How do you know if a developer is any good (or not)?

If you buy a New Build property as an investment it’s important that your developer doesn’t go broke.

But that’s not the only thing that can go wrong.

A developer might take ages to build a property. They might switch out building products and use cheaper materials. They could change parts of the property (in some instances) without your consent.

And it’s a legitimate concern. Bad stuff can happen, and developers aren’t regulated. Sure, they have legal obligations, but there really is nothing stopping a developer with no experience (and no finance in place) from setting up shop and selling properties for a 200-unit project.

Here at Opes Partners we work with 97 developers – who we stand behind as reputable and are going to build a good property.

So, it’s my job (here at Opes) to evaluate whether any developer we recommend is reputable and is going to do right by our investors.

So if you’re wondering how I figure that out, in this article you’ll learn exactly the process I go through to vet a developer from start to finish. You’ll also learn when and where I’ll say “no”.

Step #1 – making contact with the developer

The first step to any relationship is the initial contact and here at Opes this contact is made 1 of 2 ways:

• Either a developer will ring us here at Opes with their development, or

• One of our team members will go hunting for properties in a particular area.

Generally speaking this is done by Opes Partners managing director Andrew Nicol, our general manager Ollie McKenna, or Mickey Limmer.

But we also have our development consultant, Lochie Mckellar, on the case too.

The next step is to then speak to the developer about the project face-to-face.

This is where we check if the price and the property make sense as an investment.

Often our development team will tell the developer what price would work for our investors, and the developer can say: “Yup, those numbers will work”, or “no, they won’t”.

These discussions all take place before we do due diligence on the developer, which saves a lot of time.

For instance, out of every 10 developers the team will speak to, only 2 will actually make it to the next stage of the process.

Step #2 – onboarding the developer

After the numbers have been informally agreed, Opes creates a Service Level Agreement (SLA), which – essentially – “onboards” the developer.

This agreement lays out, in detail, our expectations from the developer e.g. how often service updates are given to us.

This makes it very clear for the developer the support that we at Opes will give the investor, and what the developer will have to do.

For instance, if a developer wants to work with Opes investors they need to provide regular build updates and details of any delays or consent changes.

If, having read the Service Level Agreement, the developer still wants to proceed, they will sign it.

Again, this saves time, because if a developer isn’t willing to provide this level of service it’s not worth doing due diligence on them (just yet).

They will also fill out our onboarding questionnaire. This is where they provide details about the people involved in the company and the development itself. They’ll also provide documents with important details around:

• How they’ll finance the development

• Their labour and supply chain (and how they manage them)

• Their cash flow management policy (how they manage their money).

This is a huge amount of detail, which is not available to the general public. And an investor purchasing on their own behalf would not be able to ask for this level of information.

Of course, there will be times when the developer will not upload certain information because:

• It is not yet available
• They are unsure of what is required
• We have been able to satisfy they meet our requirements through alternative means.

However, a developer refraining from providing certain information can also be quite telling.

Step #3 – researching the developer, company and build

This is where I come in. As the compliance manager I then get to deep-dive into all the answers and documents.

This is where I start to look for red (and green) flags.

There are three aspects to this step.

No.1 – Looking into key personnel

First things first, I take a looks at the directors, the key personnel, and any and all people heavily involved in this particular company.

I extend this to include the construction company the developer uses for its actual build.

It’s not just about trying to find out if a developer is “dodgy”, or if they were over budget by millions on their last project.

It’s about checking out:

• How long this developer has been in the market?

• How many developments they have they been involved in (currently and previously?)

And because the market is going through an interesting time at the moment, I’m being a bit more strict on checking if the developer can weather the current storm.

Obviously the first red flags I’m looking for are “negative press”. So, things like bad reviews online and social media comments or reviews.

I’ll also do a Google search, checking the name and the city the said person lives in, and will scour through the first 3 pages of any Google search for extra information. I do this for all directors and all major shareholders.

I also check the solvency register (have they been bankrupt?). Court cases (past or ongoing), liquidation history and former receiverships. So I’ll check the:

• New Zealand Legal Information Institute (NZLII)

• Company’s Register

• Solvency Register

I’ll also ask for their lawyer’s and accountant’s names and where they’re based.

This is important. Why? Well, for example if the build is in Christchurch but all the lawyers are based in Auckland, this can be a red flag because they won’t be as up to scratch on what’s happening in Christchurch.

No. 2 – Checking out the company itself

If all the people check out, the next step is to take a thorough look at the developer’s website. Don’t worry, this is a lot more in-depth than it sounds.

It’s not just typing in the web address, looking at the page and thinking “this looks nice”.

Rather, websites provide a lot of insight into how a company collects data and gives an indicator of how knowledgeable they are and how they adhere to privacy laws.

For instance, I’ll always check to see if the privacy policy is dated (the more current) 2020 or (the older) 1993.

This small detail can raise questions over whether the company is looking at every single legal detail they need to.

No. 3 – Researching the development

If all the personnel check out, the final step is looking at the actual development the company is putting forward.

It’s not enough to know that the people behind the scenes are legit; it’s still got to be a good investment. And they still need to have the capacity and knowledge to build it.

The usual questions I want answered are:

• How many units are being built?

• What about the land – is it urban, RMD land, or is there a sea-level risk or is it in a flood zone?

• How many units are in the build? This will indicate if it is a Body Corporate or a Residents’ Association.

These details are important, and not all are deal breakers. But I want to build a full picture, so I can get a sense of all the potential risks.

For example, let’s say the property is in a flood zone. This could be a deal breaker (depending on the risk).

But, if the property was a very good investment, the development may still pass our due diligence process. But, we would need to make sure that investors were aware of this, and the potential risks they are signing up for.

Step #4 – will the build be completed?

After the first 3 steps are completed I look at all of the information and ask, “Can the developer really complete this build?”

Because there is no point asking an investor to sign a contract for a property if it doesn’t get built. That wastes time and opportunity. Here are the three main areas I look at:

Area No.1 – Can the developer get the money to build the properties?

For starters, let’s talk about finance. Because it’s not as easy as checking whether a developer has a certain amount of cash sitting in a savings account. They’re going to borrow money from a bank or finance company.

But in practice, developers usually need a certain amount of pre-sales before the bank will lend money for the project.

So they will start selling properties, and then they will confirm the finance.

So how do I check whether they can borrow the money?

Well, usually the developer has an idea of who’ll lend them the money from their previous developments.

So, I’ll check that the developer has a good track record of paying their bills in the past.

For example, in order to pay their contractors (the people who actually build the houses) this first has to be confirmed by the lender. This leaves a paper trail.

If this has been problem-free (previously) then it can be a positive nod to the company’s cash flow management policy.

Really, it’s all about seeing proof of formalising documented policy, to get that level of comfort.

At other times, if a developer says “XYZ Finance” is lending them the money, I (or another member of the team) might call that lender to double check that’s the case.

We’ve caught developers out here before.

Area No.2 – have they got labour and building materials locked in?

Without sounding too obvious, properties need materials to be built. But they also need people.

Even the most prepared, well-researched developer will fall apart without a team behind them.

So I’ll collect information about their labour and material supply. I’ll also ask them what their plan is if materials become scarce, or they can’t get people to work on site.

For example, does this developer have a warehouse full of materials, or do they usually buy 6 months in advance?

Or, in another scenario, will the build continue if a key member of the company goes overseas, or gets injured?

The answers given will tell us a lot about their business continuity plan, a.k.a will the build continue if unforeseen events occur.

As another example, I would class a high-risk developer as hiring labour on a week-to-week basis, whereas a lower-risk developer would have a locked-in contract and will have pre-ordered materials (ideally with the materials already in New Zealand).

Area No.3 – have they got building and council consents sorted

Building consents and council consents are areas that every developer must navigate. It’s also one largely outside their control.

So I need to know how the company will tackle this.

For instance, do they have any formal processes in place? If not, this would raise concerns. They can’t just be in a “wait-and-see” situation.

Ideally, I want to see developers who are working proactively to try and catch potential issues before they start.

For example, some developers will say something like: “My Quantity Surveyor speaks regularly to the council and feeds that information back through to us”.

Or they will say: “Our engineers ring up to discuss these matters on a weekly basis”.

This tells me the developer is more likely to catch an issue, before it becomes one.

Case Study – An example of a “no”

These 4 steps – and the level of scrutiny undertaken – are designed to minimise the risk Opes investors take when purchasing from a developer.

And there are many times where I do, in fact, say “no”.

Here’s an example of when we choose not to work with a developer and the reasons why.

This developer came to Opes at the beginning of 2022. They’d signed our SLA, and the contract made its way to my desk. Here’s what I found:

Red flag no.1 - misleading statements on website

Firstly, this developer had started their first development and was looking to build its second – which is why they came to us.

During Step 3 of the process I went onto this developer’s website and read that the company’s unique feature was: “A strong background in project management and an understanding of the need for timeliness.”

If this claim was backed up this would be a big benefit for investors looking to buy a New Build. We all want our properties built on time and within budget.

However, when I read their most recent updates on their first project I saw there were big delays.

This was at odds to their original claim of strong project management expertise.

Red flag no.2 – company personnel based outside build location

In Stage 1 I’d learned the developers were based in the North Island and everyone – including the lawyer and the accountant – were also based there.

But the developer was trying to build properties in Christchurch.

Now, ideally you want your developer to be located close to the site so they can visit when challenges arise.

But these developers were a 2-hour flight away, and weren’t even located on the same island.

How were they going to visit the site when urgent issues came up?

On top of that, the accountant and lawyer were based out of Christchurch, so weren’t familiar with the specifics around the rules resulting from Christchurch’s previous earthquakes.

In the end these 2 factors swayed my decision to not recommend this developer or development to Opes investors.

And it wasn’t because of the reasons you would expect, right?

This company had good cash flow, they had good access to labour and supply. But these are factors that are easy to spot and tick off the checklist.

But when it comes to finding out whether or not a developer will actually finish a property, then that is a much more intensive process.

Can I have confidence in my developer through Opes?

There’s no avoiding it, times are tough for developers at the moment.

And that means it’s even more important to do due diligence on developers to make sure they do what they say they will.

So it’s my job, as compliance manager, to make sure any developer we take on stacks up.

That doesn’t mean there is no risk when you use a developer we recommend. All investments come with their share of risk.

But, if I do my job right, we can minimise those risks and avoid obvious mistakes.