How to Assess a Property Development Site Before You Buy

Buying a property development site can be exciting. You see a piece of land, a tired building or an underused property and immediately start thinking about what it could become.

That enthusiasm is part of being a property developer, but it can also be dangerous.

The profit on a development can often be won or lost before you've laid a single brick.

A site can look like a great opportunity when you first see it. The danger is allowing the potential of the scheme to take over before you've properly tested the planning position, build costs, likely end values and risks.

Over the years, I've learned that a good property development appraisal isn't about making the numbers work. It's about trying to find the reasons why they might not.

If a potential development survives that initial screening, it's worth spending more time and money investigating it properly.

Start with the end product

Before getting too carried away with what you could build, think about who is actually going to buy or rent the finished property.

What is the demand in that particular location? What type and size of property sells well? Who is your likely purchaser? What are they prepared to pay?

It's surprisingly easy to design a development around the site rather than around the eventual customer.

On my own developments, I've always tried to consider the market alongside the design. A technically impressive scheme isn't much use if you've created properties that buyers don't particularly want.

This is where local market knowledge and conversations with good estate agents can be extremely useful.

Look carefully at the planning potential

Planning can fundamentally change the viability of a property development site.

Look at the site's planning history and the local planning policies affecting it. Consider neighbouring developments, density, access, parking, conservation areas, listed buildings, trees and any other obvious planning constraints.

There may also be opportunities through permitted development or prior approval, depending on the property and circumstances.

Depending on the development, there may also be Section 106 contributions, Community Infrastructure Levy (CIL), affordable housing obligations or other planning-related costs to consider.

This doesn't mean trying to become a planning consultant yourself. Knowing when you need specialist advice is an important part of property development.

Sometimes an early conversation with a good architect or planning consultant can save a great deal of wasted time and money.

Don't just look at what's above ground

Some of the most expensive problems on a development site aren't immediately visible when you're standing on it.

Ground conditions, levels, retaining structures, drainage, existing services and foundations can all have a significant effect on your property development costs.

On some sites, contamination, asbestos, access problems or utility upgrades can introduce substantial additional costs.

You won't necessarily know everything before buying. That's normal.

The important thing is recognising what you don't know, investigating what you reasonably can and making an appropriate allowance for the remaining risk.

A lesson from one of my own developments

At Ranmoor Gardens in Sheffield, I purchased a brownfield site from the local council through a tender process and developed 11 new homes.

The site was in a conservation area and had a significant slope, which created both planning and construction challenges. Ground and foundation issues also had to be dealt with.

It was my first multi-property new-build development and a considerable learning curve.

Experiences like that teach you very quickly that the attractive development opportunity you see on paper is only part of the story.

The physical characteristics of the site matter just as much as the numbers on the appraisal.

Work out a realistic Gross Development Value (GDV)

One of the most important figures in a property development appraisal is the Gross Development Value, usually referred to as GDV.

Put simply, this is the anticipated value of the completed development.

But it's also one of the easiest figures to be overoptimistic about.

Look at genuine comparable evidence. Speak to estate agents who really understand that particular local market. Look at achieved selling prices rather than simply relying on asking prices.

And be careful about assuming your development will automatically achieve the very top of the market.

At the initial appraisal stage, I prefer to be pessimistic with my end values.

I'd rather be pleasantly surprised later than discover that the development only works because I've been too optimistic at the beginning.

If a scheme still works using a sensible but cautious end value, that gives me greater confidence in the development.

If it only works when I use the highest possible selling price, I'd start questioning whether there's enough margin for error.

Build costs and end values determine what you can afford to pay for the site

This is one of the most important principles in a property development appraisal.

The asking price of a development site isn't necessarily what it's worth to you as a developer.

Ultimately, the numbers have to work backwards from the completed development.

You establish a realistic Gross Development Value (GDV) and then deduct the costs of delivering the scheme.

Those costs might include construction, professional fees, finance, planning costs, surveys, warranties, utilities, abnormal costs, Section 106 and CIL contributions, affordable housing obligations, sales costs, taxation where applicable, contingency and the return you require for taking the development risk.

What's left has a direct bearing on what you can afford to pay for the site.

This is why the accuracy of your build costs and end values is so important.

A relatively small movement in either can have a surprisingly large effect on the amount you should be prepared to pay for the land or property.

A simple example

Imagine your initial development appraisal indicates that you can afford to pay £500,000 for a site while still retaining the return you require.

Further investigation then suggests that the build will cost £100,000 more than you originally allowed.

Unless something else genuinely improves, that additional £100,000 has to come from somewhere. It may mean that the amount you can afford to pay for the site has effectively fallen from £500,000 to £400,000.

The same principle applies to the end values.

If you initially believe the completed development will have a GDV of £2.5 million but further research suggests that a more realistic figure is £2.4 million, that £100,000 reduction has a direct effect on the economics of the acquisition.

Changes in build costs and end values don't just alter the profit figure. They can alter what the site is worth to you in the first place.

Don't start with the asking price and make the appraisal fit

This is where I think developers can get themselves into trouble.

You find a site being offered at a particular price and start your appraisal with that figure already fixed in your mind.

Then, consciously or unconsciously, you begin adjusting the other numbers to make the deal work.

Perhaps the end values become a little more optimistic. The build costs get squeezed. The contingency gets reduced. The programme gets shorter, reducing the assumed development finance costs.

Eventually, the spreadsheet produces the profit you were looking for.

But nothing about the actual development has improved.

The appraisal should tell you what you can afford to pay for the site.

If my appraisal tells me I can afford to pay £450,000 for a site being offered at £550,000, I don't change my assumptions until the spreadsheet gives me £550,000.

Either the purchase price has to change, something fundamental about the development has to change, or the deal doesn't work for me.

Round costs up, not down

At the early appraisal stage, I'm not trying to make the opportunity look as attractive as possible.

I'm trying to establish whether it's strong enough to justify spending more time and money investigating it.

My approach is deliberately cautious.

I tend to round costs up rather than down, be pessimistic rather than optimistic with the likely end values, and always build in a sensible contingency.

There's little point improving a development appraisal by shaving a few thousand pounds from various costs simply to make the final figure look better.

Development rarely becomes cheaper simply because you need the numbers to work.

If the deal still works after I've rounded costs up and taken a cautious view of the end values, that's a much better starting point.

Contingency is vital

I consider development contingency an essential part of the appraisal.

Almost every development throws up something you weren't expecting.

Sometimes it's relatively minor. Sometimes the building or building plot bears its teeth and you're suddenly dealing with something that has a significant effect on the budget or programme.

Putting a contingency into your property development appraisal isn't being pessimistic. It's acknowledging the reality that many of your figures are estimates and that circumstances can change.

The appropriate contingency will depend on the particular development and its risks. A straightforward new-build project and a complicated conversion or refurbishment of an old building aren't necessarily going to carry the same level of uncertainty.

What matters to me is that the contingency is there from the beginning rather than being added as an afterthought.

Has the development passed the first test?

Once I've carried out that initial appraisal, I'm essentially asking three questions:

I've rounded my estimated costs up, taken a cautious view of the end values, included a proper contingency and considered the obvious risks I know about at this stage.

Does the development still work?

If it does, then for me it has passed an important first test.

That doesn't mean I'm ready to buy it.

It means it's worth spending more time – and potentially more money – investigating the opportunity properly.

That might mean getting an architect to examine the development potential, taking planning advice, obtaining more detailed build costs, carrying out surveys, investigating ground conditions, checking drainage and utilities or getting specialist legal advice on the title.

I'd rather spend that money on an opportunity that has already survived a cautious initial appraisal than spend it trying to rescue a deal whose numbers were marginal from the outset.

A good initial appraisal shouldn't tell you how good you can make the deal look. It should tell you whether the deal is robust enough to deserve the next stage of investigation.

Get the right professional team involved

Property development is a team business.

Depending on the project, that team might include an architect, planning consultant, structural engineer, quantity surveyor, solicitor, accountant or tax adviser, finance broker, contractor and various other specialists.

You don't necessarily need every consultant involved from day one.

The skill is knowing who you need, when you need them and what questions you should be asking them.

A relatively small amount spent on the right professional advice before buying a property development site can sometimes prevent a much more expensive mistake later.

Keep revisiting your property development appraisal

An appraisal shouldn't be completed once and then put in a drawer.

As you learn more about the development, update it.

If your architect establishes that you can build fewer units than expected, change the appraisal.

If more detailed cost information shows that your build costs will be higher, change it.

If the property market changes, revisit your GDV and end values.

If the programme extends and your development finance costs increase, account for it.

You should also test what happens when important assumptions change.

What happens if build costs increase? What happens if selling prices are lower? What happens if the project takes six months longer?

This type of sensitivity testing can tell you far more about the robustness of a property development than simply looking at one headline profit figure.

The appraisal should reflect the development as it actually stands, not the development you originally hoped it would be.

If residential doesn't stack up, consider whether the site has another use

There's another lesson I've learned from looking at development opportunities over the years.

A site that doesn't work for residential development isn't necessarily a bad development site.

Sometimes the problem isn't the site. It's what you're trying to do with it.

I experienced this with an off-market development site that I was given the opportunity to consider.

My initial thought was residential, so I looked at the potential scheme and ran the numbers.

It simply didn't stack up for residential development.

At that point, I could have dismissed the site and moved on.

Instead, I looked again at the location, the characteristics of the site and what other uses might work there.

It became clear that it had much stronger potential as a commercial development site. Ultimately, it proved to be an ideal location for a supermarket.

That completely changed the development appraisal.

The important point isn't that every site that fails as a residential development will work commercially. It won't.

The lesson is to avoid becoming so attached to your original idea that you stop looking at the opportunity that's actually in front of you.

Depending on the location and planning position, a site might have potential for retail, offices, industrial, leisure, mixed-use or another form of commercial development.

You still have to understand the market demand, planning position, development costs, end or investment value, finance and risk.

But a different use can produce completely different economics.

For me, this is part of assessing the opportunity rather than simply assessing one particular scheme.

Be prepared to walk away

Of course, looking for an alternative use doesn't mean trying endlessly to find some way of making every site work.

Sometimes the right development decision is simply not to buy it.

By the time you've found a site, viewed it several times, spoken to agents and started considering designs, it's very easy to become emotionally invested.

You start finding reasons why the deal will work rather than continuing to look for reasons why it might not.

I've looked at plenty of opportunities that I've decided not to pursue.

Walking away from a deal that doesn't stack up isn't failure. You may have just avoided an expensive mistake and kept your money available for a better opportunity.

There will always be another property opportunity. You don't have to make every deal work.

A second pair of experienced eyes can be valuable

Property development can sometimes be quite a lonely business, particularly when you're making decisions involving substantial amounts of your own money.

You may have an architect advising on design, a planning consultant advising on planning and an accountant advising on tax, but ultimately you are the person making the development decision.

That's one of the reasons I now provide one-to-one property development mentoring.

My role as a property development mentor isn't to tell somebody that a site is good simply because they want to buy it.

It's to sit down with them, look at the actual site, the actual numbers and the actual problems, challenge the assumptions and help identify the questions that need answering.

Sometimes that means finding a way forward.

Sometimes it means looking at the site differently.

Sometimes it means bringing in the right specialist.

And occasionally it means saying:

After nearly four decades working across estate agency, property investment and property development, one thing I've learned is that there will always be another opportunity.

You don't have to make every deal work. You have to recognise the ones that are worth doing.