Property developers often start with a small building renovation, which is then sold on. This page is focused on the next level up, which is the development of one or more new buildings from scratch on a plot of land.
Below are the key initial steps:
The key problem with being a property developer can be the time it takes to put a proper plan in place. If a plot of development land comes on the market, you could spend days working on a development deal only to find that the land has been sold. Therefore it is important to try and agree something with the land owner at a very early stage. The land owner will want to achieve as much as he can for the land, but he will also want reassurance that you can do what is necessary.
If the land owner lives next door to the land then he will also want some say in what is being built. Therefore you need to ensure that you have a good relationship with the land owner as soon as possible and to persuade him that you can maximise his land value. It is a good idea to sign a contract with the land owner as soon as possible, that gives you exclusivity for a reasonable period of time. This contract will usually be conditional upon planning being granted of course. When buying land it is really important to pay out as little as possible until everything is in place to actually build.
There are different tax implications depending upon which route you take. Rental income is taxable like any other income. You will also have to consider capital gains tax if you eventually sell the property and do not live in it. If you are selling the properties on, a limited company will often be the most tax efficient way of developing.
Based on the location that you are considering building, what are typical sale prices and building costs for different sized houses? Do your research. Will properties sell easily in that location? What is the demand? A quick Google search will bring up websites that can give you recent sales information, but you really need to go and walk around the area and see what else is for sale. Finding building costs is harder but there are websites that tell you average building costs in different locations. You need a cost per square foot / meter a value per square foot / meter and the internal and external size of the buildings in square meters or feet. You also need to consider access to the property or plot and will the additional traffic cause a problem.
Are there any rights of way issues? If so you will need an agreement with anyone who might have or might block access to your land. This will usually be a contract and then a payment should the development go ahead. The size of that payment will be totally negotiable, but if it is unreasonable then there is no point in developing.
There is no point developing if the numbers don't stack up. All serious developers will start with a development appraisal. This confirms the viability of a development. Use the Caldes V8 Developer software to build an appraisal. This will ensure that you do not pay over the odds for the land that you are going to develop, or the buildings that you will redevelop.
This minor investment could make all the difference between success and failure. It can work out the price you should pay for the land, how much profit you will make and even how long you have got to sell your properties before you go in to a loss. You will also need this when you try to raise development finance. You will need to consider the cost of planning, building regulations, stamp duty, Architect, Quantity Surveyor, bank interest, timings and so on. The software will help you with all of this.
Don't consider going to your council with reference to planning options until you know what is going to work or you will be wasting time and money. Once you have the figures, you should talk to your local planning officer about what might or might not be allowed. If the land is in conservation area then planning will be harder, but not impossible. Your property will need to be sympathetic to the surroundings.
It is unwise to buy land without planning but it will be cheaper of course. Planning will add to the land cost, but this is the only safe option. Most people start by obtaining 'outline planning permission', which obtains approval in principle. However Full planning permission will be required before you can actually go ahead and develop. You should then agree a contract with the land owner based upon planning being granted, before you spend time and money on full planning permission. Other issues might include things like listed trees or buildings.
Before going too far down the line you will also need to have some idea of how you will finance it. There are a large number of companies specialising in property finance or you can go to your bank. In most cases you will require a deposit of your own (often known as equity) and then you will raise an interest only loan, which you will pay off when you sell the properties. Sometimes you will have a third party too.
Your development appraisal will help you calculate how much this will need to be. If possible, get an agreement in principle for finance as soon as possible. This will give you credibility with the land owner.
Normally you will need to put in either land or at least 10% equity. There are various different lenders. You should avoid secondary market lending and use a top quality source.
Good builders are often on long contracts and have another contract lined up after that, so it is worth finding a builder early on and having them in place well before you draw down on any finance or you could be paying lots of interest on the land payment without any building work in progress. When choosing a builder it is important to see examples of their previous work.
You should also get a fixed price contract and make sure that you specify everything that will be done in that contract, right down to the number and location of every plug and light switch and the quality that you are expecting (e.g. hardwood, softwood or PVC window frames etc.)
You could also provide some form of penalty if they take too long. It is also advisable to never pay for a stage that has not been completed fully.
An architect will need to be involved from planning stage forward. They will initially start with elevations and floor plans. As the project moves forward they will provide more detailed drawings of certain complicated areas as necessary, so that there is no confusion with the builder. It is important not to over design your project or get carried away with ideas. You also should avoid designs which might be too radical and therefore may not sell.
An structural engineer will undertake calculations and prepare drawings for any areas that require structural strength. This will typically be steel or wood beam sizes and how the beams should be supported, often in upper floors and the roof.
The earlier you can sell your properties the better. This keeps your finance costs down. Don't wait until the properties are built. A good developer will have them all sold before the first story is completed.
The role of a quantity surveyor is to analyse and estimate the cost of materials, time and labour required on a development. He will prepare contracts and tenders. They will be involved from an early stage and will remain frequently involved throughout the development project.
Once a project is on site a quantity surveyor will assess progress and agree whether goals have been met. This will often be tied into releasing funds from the bank and to contractors. A QS may also assess risks.
It is important to understand and meet all of the health and safety requirement on a construction site.
Don't forget to insure the development until you are no longer involved in it. Any accident or hold up could cause financial loss.
Items can often go missing from a development site. You will need to assess the security requirements.
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