We've all been there. Stuck in a corner with an overly zealous fisherman, listening to the tales about "the one that got away".
I hate to break it to you, but it happens in property development circles too. Except now it's the site that someone else was willing to pay more for.
As a budding developer, get used to it. Chances are it's going to happen to you quite often. But instead of just boring people with your tale, it's important to spend some time working out why it keeps happening. That way you can potentially change the story next time to being about the profitable development site you managed to secure.
Various factors can influence why other individuals or developers might be willing to pay more than you for a particular property. Let's clear one that's not related to property development out of the way first.
Home Buyers
Buying your own home is an emotional decision, which means that home buyers are often the biggest competitors for small development sites. This is particularly true of 1 into 2 sites. You look at it and see side access and an opportunity to sell off the backyard. They see space for a trampoline and a shed.
And let's get real here - the average holding time for a home is around 7 years. Which means they can pay a little extra now to secure a home they love, and chances are that when they sell up years down the track, it will have gained in value.
The level of competition can also influence the sale price when home buyers are in the race. If there are multiple interested buyers, emotion can drive up the bidding and result in a higher sale price.
When numbers are tight and it's hard to get a feasibility to stack, your budget has to be limited. Competing with emotional buyers like homeowners is almost always going to leave you in second place. But don't use that as an excuse to get emotional and overspend!
It does mean, though, that during times when buyers are staying out of the market due to factors like rising interest rates, you potentially have a better chance of picking up this kind of site.
Strategy
Just because someone has purchased a development site, it doesn't automatically follow that their strategy was identical to yours. By pursuing different goals, their feasibility will be different, and may allow for a higher purchase price.
As an example, consider buying a site to build a duplex. Now, as a property developer, your numbers are likely based on selling the end product into the current market.
But another developer may be planning to live in one side and sell the other. Or retain one or both as investment properties to rent out. The list goes on, and each version has a different set of numbers behind it.
This is a big reason why I don't just rely on precedence in an area to pursue a strategy. As I've said many times, just because it's developable doesn't mean it's profitable, and if you don't know what outcome a developer was looking for, you shouldn't assume they sold and made money. Plus there are always developers who don't know what they're doing and make a loss, too!
Financial Resources
Some developers might have access to more favourable financing options, such as lower interest rates or more flexible terms, which can increase their purchasing power.
They may also have more significant financial resources in other ways too, including access to capital, investment partners, or a larger budget in general. This financial strength enables them to make higher offers in the property market.
Both impact their feasibility. For example, if you need to borrow funds at commercial rates, as well as pay money partners for a lot of the equity, interest costs are going to make a big impact on your feasibility.
A large developer who has access to large cash reserves at low interest rates will have a much lower interest bill at the end of the project. That makes it easier to offer a higher purchase price and still have a project that stacks up.
Risk Tolerance
Developers with a higher risk tolerance may be willing to invest more aggressively in properties. They see value in paying more for a property they believe has great potential.
It could also be that developers who are in a better position to act quickly, whether due to market conditions, available financing, or other factors, may secure properties at higher prices before others can react. Their higher tolerance of risk, or experience in mitigating risks, makes them confident enough to act earlier than others.
Developers who focus on properties in rapidly growing or high-demand locations may also recognise they need to pay a premium to secure these properties. They expect that the potential returns will outweigh the initial cost, even if the purchase price being higher increases the risk if the market turns against them.
Area Expert
If you've spent much time at all following my content, you'll know becoming an Area Expert is one of the first steps in my Property Development Formula. And while you can do all the book learning about Council rules and regulations, the next step is to actually go out into your chosen area and apply it.
If you're still relatively wet behind the ears in your area, then other developers with in-depth knowledge of the local real estate market may have a competitive advantage. They might be able to identify opportunities or hidden potential in a property that you're not yet skilled enough to see, which can justify a higher bid.
They may also have experience stacking multiple strategies into one project, which again justifies a higher price tag. Or their prior experience in the area means they know just how to push the envelope to get a higher yield out of the site than you might expect.
Education
In the end, it's also important to recognize that the ability to pay more for a property doesn't necessarily guarantee success. There are plenty of would-be developers out there who really don't have a clue what they're doing, and so overpay for properties every day of the week. You don't want to be that developer!
That's why it's so important to educate yourself, understand how to become an area expert, and learn how to do a good feasibility. At the risk of repeating myself, you need to know enough to decide that a site's not just developable, but profitable.
Because while there are a lot of good reasons someone might have been willing to pay more for a development site than you, too often it's a case of they either didn't know better or got carried away. So take the time to try and understand why they paid more, and if you can't find a logical reason, take a deep breath and be grateful you didn't get sucked into a bidding war that could potentially have meant you ended up with a dud site.
Better to tell tales about the ones that got away, than the ones you caught that managed to bite you in the bum. There are always more fish in the sea!
I hate to break it to you, but it happens in property development circles too. Except now it's the site that someone else was willing to pay more for.
As a budding developer, get used to it. Chances are it's going to happen to you quite often. But instead of just boring people with your tale, it's important to spend some time working out why it keeps happening. That way you can potentially change the story next time to being about the profitable development site you managed to secure.
Various factors can influence why other individuals or developers might be willing to pay more than you for a particular property. Let's clear one that's not related to property development out of the way first.
Home Buyers
Buying your own home is an emotional decision, which means that home buyers are often the biggest competitors for small development sites. This is particularly true of 1 into 2 sites. You look at it and see side access and an opportunity to sell off the backyard. They see space for a trampoline and a shed.
And let's get real here - the average holding time for a home is around 7 years. Which means they can pay a little extra now to secure a home they love, and chances are that when they sell up years down the track, it will have gained in value.
The level of competition can also influence the sale price when home buyers are in the race. If there are multiple interested buyers, emotion can drive up the bidding and result in a higher sale price.
When numbers are tight and it's hard to get a feasibility to stack, your budget has to be limited. Competing with emotional buyers like homeowners is almost always going to leave you in second place. But don't use that as an excuse to get emotional and overspend!
It does mean, though, that during times when buyers are staying out of the market due to factors like rising interest rates, you potentially have a better chance of picking up this kind of site.
Strategy
Just because someone has purchased a development site, it doesn't automatically follow that their strategy was identical to yours. By pursuing different goals, their feasibility will be different, and may allow for a higher purchase price.
As an example, consider buying a site to build a duplex. Now, as a property developer, your numbers are likely based on selling the end product into the current market.
But another developer may be planning to live in one side and sell the other. Or retain one or both as investment properties to rent out. The list goes on, and each version has a different set of numbers behind it.
This is a big reason why I don't just rely on precedence in an area to pursue a strategy. As I've said many times, just because it's developable doesn't mean it's profitable, and if you don't know what outcome a developer was looking for, you shouldn't assume they sold and made money. Plus there are always developers who don't know what they're doing and make a loss, too!
Financial Resources
Some developers might have access to more favourable financing options, such as lower interest rates or more flexible terms, which can increase their purchasing power.
They may also have more significant financial resources in other ways too, including access to capital, investment partners, or a larger budget in general. This financial strength enables them to make higher offers in the property market.
Both impact their feasibility. For example, if you need to borrow funds at commercial rates, as well as pay money partners for a lot of the equity, interest costs are going to make a big impact on your feasibility.
A large developer who has access to large cash reserves at low interest rates will have a much lower interest bill at the end of the project. That makes it easier to offer a higher purchase price and still have a project that stacks up.
Risk Tolerance
Developers with a higher risk tolerance may be willing to invest more aggressively in properties. They see value in paying more for a property they believe has great potential.
It could also be that developers who are in a better position to act quickly, whether due to market conditions, available financing, or other factors, may secure properties at higher prices before others can react. Their higher tolerance of risk, or experience in mitigating risks, makes them confident enough to act earlier than others.
Developers who focus on properties in rapidly growing or high-demand locations may also recognise they need to pay a premium to secure these properties. They expect that the potential returns will outweigh the initial cost, even if the purchase price being higher increases the risk if the market turns against them.
Area Expert
If you've spent much time at all following my content, you'll know becoming an Area Expert is one of the first steps in my Property Development Formula. And while you can do all the book learning about Council rules and regulations, the next step is to actually go out into your chosen area and apply it.
If you're still relatively wet behind the ears in your area, then other developers with in-depth knowledge of the local real estate market may have a competitive advantage. They might be able to identify opportunities or hidden potential in a property that you're not yet skilled enough to see, which can justify a higher bid.
They may also have experience stacking multiple strategies into one project, which again justifies a higher price tag. Or their prior experience in the area means they know just how to push the envelope to get a higher yield out of the site than you might expect.
Education
In the end, it's also important to recognize that the ability to pay more for a property doesn't necessarily guarantee success. There are plenty of would-be developers out there who really don't have a clue what they're doing, and so overpay for properties every day of the week. You don't want to be that developer!
That's why it's so important to educate yourself, understand how to become an area expert, and learn how to do a good feasibility. At the risk of repeating myself, you need to know enough to decide that a site's not just developable, but profitable.
Because while there are a lot of good reasons someone might have been willing to pay more for a development site than you, too often it's a case of they either didn't know better or got carried away. So take the time to try and understand why they paid more, and if you can't find a logical reason, take a deep breath and be grateful you didn't get sucked into a bidding war that could potentially have meant you ended up with a dud site.
Better to tell tales about the ones that got away, than the ones you caught that managed to bite you in the bum. There are always more fish in the sea!
