It is of paramount importance when planning a property development that a budget is prepared and followed. Many TV shows feature aspiring developers that always seem to go over budget because of a combination of self-indulgent luxuries and a lack of foresight regarding potential problems. I strongly suspect that when filming, sensible and prudent developers are omitted from the eventual screening because they don’t make for ‘involving’ viewing.
Budgeting is in no way a difficult concept to understand. Private, novice developers and professionals alike should follow a similar process when planning projects. It is only the scale that will differ.
When planning a development, the initial method of forming a budget is to carry out a financial appraisal. This means that a basic plan is drawn up which sets out how much the project as a whole will cost; and how that total will be broken down into different aspects such as building/development costs, fees (estate agents, architects, surveyors, solicitors (including VAT) and Stamp Duty), and cost of land/property. As this is only a basic plan, it does not have to be accurate down to the last penny at this stage. However, the purpose of it is to establish if the project is financially viable for you.
My favourite method of appraising a development is the ‘residual’ method. This is simply as follows:
Note: ‘Gross Development Value’ is the total value that you (realistically) expect to achieve when the finished property is sold on the open market.
This method allows for the required profit to be placed into the plan. Profit is something that many novice developers almost forget about until the finished development is valued. However profit is vital if your property venture is to succeed. Obviously if the expected profit level is too high, the plan is less likely to work. Likewise, if the profit is too low then it leaves you less capital to begin your next property. On development projects at the height of the market in 2007, a realistic profit figure could have been around 30% of the Gross development value (GDV). Currently, a profit of around 20% might be considered quite optimistic (but still possible).
The next aspect is build/development costs. It is impossible to say what this will be in the region of, because it will depend entirely on the scope of the work, the required standard of finish and the size of the property. Professional property developers, who are building a property from scratch will usually calculate this on an area basis and apply a rate per square foot or metre. This method can also be applied to development properties that are not being built from scratch, but are having extensive work carried out. This rate could be between £30 per square foot (very approximately £300 per square metre) for a very basic job, or up to around £100 per square foot for a very top-end finish. Currently £50 per square foot (approximately £500 per sq Metre) might be a realistic figure. So if the development property is planned to be 2,000 sq ft in area, build costs of around £100,000 will be a ‘ballpark’ figure (depending on scope and standard).
If the work you intend to carry out is not that extensive, then calculating build costs will not be appropriate. It is more sensible to get quotes from builders for the work you want them to do. Always make a list to give to them (keep a copy too!) so that they have a formal record of your required works. This will form the basis of the quote that they will provide. Simply explaining to them what you want is not clear enough; it should be set out on paper. This will also allow you the opportunity to think about what the builders can do, and what you can do. You might find that much of the work you have written down could be carried out by yourself, obviously this will save money. If you obtain several quotes from builders, you will very soon form a picture of what is or isn’t a fair price for the required work. If at all possible, always try to get a fixed price deal from the builder. This will contribute a great deal in forming a budget that is less likely to change. Be warned however that this fixed-price deal is certain to contain conditions. A builder will not adhere to a fixed price if much additional work is added to the plan. This includes changes of your plan and unforeseen problems such as the need for more extensive ground works or compatibility problems with individual build components.
Fees for involved professionals must also be included into the budget. Solicitor’s fees are likely to be around £500-£1,000 inclusive of search fees, VAT and a small amount of additional work (phone calls & letters etc). Obviously this will depend (again) on the scope of the work the Solicitor must carry out for you. Complicated legal matters will certainly result in the fee increasing.
Estate agents fees should not be more than 1% of the sale price. The estate agent might attempt to convince you that you should pay more for a ‘top-rank’ service; this is definitely not the case. Most estate agents will acknowledge that 1% is competitive and they can still afford to provide you with an excellent service on this fee.
If the development project is a new-build property, then you might be considering the services of a Project Manager. The fee for this is likely to be from a couple of hundred pounds for a ‘phone/email based’ service, up to £5,000 or more for a dedicated service by a Project manager who can source the best materials at the best price and even find suitable temporary accommodation for you.
All these elements can be used to provide the vital components to your project appraisal. In these financially troubled times, if you’re looking to secure lending to help finance your venture, that lender will be far more inclined to consider your request if it is clear that an appraisal has been produced to establish the project’s financial viability.