Real-world Development with propertyCEO – Part 6
Small-scale property development projects that use permitted development rights can be done in your spare time, boast six-figure returns, and have a lower cost of entry than buy-to-lets. It all sounds great on paper, but what’s it REALLY like to convert a property?
Join Ritchie Clapson CEng MIStructE, veteran developer, author, commentator, and co-founder of development training company propertyCEO, as he guides us through a real-life commercial conversion project from start to finish. Witness the highs and the lows, and learn the critical takeaways in this eye-opening, warts-and-all look at what REALLY happens where property development theory stops and the practice begins…
You can watch a video of Ritchie walking around the project. Click HERE for exclusive video content.
The story so far…
With the utilities and finance all underway, Ritchie’s five-flat commercial conversion project was progressing well. However, the next step would be the opening up works, where any hidden flaws in the building would be exposed. He also needed to get his construction costs firmed up, and this would mean putting together a comprehensive tender. He already had indicative pricing, but getting a definitive cost would ensure that his chosen specification would still produce a healthy profit.
One of the challenges with converting an existing building is that all manner of nasties can lurk under the surface, just waiting to cost you money. Ideally, you want to do what’s known as an intrusive survey before you commit to buying the building. This necessitates drilling holes, lifting floorboards, popping ceiling tiles, etc., so you’ll need to speak nicely to the owner and agree to make good any damage afterwards, particularly if you decide not to proceed with the sale.
* Top Tip: If possible, get the intrusive survey done before you exchange contracts, as you can still walk away if any showstoppers come to light.
Intrusive surveys are relatively straightforward in an empty building but can be more challenging if it’s occupied. In this case, we already owned the building, and it was empty, so there was no issue with the team knocking it about. The big question was, what would they find, and would it affect our plans?
* Top Tip: Be sure to factor additional contingency into your costs if you can’t conduct an intrusive survey pre-purchase. In older buildings, you’re highly likely to uncover problems that need fixing.
I allocated a couple of days for my contractor, structural engineer, and architect to be on site, and they quickly determined what investigations were needed. Core holes were drilled into the concrete base to see how thick it was, which enabled the structural engineer to confirm that its load capacity was sufficient for us to build straight off it. Plasterboard was removed and walls checked. We also inspected the roof trusses to see whether any needed replacing and confirmed that, as we’d hoped, there was ample scope for creating vaulted ceilings in the three rear flats, making them feel much more spacious.
* Top Tip: If you can’t do an intrusive survey, consider running a two-stage contract with your contractor. Stage 1 will involve them stripping out the building, which allows everyone to see what needs doing. You can then get your contractor to quote for stage 2. With a single-stage contract, your contractor will still strip out first but will have to bear any unexpected stage 2 costs themselves. This means they will factor this risk into their pricing, which could prove expensive.
We discovered some old air-conditioning plant in the loft which would need to be removed, as well as what looked like more asbestos. I soon had my asbestos expert back on-site, who had a quick look and confirmed that there was indeed more asbestos that would need to be removed before work could begin. As it turned out, I wished he’d had a slightly longer look, but that’s a story for later.
* Top Tip: Always open up roof voids during an intrusive survey. There may be scope to add storage, vaulted ceilings, and sometimes even mezzanine levels or additional floors. Plus, you can unearth other issues, such as ducting, asbestos, etc., that will need to be dealt with—and which will all cost money.
One key message that the team stressed during the intrusive survey was the need to work with the building. Developers have a reputation for having firm ideas of what they want, irrespective of how difficult (or expensive) they are to create. In our case, both the contractor and the structural engineer came up with more cost-effective solutions in specific areas, and I was happy to let my initial plans slide as their ideas would save me both time and money.
Before long, the moment of truth had arrived. Had his site inspection affected his view of the overall sales values? Fortunately, he was happy to keep the valuations the same, and I breathed a small sigh of relief.
My next step was to get the architect back on site, this time armed with brochures galore. Because I’d nailed the specification with the estate agent, I could now choose the specific kitchens, bathrooms, doors, etc., we’d be putting in. Having a balance of cost versus quality would ensure we didn’t overspend. Once I’d nailed the spec, I updated the Finishes Schedule and asked the contractor to update his quote to reflect the specific kitchens etc. I’d chosen. This allowed me to revisit my numbers quickly to ensure things still stacked – which they did.
* Top Tip: Always revisit ALL your numbers as your costs and specifications become known. Not only might your spec have improved and your costs increased, but selling prices may also have moved.
* Top Tip: Listen to your professionals and encourage them to be honest about the best approach. You’re the boss, and they can build almost anything you want. But if they can see that some of your ideas are challenging to build, you want to hear about it and understand where there’s an easier and cheaper way. Remember that the only part of the project you get to keep yourself is the profit.
It was now time to start thinking about running the tender. This is where I’d typically invite between 5 and 10 contractors to submit a price for the work, knowing that only half of them would bother responding. In this case, I’d already selected my preferred contractor. This didn’t mean they couldn’t be replaced if their pricing was off, but I was confident I’d get a competitive quote from them as I’d engaged them on several of my other projects.
* Top Tip: Tender responses cost contractors time and money to produce, and they talk to each other. So, if word gets around that you’ve invited 20 contractors to tender, you may not get any responses, as they’ll all believe they’ve only got a slim chance of winning the deal.
I then worked closely with my Project Manager and Cost Consultant to assemble a comprehensive tender pack, which I sent off to my contractor. This is where a bit of effort can really pay dividends, as you want to make the specification as detailed as possible. I recall a previous tender where I’d said I wanted to tile above the bath. In my head, the tiles went right up to the ceiling. But the contractor gave me just a single row of tiles. He’d delivered to the specification, and because tiling to the ceiling wasn’t priced in his tender response, I now had an unbudgeted expense to absorb. And these costs can soon add up when you’re building multiple units.
* Top Tip: One of the biggest mistakes even experienced developers make is not making the tender detailed enough. You must be ultra-specific about what you want, including listing each item’s manufacturer and stock number. If you don’t, your contractor will default to the cheapest option and charge you overs and extras when you belatedly realise that they haven’t delivered what you envisaged.
There are several different types of procurement routes in construction. Design & Build is where the contractor supplies the architectural services and performs the construction. I’m not a fan because you can easily lose control of the design (the contractor is the architect’s direct boss, not you). Management Contracting is another route where the project manager tenders and appoints individual sub-contractors for each element of the build – not a great idea, as you can lose control of the costs. My preferred route is a traditional fixed-price lump sum contract, with the design, construction, and project management teams operating independently, and that’s what we went for on this project.
Within the tender pack, I supplied the architect’s detailed drawings so the contractor could see precisely what he needed to build. I also provided the structural drawings, which showed the existing layout of the building. The other key information I supplied for the tender was the services layouts. These were detailed drawings of each of the five flats showing where I wanted lights, light switches, and power sockets to be located.
* Top Tip: You’ll need to supply lighting and power layouts for the tender. Make sure you give sufficient thought to where people will need switches, lighting, and power sockets. This involves mentally furnishing the rooms so you can envisage where power and light are required. Changing things mid-project can be costly, so it pays to get it right at the outset.
I also supplied layouts explaining what flooring materials needed to be put where and a tiling layout that clarified where tiles would be required in both the kitchens and bathrooms. The tiling drawings showed each wall face-on so that it was clear which areas on the wall should be tiled. I hate skimpy tiling – for me, basin splashbacks need to go down to the floor – they shouldn’t be just a token handful of tiles behind the taps – and the tiling layout ensured there would be no misunderstandings about what goes where.
* Top Tip: All drawings and layouts should be procured from your architect. You don’t need to draw any plans yourself, but you do need to make sure that they are produced. Don’t be afraid to ask stupid questions. If you wonder how the contractor will know to price in x, then ask your architect the question – it may simply have been overlooked.
One of the most important meetings I had on the entire project was the open discussion with the contractor about the contract details and value. This was a lengthy meeting during which we went through every aspect of the tender and contract and could agree on any specification changes to hit the right price.
* Top Tip: Always ensure that your team follows the RIBA Plan of Work. This will help ensure that all of the required boxes are ticked before you are ready to move on to the next stage of a project.
Not only had the opening-up works not thrown up any deal-breakers, but the pricing from my contractor meant that, on paper, I should still hit my target 20% profit margin. At this point, I didn’t know that a storm was brewing in the background that would significantly impact all of my profit projections.