Just how do you go about working out a viable, price/value of a piece land or a property, suitable for a self-build project. In this article, we explain how to go about starting to work out a site's value?
Property valuation is subjective; It is "not" an empirical science which guarantees definitive and absolute answers. With this in mind, always remember the following:
1. The asking price could be nothing more than someone's opinion as to what the site is worth, or they can get away with.
2. What the market is prepared to pay can be highly unpredictable. Emotion often carries people away, and they, particularly in areas of high competition or limited opportunity, can often be willing to pay what it takes to secure the site they have their heart set on.
3. Different sites have their own characteristics; land is not heterogeneous, and this can influence the costs. Examples of these variables could be sloping sites, the need to demolish existing buildings, access connection to services, what planning approvals are possible or exist etc.
So how do you start work out a viable price/value of a piece land or a property, suitable for a self-build project?
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three different valuation methods:
1. The comparable or market approach
The simplest form of the valuation and usually the most reliable, is a comparison with other similar sales in the same location.
The more evidence of like sales you have the better picture you build-up of the local plot market and the more accurate your output.
Research other sites or completed houses/developments nearby that have sold recently which can then be compared against your site as an indicator of market value.
In theory, if a 1.2-acre site nearby sold for £200K, your 2.4-acre site will be worth £400k, or maybe not; it isn't always as simple as that. As stated for this approach to work, you must have good, recent and as much detailed information as possible on the historic comparative deals you are using which will be the key to getting a reliable analysis. Such information does not always come easily.
Some of the disadvantages of the comparative method are:
There may not have been any similar recent sales in the location you are interested in.
The date of the comparable transaction should be taken into account. Any transaction needs to have taken place recently as market, economic, socio or political conditions can change in a relatively short time.
Working out precisely what that deal was and how much was paid can be difficult. The site you are comparing may have been sold to a particular purchaser willing to pay over the market odds.
Local submarkets can exist, and values may differ considerably within a small geographical area, particularly street to street in established urban areas.
The condition of the site and associated remediation costs are site-specific and could differ significantly between greenfield and brownfield, and between brownfield sites.
Site and construction costs, for example, in terms of infrastructure and service requirements, may differ between sites.
The planning status can range from no permission to detailed consent.
Specific factors relating to the site or purchaser may also need to be considered, such as adjoining ownership and synergies with adjoining sites.
However on the flip side there are advantages:
It can be a relatively reliable method when the markets are stable and active.
It can be used as a cross-check against other valuation methods.
SOME SOURCES FOR FINDING LOCAL VALUES OF COMPLETED DEVELOPMENT/PROPERTIES:
The “Search for Sold House Prices” pages on websites such as Rightmove and Zoopla, are a good start.
Anna Powell-Smith’s site collates the average/aggregate price per m2 of houses in each postcode district in England & Wales. She use government data on floor areas taken from Energy Performance Certificates (EPC), matched with residential house sales recorded at the Land Registry. These are quite useful as they let you be more specific as opposed to government sites, such as the Office for National Statistics which only show information on a local authority scale.
There are also companies that collate lots of information such as planning approvals, sale prices, rents etc then overlay all of these onto searchable online maps. However, most of these companies will charge a subscription for access; they are aimed at professionals rather than one-off self-builders. However, they do offer free trials so many days you might be able to take advantage of.
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2. RULE OF THUMB:
This involves looking at plot prices as a percentage of the value of the completed house, Gross Development Value (GDV) or it's resale value as it is sometimes called. So where a plot is offered for £100,000 and the finished value (GDV) is £400,000 the percentage for the site is 25%. leaving 75% to be split between the cost of construction and residual equity/profit
Your contacts amongst estate agents involved in plot sales, can be a source of information regarding the sort of percentage is being paid at that point in time and the approximate value (GDV) of the type and size of house you want to build. For example, if you want to build a three-bedroom chalet bungalow and such properties are currently selling at around £325,000 (GDV) and the percentage being paid locally for plots it's about 33%, the plot value is going to be around 33% of £325,000 which is £107,250.
GDV ÷ 100 x percentage currently being paid locally = PLOT VALUE
or
£325,000 ÷ 100 x 33 = £107,250
There is no set percentage as it varies according to the state of the housing market and the nature and scarcity of the plot concerned but, typically, the figure is between 25% and 40%. During housing booms, percentages of 50% or even more can be paid at the level can slump below 25% in a depressed housing market. In a rising market, developers assume high sales figures in their calculations to reflect like likely price prices during the time it takes to build the house. In a falling market, the opposite is true, and developers are pessimistic about the prices they will get. Unless you believe values will rise or fall significantly in the near future, use current house prices. Don't rely on the rule-of-thumb valuations alone unless you can get good local information on the right percentage to use, based on a reasonable volume of sales.
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3 residual valuation method -
a more structured site-specific approach.
As indicated above, at the early stage of any project, there will be a lot of unknowns and questions about your development, for which you will not have answers or find it hard to establish reliable answers. So, to have any chance of a realistic valuation result, a more structured site-specific approach is advisable such as the residual method
The "Residual Method" involves a simple equation, which is in its simplest form is as follows:
GDV – (Total development costs) = Residual Land value
Where:
GDV = Gross development value (value of completed development)
Residual land/Property = The purchase price of land/property
Total development costs = For example - Planning permission, building control and associated matters, site question costs, site-related costs, construction costs, contingency allowances, fees and expenses, tax relief, insurances, grants, finance and interest payments, equity.
However, the Residual Method still has its drawbacks,
some of these are:
It is sensitive to the numbers that entered, rubbish in rubbish out.
The starting point is how much the final house will sell for once it is built (GDV). As highlighted in the comparative method, that can be difficult to work out.
The variable costs are also hard and challenging to work out in the early stages.
The residual valuation method is complicated by the fact that development takes time, while the valuation result is for a single point in time, in other words, the date when it is calculated, be aware things may be very different when the building is completed.
The difficulty of determining the value of a development site is one of the reasons why it pays to have expert assistance when it comes to dealing with developers.
Harvey Norman Architects have nearly over 25 years of new build residential development experience.