Buying land to build residential property

Hi Rupang

£800k deposit sounds like a lot of money but it would mean that you would be seeking 80% funding, possibly more, with no previous experience. I can't see that any bank would fund that.

Unless you can find an experienced cash rich developer who can buy the land and build the properties for you on a turn key basis I think you will really struggle.
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Reply to the comment left by "Mark Alexander" at "30/06/2015 - 08:50":

Thanks Mark for your prompt reply. Could you confirm how much money we would require ideally?? we can see if we all can stretch ourselves???

Rupang: when you say the project might cost £3.5 - 4 million, do you mean this is the anticipated finished value of the houses (the Gross Development Value or GDV), or your estimated costs for the land, planning, construction, insurance and finance costs, which should be a good bit less than the GDV?

How did you reach these figures?

FYI Aldermore Bank, as an example, will lend 75% costs, capped at 60% GDV. The setup and exit fees are 4%. The interest rate is 7.5% above BBR.

You can find land and secure planning permission before buying it, but you should reach an agreement with the landowner beforehand. This is often called an option agreement: you offer to buy the land at price X if you secure planning and the landowner agrees to give you this option for a year, perhaps in exchange for a small fee.

However this is a very risky route for first-timers to try, as there is no guarantee you will get planning permission, so you will just be wasting your time and about £20,000 in architect fees, application fees, and a myriad of specialist reports - land, bats, landscape and environmental surveys.

You would do better to look for sites where planning permission has already been secured, but then you have the problems that you may not like the designs, or the location, and the developer will want a high price for the land, perhaps 45-50% of the GDV.

In my opinion as you have such specific requirements you might do better to approach a current development that is under construction and ask to buy 10 new houses next to each other - perhaps a whole little cul-de-sac to yourselves! If you do this early on, most developers would be very happy to secure ten sales in one go, and give you a nice discount too in exchange for a single bulk sale.

As regards financing, there is the Government's Help to Buy programme, which is explicitly aimed at new buyers and up-sizers, so this is perfectly designed for you. Most large developers like Barratt, Taylor Wimpey, Persimmon, Redrow, Galliford Try, Berkeley, Bovis and Bellway operate the Help to Buy Scheme.

All in all it would be much simpler if, instead of trying to build for yourselves, you used your buying power to negotiate a good deal with a professional developer in a location what you like. You don't need to go to the big guys either: there are smaller sites too that might appeal to you better. Try searching under the New Homes tab at Rightmove.

Tony, many thanks for your insight information. I have been told that on new build property, cost normally spread equally (1/3) among land, construction/planning and profit of developers though I am not sure how accurate this information is. As mentioned, we are in quite early stage of our research. The ideal property we are looking in similar area costing us between 500 -550k and hence we came to figure of 3.5 - 4 million after deducting developer's profit (1/3 of market price). so answer to your question, 4 million would be the cost for the land, planning, construction, insurance and finance costs and GDV would be around 5.0 - 5.5 million. We would certainly explore the option of buying properties directly from developers provided it fits our criteria however we are not sure what sort of discount they could offer to us...

Reply to the comment left by "rupang shah" at "30/06/2015 - 09:50":

Hi Rupang

Tony Atkins has provided a good answer to your questions. Given your lack of previous experience I'd have said you need to put around 40% of the funding costs in if you're looking to self build. If you use the services of a building contractor who is well known to the bank who are funding you then they might well lend more, up to 75% as Tony said.
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Hi Rupang,

Great idea I wish you every success you may want to consider splitting the £800k using part as a deposit for a building licence say 400k then if you built two houses you could have enhanced the land value and possibly created a cash flow to prove the development it's complicated but it can be done and may give you a kick start .

Rupang: you will be extremely lucky to get land with planning for 33% of GDV in the south-east of England. You are more likely to pay 45-50%, plus increasingly there is S106 or Community Infrastructure Levy on top, although you would be exempt from CIL as you are self-builders.

Developer profits on small sites are nowhere near 33% of GDV, unless there is some special situation or the developer purchased the land years ago. Banks expect you to be able to prove 18-20% gross profit margin if you want a loan.

The area I know best is Reading. You can get a new 3-bed house there for £500K: Rightmove shows several in Old Earley at the moment. One of these has a Gross Internal Area (GIA) of 122m2, so if you were lucky enough to find land with planning for 10 of these, this would take you over the 1000m2 threshold for exemption from S106 taxes and social housing. S106 has been replaced by Community Infrastructure Levy (CIL) for contributions per house, so as self-builders you would be exempt from this, but you would still be liable for social housing, which is usually assessed at 33% of the site. Therefore you would actually need permission for and be responsible for building 15 houses: 5 to be given away to a housing association, and 10 for yourselves.

I imagine this will make the project completely non-viable for you (affordable homes make almost all sites unaffordable for small builders), so I am going to drop the size of each house to 100m2, so you don't exceed 1000m2 for the whole site, and the price to £450K per house.

in very broad terms the figures would then break down as follows:

GDV £4.5 million (£450K x 10)
Land @ 45% GDV £2.025 million
Stamp duty £70K as the site involves more than 6 residential properties purchased in a single transaction.
Total GIA = 1000 m2
No CIL as you are self-builders
No S106 social housing as the site is smaller than 1000m2
Estimated architect fees to convert the planning drawings into workable plans, meet building regulations, SAP calculations etc: £20,000
Construction costs @ moderate quality for £1240 per m2 = £1.24 million. This is the figure quoted today using the Build Cost calculator at the Homebuilding website for self-builders, using a main contractor builder, moderate quality, for a 100m2 house with one bathroom and no garage, and no problems with drainage, getting gas to the site and so on (i.e. average conditions for an infill site in a town).

Finance costs: total land and construction costs above = £3.355 million

Aldermore would finance 75% of this, so provided you used a well-qualified builder with NHBC or Premier Guarantee registration they would loan £2.516 million. This figure also falls under the 60% GDV threshold.

You would need to supply £1.05 million in working capital, as you will be expected to pay 50% of the land cost. Aldermore will then loan the full construction cost.

Their costs would be 2% going in and 2% going out, plus 8% interest which could be rolled up into the loan. A good rule of thumb for interest is that since the loan is released in stages, you can assume you will be paying interest on half the total loan across the whole time period of the project, so that's 8% x £1.251 million x 1.5 years (18 months) = £150K in interest. Total finance costs £251K.

Of course this could be reduced because as the houses are gradually finished, one by one, they could be occupied and remortgaged, with the mortgage funds being used to pay down the Aldermore loan. The ten family units would need to be able to afford to remortgage at an average rate of 61.5% loan-to-value (£2.767 total loan, divided by completed value of £4.5 million).

You could also save costs by doing some of the construction yourself, though frankly unless you are really good, any savings might well be wiped out by the extra building time and interest costs.

So, overall, you are not doing too badly but will need some more capital, or a different bank with more relaxed terms. And the £6 million pound problem, which is finding a suitable plot with planning permission, or land with a decent chance of securing permission.

It might be worth a chat with Buildstore, seeing as essentially you all want to selfbuild. They arrange finance for self builders and also for developers, so may have some ideas as to good solutions.

A face to face visit to see them at the National Self Build and Renovation Centre in Swindon might be worthwhile.

Good luck