable energy.