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
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