Our offer of £800k on the site has been rejected. It was disappointing, but the first offer was partly made to test the waters. We had some margin in it, and it was submitted to test the owner’s thinking on valuation. You never want to make your best bid first, you need some wriggle room.
In an ideal world, landowners would say what they want for their land, but in most cases, they want to see what you’ll offer before sharing such information. We want to know their price just in case it’s lower than our offer, and likewise, from the seller’s point of view, they don’t want to say what they want just in case we offer more than they think it’s worth.
The landowner on this deal has said we need to be at £900k. By making the first offer, we now know where we need to be. So, it’s time to sharpen the pencil. Can we make it work with that figure?
I’ve spoken to local land agents this week to get a feel for the price. I don’t want to be too specific about the deal as that exposes me to someone else finding out about the deal. However, making some calls to see where the market is and where values are is essential.
I was pretty disappointed with the feedback, with values being put at 25% of GDV. I am considering this, but I am also basing the values on my own experiences and thoughts on the market. When I see deals listed on the market in my area, they are never listed at 25% of GDV, more like 35% of GDV.
If someone has done all the hard work in putting a deal together, getting planning, and offering a ready-to-go deal to the market, the margins on the deal get squeezed as all the hard work has been done. If someone can just buy ready-to-go sites at reasonable prices, nobody would go to the trouble of creating deals and struggling through the planning process.
Based on all of this, my revised breakdown of the deal is:
10,760 x £375/sq ft = £4,050m GDV (I’ve pushed the sales value up slightly, which I still think is a prudent valuation. I would hope to achieve closer to £400/sqft in reality).
10,760 x £200 = £2,150 Build Cost
20% margin on the GDV = £800K
Land Value £1,100m
I see £1.1m as a realistic value if I listed the deal on the market, with planning permission in place, which puts the land at a very reasonable 27% of the GDV.
You can’t just go off ballpark figures, but when I look for a deal that is listed on the market, I can never find anything where the land value is 27% of GDV. The prices in my area are always more than 30%.
I would work on the assumption that £1.1m is the bottom end of the valuation. I would hope for closer to 30% on the day, valuing the site at £1.2m.
Based on these assumptions, I have submitted a revised offer to the landowner for £900k, which is their desired valuation.
The planning costs are going to be in the region of £50k. If we sell for £1.1m we will get a 3x return, which is at the bottom end of where we would want to be, although we do feel this could increase over the 24 months option period, along with the fact that the very earliest this deal would be on the market is 3 years accounting for 12 months on site. We would expect some price inflation over this period.
This revised offer has been submitted and we will await the outcome.
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