A Guide to Valuing Land for New Build Development and Making Irresistible Offers That Win You More Projects
Few people in the UK know how to accurately value land. And by value, we mean calculating what a developer should be paying for it if they’re looking to build new homes.
This lack of knowledge presents a problem for both property developers and landowners alike. It means there are many sites available which are ripe for being turned into beautiful new homes, but they’ve been overvalued, which means there’s no profit for developers, and landowners are twiddling their thumbs on the open market.
But, if you know how to work out the true cost of land, you can value your sites correctly, ensuring that you sell at the right price. As a developer, you can work out what a project is going to cost you, meaning that you don’t overpay for a plot, spend years building houses on it and then lose money.
In this guide, you will discover how to accurately value land anywhere in the UK. You will also learn the different options for purchasing land that lowers your risk as a new build property developer and opens doors to more profitable projects.
Where to Find Land
The process of finding land suitable for development is sometimes referred to as ‘sourcing’. There are some businesses out there that source land and then sell the opportunity to you for a fee. If you’re time-poor, then this is an option, but if you’d rather save money and put in the legwork yourself, read on.
When sourcing development opportunities, there are two options available: ‘on-market’ opportunities, and ‘off-market’ opportunities. Opportunities that are on the market are available to everyone. I.e., they’re listed with an estate agent or a land agent.
Off-market opportunities are deals that aren’t publicly available. These are typically deals where you are speaking directly to a landowner who hasn’t publicly advertised their intent to sell. Although these deals are harder to find, they can be more lucrative, as there is less competition, and you’re negotiating directly with the decision maker.
As some quick guidance, here are the first places that you should start searching for new build opportunities:
Auction: Auction houses can be great places to find well-priced opportunities. Plus, you can stop bidding whenever the sales price goes above what you’re willing to pay, so they give you a level of control. However, auction houses require the highest bidder to pay a deposit. This is usually 10% of the purchase price. The remaining funds are typically due within 14-31 days of the auction, so make sure you have your money ready before bidding on any opportunity.
Agents: Estate and land agents are a source of abundant, regular opportunities, making them the easiest place to start searching. However, if an agent isn’t well-versed in land sales, they can overvalue sites, leaving the landowner with unrealistic expectations of what their site is worth. Persistence is key with this option, so only make an offer you can afford, and follow up regularly on opportunities, even if the landowner originally said no.
Direct to Vendor (DTV): Direct to vendor means to get an opportunity directly from a landowner. If you don’t have anyone in your network who owns land they’re willing to sell, then fear not. Sourcing DTV opportunities is straightforward. Look for empty or deteriorating plots on Google Maps, or just note the ones you find on your travels and put the address into Land Registry. This will give you the landowner’s details, so you can send them a letter and express your interest in purchasing their site.
How to calculate your Gross Development Value (GDV)
Now you’ve found a development opportunity, it’s time to find out its profitability. But, before we continue, it’s important to note one thing: The calculations below will give you a ‘rule of thumb’ figure that you can use for negotiating.
The calculations below are a way of quickly offering on deals without spending thousands of pounds consulting architects and planning consultants. We’ll show you how to further analyse sites using professionals later in the article.
When valuing land, you work backwards. So, the first step is to analyse what you can build on a site (like three houses or a block of apartments) and what your buildings will be worth once they’ve been created. For example, you might build three houses, and each house might be worth £300,000.
If the land you’re valuing is surrounded by three-bed semis, then look at how many three-bed semis you can fit on your site. You can measure the land and surrounding houses on Google Maps by right-clicking and then selecting ‘measure distance’. Draw a square around adjacent properties, and this will tell you how large the area they cover is, which then tells you how many of them you can fit on your site.
For example, if your land is 2,500 ft², but the two conjoined semi-detached houses next to it are 1,196.19 ft² in total, then you know you can build four semi-detached houses.
Now you have a rough idea of what you can build, it’s time to work out its value. Go to Rightmove and look at ‘Sold Prices’. Type in the postcode for the area where the land is based and look at the price of comparable properties sold in the past two years within ¼ mile. If there aren’t many options, then extend to 5 years, or search within ½ mile of the land.
If you can see that the average sales price of a three-bed semi in that area is £250,000, and you know you can build four of them, then your GDV works out as £1,000,000.
How to estimate build costs
You know what you’re building, now you need to know how much it’s going to cost you to build it. At this stage, you’re working with estimates, but we’ll show you how to add an extra margin for risk, so you’re protected if the project overruns, or if materials cost more than anticipated.
Speak to local architects, builders, and builders’ merchants to get this part right. Build prices fluctuate, and the economy plays an active role in their movements. Most builders work on a price per square foot or per meter squared.
As an example, the price in your area might be £200 per square foot. Going back to our example of two conjoined semi-detached houses being 1,196.19 ft², you know that each individual house will cost roughly £119,619 to build. You’re building four houses, which brings your total build cost to around £478,476.
It’s better to overestimate and look at things from a ‘worst-case’ scenario. So, for an extra layer of safety, we recommend adding a 10% contingency to your costs. In this case, that would make your total build costs around £526,323.6.
Interest Repayments
Chances are you will be taking out a development loan to fund your build costs. This loan will come with an interest rate, so this needs factoring into your calculations. If you’re an experienced developer, then you might get a lower rate, like 6-7% per annum. But, if you’re new to the industry, or you want to add an extra margin for safety, you might be looking at 10%+ per annum.
Let’s say you need to borrow £550,000 to cover your build costs, just work out 10% of this and add it to your costs to work out your total investment with interest included. In this case, that would be £605,000.
Working out your profit
Going off the figures above, we know the following:
Expected GDV: £1,000,000
Build Costs (with a 10% contingency): £526,323.60
Interest repayments: £55,000
Total money left over: £418,676.40
However, you’d only make £418,676.40 if you got the land for free (which is unlikely). This means that the next step is to work out your profit so that you know how much you can afford to pay for the land.
Every developer has their own specifications, but most work to 20-25% profit of the GDV. So, in this case, if you want a 25% profit margin, you need to make £250,000.
£1,000,000 (GDV) – £250,000 (profit) – £581,323.6 (costs) = £168,676.4.
£168,676.4 is what you would value the site at as a new build developer looking to make a 25% profit margin. Of course, you might be happy with 20%, which leaves you with some wiggle room for negotiation. But you know that if you pay more than this amount for the site, you won’t make your desired figure, or worse, you could lose money.
Overvalue every cost and undervalue your profit. It’s better to have an offer refused than it is to work on a development that will lose you money.
How to offer on land- The different options
There are multiple ways to make an offer on a plot of land. The three main ones that we’ll cover are:
Sold Subject to Planning: This is where you agree to purchase the land at an agreed price provided you can get planning permission on it or have the land’s existing planning permission changed.
Sold Subject to Full Site Appraisal: This is where you offer to buy the land subject to a full assessment of the site. This can include (but is not limited to) planning, soil quality and site surveys.
Overages: This is where you offer to pay more for the land provided certain metrics are hit. For example, agreeing to increase your offer by £75,000 if you can build five houses instead of four. We will cover this in more detail below.
It is always advisable to offer on land subject to a certain condition. This reduces your risk, as it means you’re not committed to buying a plot of land that you can’t get planning on, or that is in an area with a lot of red tape.
Purchasing with conditions also gives you time to speak with professionals who will give you more accurate figures and estimations, like finance brokers, architects, and planning consultants. It is pointless paying these people for their advice if your offer is just going to get refused, which is why we do these calculations before consulting them.
Overages- The key to negotiating purchase prices
Without spending time and money with an architect or planning consultant, there is no way to get an accurate valuation of what can be built on a site, or what your expected costs and GDV will be. Offering on land is a numbers game, and you want to be offering on as many plots as you can, so it’s not affordable to use a professional every time you find a new plot.
Most landowners want the highest possible value for their site. So, your rule-of-thumb figures might not give them the valuation they’d hoped for. A way around this is overages. Overages create a win-win deal where you can pay more for land whilst still making your desired profit.
An overage works out something like this: “I can only afford to pay you £168,676.40 for your land because if I pay you more, I won’t make the profit I need, which risks the project making a loss. However, my figures are based on four houses. If I speak to an architect and they help me get planning for more houses, I’ll happily pay you an extra £70,000 per house”.
Overages are a great way of negotiating with landowners, as you show them that you want to offer them as much as possible for their land, but like any business, you need to make a profit. It also allows the landowner to put their money where their mouth is. If they truly believe that their site is worth more, then they shouldn’t be scared to demonstrate it.
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