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The Magic of Value Engineering

Ritchie Clapson, co-founder of propertyCEO, comments

You’ve got to love a good old-fashioned sweeping statement. Back in the day, my old boss used to say, ‘my door is always open’. Which was more or less accurate unless you had a complaint or wanted to discuss remuneration, in which case its metaphorical hinges would suddenly need a strong dose of WD40. Then there are classics such as ‘all politicians are corrupt’, which is almost certainly a sweeping statement but can be worryingly difficult to disprove. And, of course, there’s ‘fast food is bad for you’, which may be broadly accurate if you’re comparing it to celery. However, it completely ignores the not-insignificant emotional uplift I get from having a cheeky pain au chocolat on my morning travels.

Or, from the property world, what about; ‘all property developers are rich?’ I have an inside track on this because I teach both new and existing property developers as part of my day job. And I can share two particularly relevant insights. Firstly, most people who engage with developers act as though this statement is true. And secondly, first-time developers are usually not particularly wealthy. Okay, they may not be on their uppers, but it’s not a big stretch to guess why they want to develop property, and it’s not usually because they already have the riches of Croesus. Unfortunately, that doesn’t stop the rest of the world from thinking and acting as if they have; call yourself a property developer, and you’ll find that most people will assume that the shiny new Range Rover in the car park is yours.

There are two key reasons why this perception exists. First, most successful developers ARE wealthy, so everyone tends to get tarred by the same brush. Second, it takes a fair amount of cash to develop property, and many people wrongly assume that this money comes from the developer’s own pocket. Let’s debunk this myth first because the reality is very different. Development finance is hugely leveraged from the developer’s perspective. Where a landlord might typically need to put down a 25% deposit to acquire a property, a developer can secure the bulk of their deposit for their land or property purchase from private investors, meaning that their personal cash investment requirement is significantly reduced. It’s just one of the reasons why property development is so attractive. Whether it’s landlords looking to get the cash to grow their portfolios, architects and other industry professionals or tradespeople looking to leverage their industry knowledge, business owners looking for extra profits, or simply everyday folk looking to create a decent pension or improve their financial situation; the amount of cash they need to invest in a development project can be surprisingly small. But while the returns can be significant, they are not risk-free. There are many pitfalls that that can seriously derail the unwary traveller financially, which need to be considered. Because one of the key features of development is that the developer not only gets paid last, but they also only get paid whatever is left in the pot. In theory, this should be the largest slice of the pie, but in practice, this is where the risk comes in. It’s critical that the developer is on top of costs throughout every project stage because every penny of overspending ultimately comes out of their own pocket as reduced profits. 

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