How to accurately calculate development costs for your new build projects

April 30 2022

How to accurately calculate development costs for your new build projects.

Due diligence is key to a successful investment; this is especially true if you are investing in or with or other people

In most cases, they will complete their own due diligence, providing you with the details, however, it is vital that you still undertake your own. You can protect yourself and your finances by not taking a property deal at face value.

This is never truer than with new build developments and although everyone aims for things to go right, things can go wrong. Conducting thorough research and giving yourself a financial buffer before you lay the foundations is vital. 

To demonstrate to you how to protect yourself and your finances, we wanted to show you how to value land like a professional would. Whether you are an investor looking to get involved in a development project, or a landowner looking to sell, this article will allow you to accurately value sites with a quick desktop appraisal.

Start at the end

The first step is to work out the GDV (Gross Development Value) of your site. This is how much the site will be worth when complete. So, if you are building three houses and each one is worth £435,000, then the GDV of your site is £1,305,000.

We recommend working on a profit margin of 20-25%. You can go higher, but this is a good enough amount and leaves you with enough collateral should any unexpected costs arise. So, for this deal to work, you need a minimum of £261,000 profit.

Estimating build costs

Build costs are estimated based on a price per square foot or metre. If you don’t know what these costs are in your area, then call local builders for a quote. They will be happy to give you a quick figure, especially if there is the possibility of them getting the job once the deal completes.

As an example, let’s say you are building three detached properties at 645 square feet each and the build cost per square foot in your area is £150.

Since you are building three properties, you need to multiply 645 by three. This means that the total area you are building is 1,935 square feet. You now need to times this by your cost per square foot. So, 1,935 X £150 = £290,250.

For an extra layer of security, we recommend slightly overestimating the build cost or adding a 10% contingency.

Calculating interests

The next step is to work out the interest you will be paying back on the development loan. If you are an experienced developer, then this might be a lower amount like 5-7%. If you are new to developing or want to air on the side of caution, then you will want to estimate a higher amount like 10-12% per annum. Therefore, if your build costs (without interest included) are £290,250, then simply add on your interest amount i.e., £290,250 +10% per annum (for 24 months) = £348,300

You will need to apply this to the length of time it will take you to complete the development. Remember, this isn’t just how long it will take you to complete the build. You will also need to apply this to the sales period too. So, if you think the build will take 21 months and selling the properties will take 3, then you need to account for 24 months of interest.

Your final offer

Now you have your GDV, build cost and interest rate, you’re ready to place an offer. When we offer on land, we show the way we have reached our value to the vendor or agent. We believe in honesty and transparency, and showing our workings demonstrates to vendors that what we are offering is a fair price.

Using all the figures above, your offer should be as follows: GDV (£1,305,000) – Profit (£261,000) + Build and expected interest costs (£348,300) = £695,700.

A developer you can trust

We hope that this article has helped you understand the best way to value land. If implemented correctly, it will save you money and protect you from financial harm. Remember, it is better to underestimate and be pleasantly surprised than it is to work on a best-case scenario and be disappointed.

We thoroughly appraise each development before making an offer. This way we protect our clients’ investments while being able to promise a safe return. Following in-depth desktop appraisals like the one demonstrated above is just one of the ways we do this.

If you are looking to invest in a development project or sell your land, then do so with a developer you can trust. Contact us today by clicking here. We will talk you through each of our development projects and help you to find one that is right for you.

If you are looking to sell your land, then we will complete a free appraisal and present you with our workings. Contact us today to book yours.