Using Second Hand Model Analysis to Analyse Off-Plan Projects

The below is quite detailed so forgive me if you are not one for detail….. I'm assuming you are no stranger to detail if you read this to its entirety.

A client of mine who went to property educational seminars previously was shown how to analyse deals……

He has since become a new client of ours and the big change for him is he realised that what he was taught at the seminar was related to second-hand properties (Which isn't practical for most people's Lifestyle, current situation and goals). 

There is a big difference in how to analyse a second-hand property deal compared to analysing an off-plan or new build property opportunity.

Analysing an off-plan project in the same way as the second-hand project is comparing apples with oranges, it's like trying to make an orange juice using apples ……

It just doesn't work and always leads to people passing on awesome projects that would make money for them, then they look back 2-5 years down the line and say oh I wish I bought in that project way back when.

Having that clarity meant he could see the real opportunity with off-plan projects without any distortions.

Below are some of the differences:

Second-Hand Property Strategy

  1. Find a good Street (in a good area).
  2. Find the worse property in that street and do it up to bring it in line with others in the street.
  3. Make a margin by adding value to the property.
  4. Continue getting normal market growth.

Usually time intensive or suitable for someone looking to be hands on.

Not scalable people doing this usually are not able to change areas as the market changes so they just know 1 or 2 areas which can restrict returns or

  1. Find a good area.
  2. Find a motivated/distressed seller that needs to sell.
  3. Negotiate a below market value deal.
  4. Get normal market growth.

Usually time intensive or suitable for someone looking to be hands on.

Not scalable people doing this usually are not able to change areas as the market changes so they just know 1 or 2 areas which can restrict returns.

From the above, the equation is GOOD Area/Street + DISTRESSED Property/Person + Get a great deal (BMV Numbers from NOW) because it's a distressed property or individual (Motivated seller).

Second hand model looks at things from perspective on what the NUMBERS look now and based on this get the best deal based on the NOW (BMV) as you can usually only expect normal market growth….unless you are adding some sort of value which requires time, effort, skill, team and also needs to be reflected as part of purchase costs e.t.c

The money is made from when you buy + normal capital growth.

The rental yield based only on today's numbers.

Because of this equation, information on property sites like Rightmove, Zoopla and on the market are very important in working out the current market price and negotiating the price down from the market.

Off-plan Strategy

  1. Find a regeneration area (Fundamentals strong and fundamentals improving – more money being pumped into the area, population growth e.t.c).
  2. Get in with Cash-rich developers in that area (They are not distressed sellers… want cash-rich developers because they are market makers meaning they can out market others to attract people to their projects and people will buy and pay more for their brand, it's the way it is and it's the way it will always will be……Collective market makers with huge marketing budgets move markets in an area).
  3. Negotiate preferential price and or terms.
  4. Benefit from the developer's price increase strategy.

(From the above you get above normal market returns right up to completion).

  1. Continue to get normal market returns.

Scalable and not restricted to one locality.

Less hassle associated with holding on to new properties.

This is where the Offplan model flips the second-hand model on its head…..(to the benefit of hands-off investors).

The equation looks like this: Distressed Area (Regeneration Area) + Cash Rich Developer (Not motivated but Market Maker) + Numbers based on now, however, the real buying decision is based on where you see the developer taking prices to.

The small money is made from when you buy, the big money is from developer's price increase before completion + normal market growth (Giving you above normal market growth before completion) + normal capital growth after completion.

Rental yield is from today (however comes completion yields are higher).

Off-plan mainly requires you being able to get in on the ground floor of regeneration of an area, with a cash-rich developer. 

The money is not necessarily made from buying but from the developer's price increase strategy (Yes we get some discount on purchase) but the mindset is mainly about leveraging of a developer's price increase strategy so you get above normal market returns before even completion plus higher rents from today.

You have to be able to see a Vision as to where prices will go to in order to move forward as the Big Brand developers are moving their price points upwards through their marketing efforts.

Because the Big Brand developers are always thinking more in terms of price and their marketing efforts – the information on Rightmove, Zoopla and Onthemarket (even though an individual can use them as a guide) however the reality is they are pretty much irrelevant

The big brand developers are not looking on Rightmove, Zoopla or Onthemarket to make their prices, (as Rightmove, Zoopla, Onthemarket can only show you information on Now and the Past)……they look beyond this and look to push their pricing up based on their own marketing efforts in the UK and internationally.

So sometimes we'll get a project on by a big brand developer and when compared to others on Rightmove you think that's ridiculous, then 3-5 years further down the line you look at the price for the same development and you look back and think I can't believe where they have been able to take prices to.

These big brand developers are creating a global demand for the project which helps us, the projects I recommend are part of a bigger regeneration plan which helps support growth and rental demand for investors…….hence the value of a strong brand. 

The way my client put it to me, is the way he now sees it, is that the cash-rich developers are investing huge amounts of money on their businesses on marketing their brand to get people to pay more to buy their properties and by nature, they naturally would want to make the most for themselves. 

So by getting in early with these guys, I get to align myself with their business model and basically allow them to do all the work and I get to keep 100% of the returns.

It's just the way the system works, you get to choose what system works best for you. Feel free to contact the team at Gladfish today.


Manny Esezobor

Brett Alegre-wood
July 22, 2019

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