I Am A Property Developer – Ask Me Anything!

Reply to the comment left by "Josh Taylor" at "07/02/2014 - 19:21":

Sorry "Josh" for the delay in my reply: I've been laid up defying a deathly dose of man 'flu.

I've no idea about auction house policies: have you tried asking a few? Peter Heron, for example, picked at random, say in their website blurb: "When buying at auction you have a known fixed timescale for exchange and completion giving you added peace of mind. When the auction closes the winning bidder has 28 days to exchange contracts and a further 28 days to complete the purchase, giving the buyer more time to organise finance or a mortgage."

But I don't know whether this is some legal requirement or an auction house policy designed to give confidence to sellers. Peter Heron clearly believes fixed completion dates are attractive to sellers, but perhaps other options are feasible, provided of course that the auction house is guaranteed its fee . . .

Reply to the comment left by "Josh Taylor" at "07/02/2014 - 19:09":

Hello Josh

1. No idea. It could mean the sum paid when an option agreement is exercised, or the sum payable if you sell the option to someone else, etc. This is not an exact science with fixed terminology. It would help if you could give us some context for this sort of query.

2. Normal architect's drawings, like most technical drawings, work off some sort of datum, typically the current ground levels and slopes on the frontage. Planners and the general public can then see what is meant by a certain ridge height etc, even if the builder will need to excavate.

Eye-level is no good because we are all different heights.

Some architects submit supplementary drawings or walk-through CAD movies, often using appropriate colours and "social space" context like trees and pedestrians, drawn from different geographical angles, in order to help users visualise what the structure will look like. Of course these are likely to show the proposal in a favourable light, but they can be genuinely helpful, as a lot of people find 2D plans and elevations hard to read. However, they are not yet a requirement for planning applications, probably because there is no agreed common standard of presentation, whereas 2D drawings have been around for centuries.

3. Margin on cost means your gross profit calculated as a percentage of your costs. This could be total costs across the whole project, from planning and design and land purchase through to estate agents' sales fees; or it could be total construction cost, or whatever the parties wanting to assess "margin" agree is an appropriate measure of costs. For example, a developer who only develops land and sells on to builders for the actual construction will only deal with her element of the overall project, and only estimate the construction costs when taking the project to an investor or lender.

4. The nearest to a standard is the GDV one, but as outlined in answer 3, margin on costs is useful if you want to break down the project into different phases with different profitabilities. Margin on cost is also a useful measurement of project returns because it tells you what you hope to make in profit for a given cash outlay.

Hence in your example, a 20% return on a £500K GDV is one measure, or you can think of it as a 25% return on your £400K actual cash spent. This may fit your company's minimum profit rules, or just make you feel better as it's 25% profit instead of 20%!

5. I'm unaware of any industry standard way for measuring floor areas, but I expect RICS has guidance for surveyors. For floor plan software, I suggest searching on Google for "floor plan software": there are loads of hits just on the first page.

Reply to the comment left by "Josh Taylor" at "07/02/2014 - 19:21":

Hi Josh

I don't know the answer to your auction house question either. However, we do have a Director of the UK's largest auction house right here on Property118 and he runs a very similar Q&A thread to this one. His name is Martin Cunningham and this is a link to his member profile - http://www.property118.com/member/?id=376

His Q&A thread is here - http://www.property118.com/auctions-sell-tenanted-properties/40635/
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Reply to the comment left by "Tony Atkins" at "08/02/2014 - 20:09":

Tony thank you for your insightful answers which are very helpful.

Reply to the comment left by "Neil Patterson" at "03/02/2014 - 14:22":

(Original post – comments page 6 @ 03/02/2014 at 12:52)

Apologies for the late reply. To summarise my original post; I was the guy putting together the £1m development project and was asking for general advice on development and financing.

@ Neil Patterson
Thanks for the reply Neil. I did think about giving you a call but did not want to waste your time as I am sure you are busy. What is your background in?

In answer to your key questions:

1) What is or was the purchase price :
£215,000 (it went to sealed bids) probably slightly more than what we wanted to pay but there were lots of bids and we know the second highest bid was just below ours.

2) How much will the development completion cost :
After looking at the possible GDV value and meeting with a bank to look at funding available we have set our budget at £800 + 10% professional fees + vat on fees = approx. £900k-£1m (from research construction costs on new builds are VAT exempt but I have assumed 20% of the build costs will also incur some VAT)

3) Gross development Value (GDV) – final value when finished :
This is an interesting question. Using 3 methods I have come up with these values –
(a) Land & Build Valuation: £1.47m (using cost estimates supplied by an architect that recently worked on a similar project)
(b) Comparison Valuation: £1.82m (due to the specialist nature of student accomodation the only way I could compare is to work out a sale price per student room across the local private sector area and multiply it for the number of rooms I would have - although most of these were of lower quality than I expect my build to be)
(c) Rental Valuation: £3.51m (using 5% yield converted into a years purchase in perpetuity figure)

Weighting the above valuations 40%, 50%, 10% respectively I arrive at £1.85m. Would you consider this the correct way to arrive at the GDV value?

Yes I have come to realise the importance of the architect and have a couple of meetings set up over the next few weeks.

Given the numbers above the 33% purchase price, 33% build costs and 33% profit rule doesn’t hold. If my numbers are accurate it is more like 12% purchase price, 50% build costs and 38% profit.

Yes the exit strategy would be a commercial mortgage. The aim is to keep it long term and the rental income will more than cover any mortgage payments. Barclays who are my business bank for my day job were not very helpful, they just stated that they lend 66% against the land and 50% of the build costs and no movement in any of their criteria. He did not even read my business plan (which took hours to put together! lol). He only looked at 3 pages, the partnership balance sheet and each of the partners own personal balance sheets.

I think to move forward with funding I need to get tenders in so I know the exact amount I need to approach lenders for.

Reply to the comment left by "Mark Alexander" at "03/02/2014 - 15:14":

(Original post – comments page 6 @ 03/02/2014 at 12:52)

To summarise my original post; I was the guy putting together the £1m development project and was asking for general advice on development and financing.

@ Mark Alexander
Apologies for the late reply. Thanks for the reply Mark.

I followed your advice and emailed large builders in the area (and even some national ones) proposing a turn key type of proposal but got zero replies! Maybe I need to pick up the phone.

I think the upturn in the construction industry could mean builders no longer have to consider such development funding like RG Carter did with your development to secure the contract. Although such a contract would solve a lot of the headache involved with trying to raise the funding and would simplify the whole process for us ten fold.

My current plan now is to appoint an architect, get planning approved and then get some fixed priced fixed term tenders which I could take to a financial institution. At this stage any tenders could also be advised they would be preferred if they would consider a turn key arrangement.

Reply to the comment left by "Mic Singh" at "24/02/2014 - 12:55":

Hi Mic

Picking up the phone is one possible solution but referrals from architects would be even better. When deciding which architects to employ, bear this in mind - it's not just about what you know, it's who you know and who and what they know.
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Hi Tony
Thank you for the informative blog. Wanted to ask you opinion on how you go about getting a good refurb or plot of land to develop with planning.
On almost every deal we have looked at there seems to people out there with cash lying around to snap up deals and cant see how we will ever get our foot in the door.

Any advice please

Thanks

Hi Tony,
I am about to commence a conversion coupled with a new build on a couple of flats of mine. My existing 2 flats will be turned into 4 flats by building a new 2 storey side extension and breaking into the attic.
All labour employed are not vat registered to keep the cost down. As you know, it is hard to escape the vat element at the point of purchase on most materials, so I wish to claw it back at the end of the build - am I able to do this, if I register myself for VAT prior to commencing the build?

Regards

Rick.

Hello Tony,
I am a prospective property developer and I have a question relating to acquiring property that has sufficient land to accomomodate additonal housing.

In my case I have a strategy to acquire buy to let properties that are viable investiments in their own right, but have plots that could accomodate additional housing that I could develop to sell or let.

Questions:
1. What options are available to quickly understand the viability of a building additonal housing on a plot before making an offer?
2.Is there a way to quickly assess the likelihood of the plans being approved?
3. Would you recommend purchasing a plot/property without any immediate knowldge of the likelihood of gaining planning permission? i.e. gamble