Analysing deals can be a little daunting for new developers, mainly because getting something wrong could prove alarmingly costly. How will you know you’ve not missed something vital in your calculations? Or what if your spreadsheet skills are a little outdated, and you’re struggling to get Lotus 123 loaded back onto your ZX Spectrum? After all, one small slip for man could surely lead to one giant leap backward for profitability? All too true, but never fear; with a game plan, some common sense, and a few dating analogies, I hope to demonstrate that you can crack it very successfully.
As with many things in life, deal analysis is easier if you approach it as a system. The first thing to point out is that you don’t want to do an in-depth analysis of every deal you look at because you won’t have enough time. Deal analysis should operate as a sales funnel (or a dating app, if you’re allowed to use such things). You start with everything that meets your high-level requirements for location, property/plot type, and value, then quickly swipe left for the obvious no-hopers. Then you dive down a further level and cull anything that doesn’t bear closer scrutiny. And you keep diving down in stages until you’re left with a much smaller number that are worth putting some time into Similarly, when running some numbers, you want to get to a ball-park profitability figure first. That’s because it’s not worth spending time firming up accurate numbers if it’s evident from a high-level analysis that the deal won’t stack. Again, it’s about spending the most time on what will give you the biggest return.
A big part of systemising your deal analysis involves using a deal analyser – a generic spreadsheet that allows you to enter all the relevant parameters for build cost, professional fees, and finance and arrive at a bottom-right-hand-corner profitability figure. You can build your own analyser from scratch, or use an off-the-shelf version, however a few words of warning on the latter.
Firstly, make sure it’s comprehensive enough to give you a reasonable ball-park profitability figure but not so complex that it takes you hours to complete on a first pass. I’ve seen some analysers that promise that just three numbers will tell you whether a deal is profitable, yet I guarantee you’ll be throwing out babies with bathwater left, right, and centre if you use it. Conversely, I’ve seen some forensic deal analysers that take hours to complete and so won’t give you a quick high-level indication. A happy medium is what you’re after for your first pass – you can get forensic once you know the deal has a good chance of stacking up. If you’re using someone else’s deal analyser, make sure you understand it inside out, and you know precisely what number goes in which cell and what downstream calculations link to it. Also, make sure that you don’t overwrite formulas by always starting each new analysis using your ‘template’ spreadsheet rather than re-using the previous deal’s workbook.
