If you work in the development industry, you’re likely to have heard the phrase, “skin in the game”. Developers, professionals, brokers: everyone’s expected to have it.
But what does skin in the game actually mean?
Essentially, it means having something to lose in a collaborative venture. If you want to learn more about the general concept, I’d highly recommend Skin in the Game by Nassim Nicholas Taleb, one of my favourite authors. In the meantime, here are some examples of what skin in the game means to those of us in the residential development Industry.
Funders
First and foremost, funders want to know they’re dealing with competent and motivated developers on viable projects. Every project starts out positive and on the small number that hit problems (whatever the reasons or circumstances), funders want to know they won’t be left to pick up the pieces alone. They want the developer to see the project through with them, achieving the best outcome for all involved. For this reason, funders may want to see the following forms of skin in the game from developers:
- Cash equity
- A capital guarantee
- A cost-overrun guarantee
- An interest guarantee
- Secondary collateral
Investors
Investors want to work with developers who believe in the projects they’re promoting and are committed to seeing projects through. Investors / partners primarily want to see a return of their investment and then a return on their investment.
Investors have skin in the game by way of hard cash invested in a project. Unsurprisingly, they want to see that developers have skin in the game, too. This could include:
- A capital guarantee
- Secondary collateral
- A priority return to the investors
- Performance guarantees
Developers
Developers always have skin in the game. This can consist of any combination of the requirements listed above from funders and investors. However, developers also have another vital form of skin in the game: reputation. Any developer is only as good as their last deal. Funders and investors rely on developers’ ability to deliver and developers stake their reputation on this ability.
Developers also have another important form of skin in the game: time. Even a modest scheme can take 18 months from conception to final sales completion and developers are generally last to be paid. It is therefore in developers’ interest to minimise delays and get paid as quickly as possible.
Other Professionals
Architects, surveyors, valuers, lawyers, engineers, and other professionals: all have skin in the game. This is mainly because, if they get a project wrong, they can potentially be sued! And, like developers, professionals need to protect their reputations.
Brokers
What about property finance brokers? Yep, we have skin in the game, too. We are typically success-based and our fees are paid on successful commencement of a project. We also need to protect our reputations. If a scheme fails and we could have identified the issues in our due diligence, our reputation in the market is put at risk.
In some form, pretty much all parties to our industry have skin in the game. By having something to lose, we build trust and commitment, and increase our chances of mutual success.