How can you limit your property development costs?

[nmb]

There was a report recently suggesting that many property investors are now looking towards the property auction market where there are some “bargain” properties which require development to bring them up to standard. In simple terms, the earlier in the chain you buy a property the more risk due to development costs, planning applications and eventual sale/rent of the property.

Does anybody have a failsafe way to limit development costs when buying property which requires significant work?

 

[kchiggs]

Sure work out the cost of a knockdown and new build that is your highest price. Then get a pro in to figure out the cost to renovate before you start het jim to hove you best case and worst case scenarios. Knockdown and rebuild gives you the limit you want.

 

[nmb]

Thanks for your reply - I see what you mean. In some situations there may be potentially expensive problems with a renovation which might see a knockdown and rebuild giving the best value for money. What is the ball part figure for rebuild costs as a percentage of a property's final market value?

 

[lookinginvest]

Also, knocking down a building and starting again allows you to create what the local rental/house purchase market are looking for. Kind of like selling to the converted

 

[kchiggs]

You can't get it as a percentage of final value. The cost of bricks is not reslly related to the value od property. You have to think what the total cost to do as a new build is ( any property insurance company or developer should be able to give you that. If its a three bed detached what would be the cost to build that new? Then add to demolition cost I've seen 10k quoted then divide that by the total final value and multiply by 100. Ive seen suggestions of 70k as a low end for three bed detached

 

[nmb]

Plenty of margin according to average house prices (I appreciate the build cost will also be impacted by the area in which you are building):-

https://www.gov.uk/government/publications/uk-house-price-index-summary-october-2017/uk-house-price-index-summary-october-2017

 

[kchiggs]

Depends on how your building. Plenty off factory builds now so distance is the overriding factor.

(Obviously in a knockdown you already own the plot)

 

[nmb]

The bottom line is that any investment offers a degree of risk. Also, the earlier in the development stage you become involved the greater the risk but also the greater the potential rewards

The more margin, or "headroom", you can give yourself the more chance of making some money.

 

[kchiggs]

Usually the more margin the less risk. Horses for courses

 

[diyhelp]

Has anyone gone down the route of stage payments for their building contractors? If so how did it work? Did it incentivise them to get the job done on time and on budget?

 

[Veronica]

Has anyone gone down the route of stage payments for their building contractors? If so how did it work? Did it incentivise them to get the job done on time and on budget?

I would never pay up front for a development. Paying for each stage as it is completed is by far the safest way. This way if things go wrong and you have to terminate the builder you still have the money needed to get someone else to complete the project. You need a good strong contract which protects you from bad workmanship and an independent inspector to check each stage and sign it off if satisfactory. This is the only way I would ever have a property built.

 

[nmb]

I totally agree, even if you are protected having paid upfront for development costs it would take you months to get the money back which could seriously impact your own business and cash flow. Incentivising building companies is the only way forward - there is even an argument for bonuses for those who finish ahead of schedule. The fact is the quicker your development is up and running the quicker you can get cash flowing into your business.