By Lyndon Forshaw

Hello once again!

Last time, I explained the new build development process – in particular sourcing and appraising the land.  Following on this week, I would like to show you a number of different ways to structure the purchase of a suitable site in a bit more detail.

Okay, so you’ve taken the plunge and decided to go ahead and search for a suitable development site.  As advised in my last article: your potential site is close to your home in an area you are familiar with.

Buying a site with existing Planning Permission

If your site already benefits from detailed planning permission, then it will simply be a case of negotiating the best price you can.  Make sure you perform all your due diligence thoroughly.  Don’t just take the selling agent or the seller’s word for the likely Gross Development Value (GDV).  Work this out for yourself and ask the advice of other agents.

For example, I recently purchased a site that was on the market with a commercial agent for £100,000. To me, this was way over priced.   Eventually, I paid £55,000 for the land.  Had I paid the asking price, there would be hardly any profit margin in the development.  So you really must look at this carefully.

A good negotiation tip for you is to highlight all the site’s negative points to the seller.  Remediation issues, proximity to a busy road, lack of garden space or parking, etc.  Use these to lower the seller’s expectation of the site value due to a lower GDV.

If circumstances allow, I also exaggerate the elements of the build costs, such as the foundations or sewer connection.  Of course, this will depend on how far the nearest sewer is and the depth of the culvert.  Your solicitor will carry out utilities searches as part of the legal process.

Once you’ve negotiated the best price on a site with existing planning consent, it is usually a case of completing the purchase when ready.  Though if you are buying the site with cash (without bank funding) then make sure you have the development finance agreed first. Just as when purchasing a house, your solicitor will set an exchange and completion date in conjunction with the seller’s solicitors.

Buying a site without planning permission

This is slightly more involved.  When you offer to purchase a site ‘subject to obtaining planning permission’, you need to secure control of the site before you invest the time and money in applying for the planning permission.  Let’s look at two ways you can go about this:

1.    Option Agreements

In order to secure control of the site, we often use a legal contract commonly known as an Option Agreement.  The Option Agreement is a legal contract that provides you (the buyer) with an exclusive right to buy the site for a pre-agreed sum at some point in the future. This is often within 12 months or before.

In this time, the seller isn’t allowed to sell the property to anyone else and so it gives the buyer the peace of mind to invest time and money in the planning application.  The legal jargon within the Option Agreements varies according to the desired outcome. That’s why I always recommend you leave this to your solicitor to draw up even though you can purchase an example copy online for just a few pounds.

2.    Standard Purchase Contract

An alternative to the Option Agreement is a Standard Purchase contract that is conditional to you obtaining planning permission.  In this instance, you basically agree to buy the site, complete all your legal due diligence and exchange contracts as you would normally.  However, the contract allows for the completion to take place after you have obtained planning permission.

There is usually a long stop date of say 12 months.   However, you can tailor this to allow time for an appeal process should the planning application be refused.  On the whole, I tend to use a conditional contract rather than an Option Agreement.  Especially if I’m only dealing with one seller.

If I’m trying to assemble a larger site from several different owners then I usually go for an Option Agreement as it is slightly cheaper and quicker.  I also tend to use an Option Agreement if I intend to “sell” the site (sell the Option) once I have obtained planning consent rather than developing it myself. This is because the Option Agreement doesn’t commit me to purchasing the site myself.  It just allows me to purchase the site within a given period.

Negotiating the best deal

Whichever contract you use, negotiations will determine whether or not you pay a deposit to the seller on signing of the Option or exchange of contracts.  Nine times out of ten, I have argued to the owner that my commitment to the deal is the time and cost of applying for the planning permission which can be many thousands of pounds.  I also argue that if planning permission should fail then the land owner would only have to return my deposit in any case.

Having said this, in certain circumstances, I have given the land owner a non-returnable deposit as a “sweetener” to the deal.  Not a huge sum – perhaps £5,000 or £10,000 if the site was particularly good and I knew that obtaining planning permission was a “no brainer”.

There is more than one way to skin a cat, as it were, but the best way to learn is through experience.  And so long as you have a good solicitor who is used to these transactions you will be fine.   Feel free to drop me a line if you would like some help with your project or sign up for my free newsletter at www.ukpropertyexpert.com where you’ll learn more about such deals.

Next time, I will discuss the importance of establishing a quality development team.

Until next time!
Lyndon Forshaw

By Lyndon Forshaw

I’m really glad so many people found my recent post ‘Develop Beyond Buy-to-Let’ of interest.

I realise now that I may have underestimated the level of interest buy-to-let investors show in new build development. My assumption that most investors have never even considered moving into new build was based on the fact that there seems to be very little discussion or resources dedicated to the subject.

So – by popular demand! – I’ll describe in more detail each phase of the development process. Obviously every development is different but broadly speaking, the key stages of a typical project are usually as follows:

• Source and appraise the development site. Assuming the site is being sold without planning permission, what can fit on land? What is the most suitable (and profitable) development for the area/locality? What would the houses sell for? What is the optimum house size for the location? Are there any remediation / contamination issues? What are the planning restraints? What are approximate build costs?
• Apply for development funding
• Agree purchase of the land, subject to planning consent being agreed
• Appoint architect, prepare scheme proposals and obtain planning permission
• Acquire the land
• Remediate site as necessary
• Tender for construction costs
• Appoint contractors – construction company, quantity surveyor (if necessary), building surveyor (if necessary), CDM coordinator. Apply for new build warranty.
• Begin construction. Choose kitchens, bathrooms and tiles etc
• Appoint sales agents
• Complete construction, sell properties and bank your profit!

“Is it really that easy?” I hear you cry. Well actually no. Each stage has its difficulties and pitfalls so let’s break the whole process down and concentrate on the initial phase: sourcing and appraising the land.

Site Sourcing

The internet has become an invaluable resource for those wishing to source development opportunities. There are a number of dedicated websites out there that specialise in marketing and brokering development land.

Many of the generic property websites such as www.rightmove.co.uk feature development land for sale. There are also more specialised sites such as www.uklanddirectory.org.uk and www.developmentlandforsale.com. In addition, there is my own land agency website: www.landlounge.com.

As well as listing over 150 quality development opportunities we also offer a land finding service whereby we use our extensive contact list and industry knowledge to source land beyond that which is listed on the website.

Another valuable source of potential development opportunities are local estate agents and commercial agents. It’s definitely worth registering your details with those agents local to you.

Having said that, I usually try to source land ‘off market’ whenever possible. Rather than purchase land which is being openly marketed, I prefer to approach the owner directly, agree to buy the site subject to planning consent and then handle the planning application personally. This often enables me to acquire land at a figure below market value and to maximise its development potential as I’m not limited by the pre-existing planning consent. If there’s good profitability in the land once planning has been granted, a number of benefits arise:

• Funding: even in the current climate, banks are often prepared to lend up to 70% of the gross development value (GDV) of the project. So if you intended to build two houses with a combined value of £200,000, you should be able to secure funding of around £140,000. If the cost of construction and land purchase exceed this figure then you will have to make up any shortfall out of your own pocket. Therefore, the cheaper you can obtain the land, the less capital you’ll require. If you lack the necessary capital, another option is to consider a Joint Venture with the land owner, a subject I will cover in a future article.
• Bigger profit potential – I realise I’m stating the obvious here but by enjoying the comfort of a larger profit margin, you’re able to absorb any unforeseen circumstances such as a problem with the ground works, remediation or increased funding costs due to sluggish sales of the properties.
• Potential to sell the land – On more than one occasion I’ve secured off market land, obtained planning consent with the full intention of developing it myself but then received an offer for the land and sold it. Sometimes, the temptation for a quick but substantial profit can be too good to refuse.

Which site? ‘KIL’ and ‘KIS’

There are literally thousands of potential sites out there so with so much choice, how do you select the ideal development site? My advice is to Keep It Local. I’d always recommend that your first project is located close to your home in an area you know well. Not only will this make the whole process easier to manage but if you’re familiar with the neighbourhood you’ll be better able to evaluate the suitability of the land, decide upon the most appropriate scheme and more accurately estimate the sale value of the properties.

I’d also recommend that, until you find your feet, you Keep It Small. A small development of just one or two houses is ideal, or perhaps you’d like to take on the challenge of a self build, with the intention of living in the property once it’s complete.

Site Appraisal

Okay, so one or two development sites have caught your eye. You now need to assess the full potential of them and the profits (if any!) that can be made.

I usually start with the gross development value (GDV). Once you have this figure, you know your maximum income potential from the site. A local agent will usually be able to give you a good estimate of GDV. They should be able to advise the type, size and number of properties which would be suitable for the site and what sort of sale value you should expect.

I then calculate the estimated development costs – this includes legal fees, architect fees, planning applications, finance, construction, remediation/demolition and costs associated with marketing and sales. A good architect, working in conjunction with a trusted construction company, should be able to give you a good idea of these costs, based upon the proposed scheme.

Now take your GDV figure and deduct the development costs. The balance must cover the purchase cost of the land and your profit margin. You should normally aim for 25-30% profit so deduct this figure and you’re left with the maximum amount you’re prepared to pay for the land. It’s exactly the same process as you’d use for a refurbishment process… just on a slightly larger scale!

Below is a simple example for single dwelling:
Gross Development Value (sales) £250,000
Development Costs £125,000
Profit (30%) £75,000
Offer for Land £50,000

As I mentioned in my last article, by far the easiest way for a novice to embark on a development project is to employ a main contractor to handle all the construction work. This takes the responsibility for the most difficult part away from yourself. A good architect should be able to recommend trusted contractors for your project and obtain cost estimates on your behalf.

If construction costs turn out to be too high it’s worth double checking the suitability of the proposed development. Are the properties too large? There’s no point building a 2000 sq ft, five bedroom house in an area where the maximum achievable sale price is £200,000. The build costs will be too high to make the development viable. You need to make sure the size of property and quality of finish is appropriate for the location and delivers the optimum return. As I say, a good local estate agent should be able to point you in the right direction.

Finally, something you must consider before purchasing any development site are the ground conditions. The condition and nature of the ground can seriously affect the cost of both remediation and construction. These days all local authorities insist on some information regarding ground conditions as part of the planning application but before committing to acquire a site you must investigate this thoroughly. There are many specialist contractors that can handle this for you. Ask your architect for recommendations.

Next time we will look at establishing your development team and ways to structure the purchase of the land
To your property success

Lyndon Forshaw