Positive planning and building to sell?

Hi Ros,

I love a bit of positive thinking and when I was on the mortgage desk at Barclays many moons ago my absolute favourite type of customer was the self builds. They were by far the most interesting and you got to spend much longer with a customer helping them, and seeing the property go from a plot of land to finished was very satisfying 🙂 Also everyone one else was scared of doing them so I got all the self builds - double bonus.

The hardest bit really is finding the right plot, making sure you plan for the right type of property for that plot and area and then beating the competition to it. You will often be up against a builders who have the advantage of reduced costs by building themselves so they can afford to offer slightly more than an investor that has no building expertise to call upon themselves.

The finance is usually done in stages with a typical LTV of 65%-70% at each stage eg purchase, foundations, first floor etc. The LTV can be higher if you are building your own main residence.

As a very rough rule of thumb you are normally looking for 1/3rd purchase costs 1/3rd build cost and 1/3rd profit, but this is harder if you are not the builder so will be a little less profit.

I would be a little concerned with a planned profit of 40K on a 220k property as one thing I know for sure is it nearly always runs over budget and the lenders will be looking for a bigger margin if possible for their own security.

If you find anything and need help give me a call as I love a chat 🙂

try this http://www.jewson.co.uk/working-with-you/for-self-builders/preliminary-planning/calculators/build-cost-calculator/
bear in mind a single plot better to go for a 3 bed if you can and the difference between standard build and high quality is £900 to 1300 per m/2 so a typical 120m/2 house may be 120K to build

Thanks Neil and Mark.
A few questions:

Neil - so would I go to a specialist broker to get a 65-70% mortgage to purchase a plot? Any ideas of the interest rates on that sort of thing?

Mark, where the calculator says floor area I put in the 120 sq metres as you suggested and then put in '2 floor' - I assume that means roughly 60 sq metres per floor - is that correct? This was what came up, in case others are interested (I did standard build as in my area there's not a lot of money sloshing about; I also put in self-managed ocntractors as I like to be in charge):

The cost/m<² is £786. This means the average build cost for a floor area of 120m² will be £94,320 .

When I had my cannabis farm (well, not me literally - my charming tenants) and I was accused of having under-estimated the rebuild (the conversation went like this: 'Why did you put £140,000 as the rebuild value?' 'Uh, because I know I can get it built for that') - I had to get quotes for completely demolishing the house, taking it all away and rebuilding it. That might come in useful now as I learned a lot about all the different stages in building a house - on paper, at any rate.

Can anyone run me through the issues regarding VAT and tax though? I don't want any nasty surprises. For example, if I made £60,000 profit, would I then be taxed 28% as a capital gain or 40% as income tax? Excuse my ignorance - this will be a learning curve for me.

Hi Ros,

Unless you really are an expert you will need a commercial finance broker or at least see your own personal bank's commercial team.

Rates always depend on perceived risk so if/when you need help just email me offline and I will get one of our NACFB member brokers to give you a call 🙂 npatterson@property118.com

You may want to read the propertywire neswletter which has a report on self builds.
http://www.propertywire.com/news/europe/uk-self-build-study-2015091110974.html
Another suggestion that I have heard is to increase pension contributions to bring your taxable income back down to basic rate. You won't get your money until retirement age, but at least the government can't get their hands on it!

Ros, IME it is better to develop for resale through a company or LLP. Lenders like each project to be isolated. In the past it has been better for tax too.

I popped into a local estate agents today to ask about plots. He said there is one coming up on which there is permission to build 2 x 3-bed houses. For the two plots together they are asking £90,000 (for one the price is £50,000). The estate agent reckons the completed houses could sell for £175,000 - he didn't mention build-quality. I am wondering how I go about finding whether houses really would sell that easily or if I might get lumbered or have to drop the price etc. I don't know the specific area for a start. It's got a fairly posh name for the valleys, but I'd have to look into it. When I used the calculator supplied by Mark, I got a build price of about £95,000 - but I drive a hard bargain when it comes to builders so I'm wondering if I could get the builds done for closer to £75,000. I was told 'services' are there, but again, I would appreciate any ideas regarding ball-park figures for connecting up. Don't go to too much trouble anyone, as I'm only considering it - just if you have the experience you might want to share it and maybe others could also use the info.

The cost of building a house isn't just the cost of building a house.

On purchase of the land you will have stamp duty and legals.

You will have the council community infrastructure levy which in some councils can be higher than £300/square meter so a 100 sqm build will need you to write a cheque to the council of £30,000!! Of course some councils are a lot cheaper eg £50/sqm. Check with the council website

You will also have other building costs. For example a driveway or road leading to the property which can be £100/sqm.

you will have planning permission fees

you will have fees to erect a boundary fence or wall. A simple brick wall is surprisingly expensive at >£80 per meter. So if you have a nice big garden say 30 meters long and 10 meters wide. To erect a 70 meter brick wall (30+10+30) will cost you nearly £10k. Could of course use cheaper wood fences but any good buyer will know thats a cost cutting measure

Utility connection fees

legal fees on sale. agent fees on sale

finance fees (think of a mortgage that might have £2k in fees and you pay maybe 9-12 months in interest on the money you borrow)

architect fees

risk and time too

none of the above should put you off however do your sums as best you can so you dont take on nonviable plots or projects.

forgot to add. You can potentially get a discount on building plots especially in areas of lower demand

If you go to view a £150k house and put in an offer of £75k you will likely be laughed at. If you go to view an £80k plot and put in an offer of £50k and tell them to call you back even if its months later you have a chance. Often the owner of the plot would have only spent a few thousand pounds at most truing it to a building plot so £50k is still a lot of profit for them and you may be the only interested person

of course in areas of high demand its not likely to work

I think utilities (gas water and elec) connection / upgrade set me back £10,000 for the last conversion I did (3 units). That is works in the street up to the boundary (including new infrastructure charges). Water is the priciest, elec the cheapest.

Also, you will need to provide a 10yr insurance backed warranty. This can be expensive first time round. Ballpark 5k for two houses, possibly more.