Land to building to profit ratio ?

Is there a "rule of thumb" calculation for property developing

Didn't find your answer?

Good afternoon all,

Having only dealt with a couple of building projects on behalf of my clients I wondered if anybody knows whether there is an accepted ratio between cost of land, cost of biulding and eventual profit.

Both my previous clients were working on a third land/third building/third profit, is this just "pub talk"     

The reason for asking is that a client has a plot of land for sale and is being told the ratio is a quarter for land, quarter for build, quarter for all the planning and snags with the land and a quarter profit.  

This obviously has a major effect on the amount my client could expect to recieve and as it is their "pension" they are bit disappointed ! . 

Your input would be appreciated. 

 

Replies (18)

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By Anonymous.
04th Dec 2020 14:19

meadowsaw227 wrote:

Both my previous clients were working on a third land/third building/third profit, is this just "pub talk"   

Yes, absolutely it is. For a start, it depends what type of property you build. You might have a piece of land and chose to build a large 5 bedroom detached house. Alternatively, you might build a small block of 4 flats. It's unlikely that the two scenarios would yield the same profit.

Not sure who is advising your client but he sounds like an amateur so there are any number of potential pitfalls. Homes Under The Hammer does tend to make people think property is development is easy money. It isn't.

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By frankfx
04th Dec 2020 14:28

Buy a copy of Build It magazine.

Stats are there.

Then consider your unique circumstances.

Material costs are expected to increase.
Labour costs too, if pent up demand post covid 19.
Brexit effect on imported element of material costs

Rule of thumb , take with a pinch of salt.

For instance...

Cheap land, may have access problems
Or be contaminated.
Or require concrete piling.

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Replying to frankfx:
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By meadowsaw227
04th Dec 2020 16:01

Thanks for that.
The land is in/near green belt and is surrounded by properties of £500k plus

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paddle steamer
By DJKL
04th Dec 2020 15:48

It can be used as a very, very rough view when considering acquisition, but do note the land cost allowance should include all costs to purchase (SDLT/Legals), the third allocated to build cost these days may easily be light (depends where in the UK you are, whilst build cost varies a bit re region land prices vary far far more, so static ratios do not apply across the UK) and a third profit from SP rarely gets realised, especially if other contractors involved who are charging well over cost. Maybe if just employees and owned plant 33% GP might be possible but one needs lots of steady work to justify permanent employees, owning Heras panels/site toilets/site cabins, owning diggers and cranes etc - looking at accounts for listed builders none of them get close to 33% profit.

I would instead prepare a desktop, get the sizes in sq ft (or metres) that it is intended be built, get a feel for SP per sq ft, plug in numbers, allow connection costs (they can be expensive, remember Cat 6 road requirements and all the things you do not think off), marketing, finance, prof team, build cost per sq ft, landscaping, street furniture, plug them in and see where you get to.

Of course if you are dealing with conversions even that will not work, we had an interest in a site with 20 new builds that gave a profit (not great because works needed on nearby roads at our costs) but as we also had to convert two older structures (Historic Scotland or similar) it killed the build as the costs re these had that part of the site losing money and killed the profit overall- 15 years on still nothing built on that site.

Edit- I really ought to have said we tend to buy land/buildings without planning and get the planning ourselves and sell on to builders, as most of the "profit" tends to be in that earlier process our crude use of 1/3rd tends to be when considering what we might get for the site if we did get the planning, as that sort of rough is not critical (usually plenty of fat on the planning uplift)

In our case look at site, estimate unit numbers we might get, value them, divide by three, compare with what we are paying for site plus likely professional costs re planning , consider existing value if we do not get planning, buy site/building or do not, but if I was building out I would want very detailed budgets from my QS before starting. (In fact tend to bring in QS at design stage to give input re the design/restrain the architects- An Architect, someone who wins prizes with his client's money)

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Replying to DJKL:
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By meadowsaw227
04th Dec 2020 15:55

Interesting reading, thanks for taking the time to answer

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Replying to DJKL:
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By SouthCoastAcc
04th Dec 2020 16:57

Interesting, and a great answer.

I found the "profit" from planning permission was variable, if you know a site will sail through planning the profit will be minimal, but get something unexpected through and you are laughing.

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Replying to SouthCoastAcc:
paddle steamer
By DJKL
04th Dec 2020 20:36

Just try to spot what others do not yet appreciate (and try not to pay much more than value in current use), e.g. we picked up three whisky bonds in the 90s for circa £200k, spent a bit more than that on top to got residential planning on all three, we sold one for £900k (25 flat units), another for £1.5m (34 flat units) and built 27 flats out of the third.

Of course as cities mature it is trickier to find overlooked potential but it is not impossible though of course they do not all work out (we spent £670k on a shed, we could not get residential planning so got office use instead, all in by then nearer £800k spent , ended up selling for £650k making a loss).

We tended to do larger than average sites and always bought as is (nothing conditional on planning), take the risks and if it works out you get the rewards. (Though these days we are not really buyers we more develop our portfolio of investment properties when there are opportunities)

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RLI
By lionofludesch
04th Dec 2020 15:45

'Both my previous clients were working on a third land/third building/third profit, is this just "pub talk"'

I thought so when a builder told me that but, over the years, the slightly modified ratio of land/building/profits+overheads has proved surprisingly accurate.

I think it's because the better the plot, the better the spec of the house that gets built on it and the better the sale price. There's a subtle link between the three.

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Replying to lionofludesch:
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By meadowsaw227
04th Dec 2020 15:59

Client has been told that the site is well placed and big enough for a minimum of 5 large dormer bungalows (in keeping with surrounding properties) at £500k minimum

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Replying to meadowsaw227:
RLI
By lionofludesch
04th Dec 2020 16:05

meadowsaw227 wrote:

Client has been told that the site is well placed and big enough for a minimum of 5 large dormer bungalows (in keeping with surrounding properties) at £500k minimum

Well, I would respectfully suggest that your client's previous experience in building houses is probably going to be the major factor.

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Replying to lionofludesch:
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By meadowsaw227
04th Dec 2020 16:17

Thanks for that.
Totally different client, who is currently trading from the land in question.
The other two clients sold their land to big builders and were "relatively" happy with their lot.
This is the clients only chance to make any money before retiring, hence why I am trying to ascertain the next step forward for them .
Might have to use the big firm of accountants that assisted me with my other clients tax calculations etc .

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Replying to meadowsaw227:
RLI
By lionofludesch
04th Dec 2020 16:35

meadowsaw227 wrote:

Thanks for that.
Totally different client, who is currently trading from the land in question.
The other two clients sold their land to big builders and were "relatively" happy with their lot.
This is the clients only chance to make any money before retiring, hence why I am trying to ascertain the next step forward for them .
Might have to use the big firm of accountants that assisted me with my other clients tax calculations etc .

Oh well, good luck to him. It's experience which will make him money.

He might like to consider a joint venture with a builder. If somebody will take him on.

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Replying to lionofludesch:
paddle steamer
By DJKL
04th Dec 2020 20:38

Not for the inexperienced , it all depends how the income share is to be calculated and what security one can get if you lose title. ( and builders can be cute)

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Replying to DJKL:
RLI
By lionofludesch
04th Dec 2020 21:35

DJKL wrote:

Not for the inexperienced , it all depends how the income share is to be calculated and what security one can get if you lose title. ( and builders can be cute)

I'm not recommending it. Nor am I recommending a bloke with no building experience running a house building project.

It all sounds fraught with difficulties.

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Replying to meadowsaw227:
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By Anonymous.
04th Dec 2020 20:40

meadowsaw227 wrote:

Might have to use the big firm of accountants that assisted me with my other clients tax calculations etc .

Wouldn't the client be better speaking to a firm of chartered surveyors?

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Replying to Anonymous.:
paddle steamer
By DJKL
05th Dec 2020 13:00

Where I would go, some form of property professional would likely be most helpful.

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By SouthCoastAcc
04th Dec 2020 16:59

I've built a few houses and imo there are no ratios. Too many variables, in london the land value won't be a third. The build it magazine numbers weren't accurate either.

The starting point would be to work from the likely value of the house and deduct all costs, that will give you an idea of the theoretical max value. However, if it is a popular area people can over pay massively for their chance of a grand design.. Again very area dependant.

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blue sheep
By NH
05th Dec 2020 15:07

In my experience of projects ranging from fairly small and into the millions the land cost ranges from 15% to 30%, and profit ranges from 16% to 33%, others will no doubt have seen different figures

Every single project is different and needs its own detailed planning including the financials simple as that.

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