A small development project with big potential
I’ve mentioned before that I’m about to embark on a small development project of two semi-detached houses. Well, my solicitor has almost completed due diligence and we’re almost ready to complete purchase of the land.
I’ve agreed to buy the small site in Bolton with the intention of turning a £70,000 or £80,000 profit. The land already benefits from detailed planning consent, however I decided to amend the floorplans of the two houses to provide a more attractive internal layout. Unfortunately this has resulted in the extra cost and hassle of a new planning application but I’m sure the changes I’ve made will make the properties much more desirable. I’ve just found out that the revised plans have been passed by the local planning authority. So we’re all set!
The land was on the market at £99,950 but I’ve managed to negotiate the purchase price down to £55,000. I don’t believe that in the current climate the site was worth anything like £99,950 but as I’ve managed to secure the site for nearly half that value I reckon I’ve got myself a very good deal.
Crucially the site is fully remediated and ready to go, so all I have to consider are the construction costs. If you’ve read my previous blog posts you won’t be surprised to learn that I’m going to employ a main contractor to complete all the construction work under a fixed price contract. The build will take six months, so I’m going to schedule completion for next spring which will coincide with the beginning of the 2010 ‘buying season’ and should give the market chance to improve a little further (fingers crossed!).
My original ‘back of envelope’ figures weren’t too far wide of the mark. I’ve now firmed up the budget:
| Land | £55,000 |
| Construction | £160,000 |
| Architect | £3,000 |
| Structural engineer | £500 |
| Funding | £12,000 |
| Sales and Marketing | £2,500 |
| Legals (land and house sales) | £2,000 |
| Total development costs | £235,000 |
| GDV (£160k x 2) | £320,000 |
| Profit | £85,000 |
Funding for the scheme has changed since I first considered the deal. I originally had a lender lined up who was prepared to provide 70% of GDV which at £320,000 would have provided us with funding of £224,000. As we’ve built a 30% profit margin into the scheme, a 70% loan would have meant we didn’t have to inject much (if any) of our own capital. The down side, however, was the very high interest costs (around 18% per annum).
I’ve opted for an alternative product from another lender which provides funding up to a maximum of 50% of GDV – in this instance, £160,000. This deal offers a much cheaper interest rate at 9% per annum. We’ve therefore taken on a JV partner to fund the shortfall. Although our partner will receive a percentage of the profits, we get to develop the scheme quickly with very little risk. The loan to value on the finished houses will be just 50% (ish!).
I wish I had the benefit of a crystal ball to tell me how much interest – and money! – the properties will attract once the development is completed. My predicted value of £160k per house is based on sales of similar properties in the area but trying to predict GDV (gross development value) is difficult enough at the best of times. In the current climate it’s harder than ever.
However, before the bank will grant funding, their surveyor will have to confirm that he agrees with my GDV figures. If nothing else, this process gives me the benefit of another pair of expert eyes double checking my figures and provides a little extra reassurance before I commit to the deal.
I thought I’d managed to pre-sell one of the houses which would have made the venture even more of a no-brainer. Unfortunately, due to personal circumstances, the buyer can no longer wait six months before moving house. So it’s worth our while to go that extra mile to improve the chances of a quick sale, especially in the current climate. The longer the houses are on the market, the more it will cost us in finance charges. So I use a range of tactics to increase saleability, such as…
- Price the homes keenly: As we’ve built a good margin into the deal, we can afford to price the properties competitively. I’d rather accept a few thousand pounds less for the properties, sell them quickly and release capital for our next deal, than have them hanging around costing extra £££ in interest.
- Include ‘free’ white goods: A full set of white goods – washer/dryer, dishwasher, fridge/freezer, oven, hob and extractor – can be bought and installed for around £1,500. I’ve included this cost in the budget. In my experience, a kitchen full of brand new white goods has a very high perceived value in the mind of prospective purchasers. It can really make your property stand out against those of your competitors.
- Kitchen accessories: You’d be surprised how a few accessories can smarten the appearance of a kitchen. It adds to the wow factor and doesn’t cost a great deal.
- High quality internal specification: I usually install high quality internal joinery. It’s amazing how much difference solid wood doors and well crafted ironmongery can have on a property. The larger house builders tend to charge extra for fully tiled bathrooms. But it’s possible to buy good quality, expensive looking tiles for as little as £8 per metre. So it needn’t cost a fortune to tile the whole room but the end result is well worth it.
- Branded bathroom suites: Branded sanitary ware adds value but doesn’t have to cost the earth. Alternatively, install a cheaper suite but add more expensive taps. This really can make a difference to the look.
- Fitted carpets: It will only cost around £1,100 to fully carpet and underlay each of the semi-detached houses. In my experience, most people put a high perceived value on a fully carpeted house.
- Recessed lights in bathrooms and kitchen: recessed lights are cheap to install but look great.
- Tiled kitchen floor: tiles are much more durable than vinyl and give a much better finish.
- Blinds and curtains: window dressings make a house much more saleable, but I’d normally only install blinds and curtains in a show home.
- Small patio: you may be surprised to learn that most of the larger developers don’t install any form of patio area at the rear of their homes. It’s normal to flag a pathway around a home so it doesn’t cost much more to add a patio which helps buyers to picture themselves enjoying their new outdoor space.
I’ve negotiated a really keen price with my main contractor, so I can probably afford to include many of the items I’ve listed above. However, as always, I’ve taken a long hard look at the build spec and I’ve managed to find a few areas where I can cut back on costs. The biggest saving relates to the boundary around the rear garden of the properties. The original planning consent specified a solid brick wall which would cost around £13,000 in labour and materials. By replacing the brick wall with a high quality timber fence (not one of those horrible concrete / timber waney lap efforts!) I will be able to save £11,000 without much loss in perceived value.
The main contractor I’ve got lined up for the project has completed several projects for me in the past. They know the standard of finish I require and will work directly with my architect, structural engineer and monitoring surveyor (working on behalf of the funder) to complete the project with minimal intervention from me. So now that I’ve negotiated to buy the land, secured the revised planning consent and applied for funding, my involvement should be limited to a monthly site meeting. I also tend to get involved in selecting kitchens, tiles, bathrooms and carpets but only because I enjoy this part of the process so much. If I get too tied up with other projects, I’ll delegate the work to an extremely competitive interior design company who’ve helped me out in the past.
The fixed price build contract dictates not only the build cost and specification but also the build term. My contractor has agreed to a detailed build program of six months with penalty clauses for delays. I always include late completion penalties to protect myself against increased finance costs but I have little grounds for concern… my contractor hasn’t been so much as a day late on any of my previous projects.
As soon as construction work begins, I’ll appoint a local estate agent to help market the properties. I’ve already commissioned some CGI’s to help with this process… you never know, we might even be able to achieve sales off-plan.
I’d like to think that the properties will be considered very good value for money when compared to what’s being offered by our competitors. Thankfully, due to the deal I’ve struck with the land price, we’ve already built a good margin into the scheme and can offer extra incentives such as deposit contributions if necessary. Even so, the scheme should return a healthy profit.
Hopefully we’ll make £80,000+ profit within around 10 months. But if the market proves to be tougher than we expected and we only walk away with £50,000 then the project will still deliver a great return for our time and effort. Thanks to my fantastic team, I can leave all the hard work to other people and concentrate on other deals.
I’ll keep you posted as to how we get on.
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Hi Lyndon,
As usual, loving your work.
This looks like an interesting project and being able to follow it from ‘the inside’ is such a bonus, so many thanks and good luck.
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Lyndon Forshaw Reply:
September 16th, 2009 at 12:08 pm
Thanks Marcus,
Glad of your interest. Will keep you informed
cheers
Lyndon
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The figures all sound great even though I don’t know the market in your neck of the woods. If £95k was a silly asking price what would have been a reasonable one?? I guess it’s your local knowledge and experience that tells you where you should pitch and this is what seems to stand you in good stead. Good luck.
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Lyndon Forshaw Reply:
September 22nd, 2009 at 7:29 pm
Hi Ian, good points you make here.
As you can see from my profit projections which are based on actual development and costs and not estimated. If I’d paid anything approaching 95k for the land the profit would be down to circa 50k. This as a percentage of Gross Development Value isn’t enough. In percentage terms it would be 15%. I aim for 25% profit. Also, in today’s market, the lenders like to see good profit potential in a development too as it gives them extra confidence. My construction costs are also tight on this scheme so its not as if I’m over paying on that front either. This leads to be believe the land was considerbaly over priced at £99,950, but I could see someone having a go at around the 70k mark so that would be reasonable.
Hope this helps, cheers
Lyndon
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