I was about to buy a property, a project development opportunity, just outside of Walsall . I've been talking about it for the last couple of days at some of my events. However, after doing my due diligence, I decided to walk away from the deal. I really, really believe that in property investment sometimes knowing what not to do is as important as knowing what to do, because knowing when to walk away is just as important as being able to take action.
The Property Opportunity
Someone at one of my crash courses, someone who I know, a trusted friend, pitched me on an idea of buying a pub conversion just outside of Walsall. I'm from Walsall, so I loved the idea.
He showed me the numbers, he gave me a due diligence sheet, and I paid a £5,000 finder's fee.
Here were the facts and figures according to him:
– The pub has planning permission in place to turn it into 12 apartments.
– Negotiated purchase price: £125,000
– Conversion costs approx. £400,000
– End value £800,000
So that’s about £ 525,000 all in.
I was going to use bridging finance or development finance and was going to pull in private investment onto the deal alongside a little of my own money. All good so far, with a good profit margin.
The Problem
The problem was, this pub was in a slightly rough part of town. Sometimes you can have a road and at one end of the road the house prices or the apartment prices can be more than the other end of the road. In this case, I think the end value will be approx. £700,000 not £800,000.
However, what got worse is when I sent the estimations to my brother Ben Machekanyanga. He said that refurb costs have gone up a lot. He said the estimate for the work was about 8 or 9 percent wrong. If you're wrong by a little bit on the end value and on the refurbishment costs, you can quickly wipe out any profits. So this deal looked great on paper, but after doing serious due diligence it ended up that it wasn't actually a good deal at all!
So I told my friend and he refunded me the £5,000 finder's fee, as I was within my 14 day due diligence calling off period.
The Lessons
The first lesson is always make sure that you use your formulas not your feelings. When emotions are high, intelligence is low. I wanted to go ahead with this deal because I knew the pub, I grew up in Walsall and I genuinely just wanted to restore it. But I needed to remember that this isn't about what I want to do; this isn't about my feelings, my emotions; this is about the formulas of the deal; that's the first lesson.
The second lesson is always be prepared to walk away. Just because you've paid a finder's fee; just because you paid a survey; just because you have invested (whether that be resources, time, money etc.) doesn't mean that you have to go ahead with a deal. Unless you're buying it from auction or in Scotland (where the rules are different) be prepared to walk away from a deal.
The third lesson is prices of materials have gone up a lot in the last year or two, so factor that in on your refurb costs. Due diligence, due diligence, due diligence. Get the right team and professionals to go out and look at your properties.
The fourth lesson is know the area well. Make sure that you calculate the gross development value, i.e. the end value based on like for like comparables, not comparables that are a quarter of a mile away, that are actually in a better side of town.
I hope you learned some valuable lessons and have learnt from my mistakes. If you would like to learn how to evaluate deals yourself, why not book a space on my next crash course? It’s free (£1 booking fee applies).
