Valuing a plot of land can be a difficult step in the self-building process. Where do you start? What if you spend too much? What if you don’t offer enough and lose out on a perfect plot? To help you overcome these doubts, we’ve put together a helpful guide to plot valuation.
The value of the plot is dependent on the house that you could potentially build there. To learn how to develop a plot you need to think like a developer, taking lots of variables into account. Such as what do you want to build and what can you afford. You will also need to account for the other buyers, such as professional builders who might make offers too.
How is a plot of land valued?
The asking prices for plots are often based solely on someone’s opinion. This is usually based on what the market will pay, rather than what the land is worth. This concept isn’t necessarily wrong, but if you don’t understand the costs involved, you could pay far too much.
The price the market will pay for a plot is highly variable. Good plots in prime locations are hard to come by. Therefore when they hit the market, some people will pay more simply so they get the chance to build.
How do I pay the right price for a plot?
First, it's best to understand the valuation method in a little more detail, and how it applies in practice. The basic calculation, known as the residual valuation method, is an essential tool. This will quickly identify the value of a site that has the potential to be developed or redeveloped.
Plot Value = End Value – Development Costs – Desired Equity
The idea is that you establish what the proposed finished house is likely to be worth. Then identify and deduct all the costs involved in designing and building the house. The remaining amount will be the desired development profit or equity, and the sum you need to buy the plot. This is essentially its valuation. The calculation is simple. Although it’s sensitive to many variables, which are where valuation difficulties arise.
It’s easy to understand that houses of different sizes and architectural styles have different values. The tricky part is knowing what type of house could be approved by the local planning authority. This can significantly affect the plot valuation. So it’s vital to learn as much as you can about these variables.
The issues you should carefully consider when calculating a plot value are:
End value
Plot valuations should always start with understanding the end value of what you intend to build. The trick here is working out what the plot will support and what will gain planning approval. Once you have a clear vision of what’s possible, working out the end value is straightforward. You need to research the local market or ask an estate agent to value your proposals. Be careful to never base end values on designs that over develop the plot, as these may never be approved.
Development cost
These cover all the costs of building your home. Including professional fees to finishes and everything in between. Understanding what needs to be included and the level of cost involved is a challenge, even for the most experienced self-builder. This is where professional builders have the advantage over self-builders. As they have the experience to identify and reduce building costs.
Things to consider here would include:
Design Services
This covers the professional support you will need. To ensure the house is designed according to planning requirements and building regulations. To figure out what type of house will most likely gain planning, you have two principal choices:
Put together a wide-ranging team of professionals and build up a cost.
or
Work with a package-company, such as Potton. Most package companies include professional and design fees. Which can be more cost effective. Package-companies are usually involved at every stage of the process. Which means they can offer support and have a clear idea of build costs from the outset.
Build Costs
Identifying the expected build cost is possibly the most important part of calculating the value of the plot. It will be the largest part of the budget and the part that people are most likely to have differing views on. Ideally, build costs should be based on actual quotations. However this may not be possible at the plot buying stage.
If you want to build a Potton home, we recommend that you speak with one of our self build consultants. They will be able to help you assess your total budget requirements bearing in mind the size, location, route to build specification and desired performance of your new home. Additionally, you can use online cost calculators, but be careful. These can be very generalised and may significantly understate or overstate the build costs. Once we have created your design we provide an independent benchmark cost analysis to help your budgeting process.
Route to Build
Depending on your preferred route to build, it’s possible to reduce the build cost. That means that you may be able to pay more for the plot. Using a turnkey contractor may be the most convenient build route. However, contractor overheads and profit margin will increase costs. Which can negatively impact on what you can afford to pay for a plot
Self-builders who self-manage or employ a project manager will generally enjoy a lower build cost. Which means they may have more budget to spend on a plot.
Fees
There will be a plethora of fees that must be paid to be able to develop the plot. Including planning fees, surveys and taxes such as stamp duty and CIL (Community Infrastructure Levy). Allowances for site insurance and warranty provision also need to be included.
As a self-builder, you have an advantage when it comes to fees as you are exempt from CIL. Which can cost tens of thousands. This may give you an advantage over builders, as they will have to include this cost in their calculation.
Site Abnormals
Broadly speaking, the cost of building the same home from one plot to another is the same. There are some regional cost differences, but the principle is sound. What changes from plot to plot are what’s known as the site abnormals. The costs associated with the specific issues unique to that plot. Examples of abnormals would be complicated foundation requirements, expensive service connections or dealing with demolition or challenging decontamination.
Contingency
Valuing a plot is all about figuring out the costs and then deducting these from the end value. Unfortunately, not every cost can be identified. That means you must include an allowance for unforeseen costs, known as a contingency. Generally, contingency allowances range from between 10% to 15% of the construction cost. Depending on the complexity of the project and the due diligence you have carried out. Remember that as your build progresses you could sensibly consider releasing contingency funds. Particularly when the build is above ground level.
Level of Specification and Individualism
Always try to think about the impact of individualism when personalising your home. Do the features you crave add value or do they compromise the plot valuation. If you make the house you build less appealing to others it will have an impact on the cost if you decide to resell.
Equity
This is the profit you expect to make from your efforts in developing the plot. Unfortunately, the level of equity is subjective. While some see this as essential, for example builders or developers. As a self-builder you may be less interested in profitability. For many, the opportunity to build a unique home is sufficient reward for the time involved. This means someone who isn’t concerned with profit won’t deduct an allowance. Which could drive up the plot value as they may be willing to pay more.
Ask a self build expert
A professional will be able to advise on how likely planning permission will be approved. They will also guide you on whether the home you intend to build will live up to the land value. For example, if you want to build a small two-bed bungalow on a half-acre plot, you might be underestimating the value of that plot.
As annoying as it might seem, land often comes before house. It’s a careful balance between the land and you, as an individual. The key is to find the best answer for the location, without spending more than it’s worth once finished.
Location, location, location
Value is tied to location. In some areas, land will be cheaper than others. So in these places it's advisable not to sink loads of money into an expensive house if you plan to sell it. This is because you just won’t make up the cost when you decide to sell it on. If it’s going to be your forever home though, then this might not matter to you so much.
Planning consent is also a consideration. A plot with existing consent is arguably more valuable than one without. As you already know that the local authority has permitted development there.
How to value land without planning permission
Is it a realistic proposition? Make sure you’re asking the right questions. Why has no one built here before? Would the expense be too much, meaning the project wouldn’t be financially viable? Would you be able to get planning permission?
Quite often the answers are obvious. A great place to start is to ask people familiar with the location. Talk to the landowner and neighbours to find out if a development has stalled in the past and why.
Am I taking a risk?
It’s never wise to buy land without being sure that you’ll secure the planning permission required. Ideally, the land should already have permission in place. This will give you a good idea of what you can build and will form the basis of valuing the plot.
If the plot does not have planning permission, then consult a professional. At Potton we can help you understand what might be possible with our plot appraisal service, and education through the Self Build Academy. If the prospects are favourable, you can negotiate an ‘option to buy’. Subject to securing permission and any necessary site investigations.
Would you be able to secure planning permission?
Have there been approvals granted for self builds in the area? Were they approved first time or did they go to appeal? Was there local support or did people object? This will show how ‘pro development’ the local area and council are.
It's also worth finding out if the plot is within a development or settlement boundary of the town or village. Sometimes referred to as the ‘red edge’. This identifies the area considered suitable for future development.
Replacement dwellings, infill and garden plots are good options. As they will usually be situated within this boundary and have a better chance of being approved.
Plots in open countryside
Be cautious. If you're offered a field at what seems to be a bargain price, then chances are it won’t be suitable for development. If you're unsure, then why not take advantage of our free planning appraisal service?
In rural areas, replacement dwellings are the most common way of building a new house. Securing planning permission will be specific to the plot and what you want to build. So you will need to work out if this is possible. Check the local authorities development plans and policies, to see if your proposal could meet their criteria.
Are there complications?
Many complications can be overcome with the right amount of money and time. Land within conservation areas, areas of outstanding beauty, open countryside or situated next to listed buildings will all have restrictions. These will limit what you can build.
Consider legal issues. Such as covenants, easements and rights of way, which can be equally restrictive. Make sure any existing planning permission has adequate time left to start your build before it expires!
Many build complications will be obvious such as access, site gradients and boundaries. Take time to meet with neighbours and talk to anyone that may know the history of the site.
Employ a professional to carry out a site investigation prior to purchase. This will help identify any potential site problems. The proposed purchase price, should reflect the investment you are willing to make, after the results of the investigation.
Do I have access to the plot?
Your plot may have what looks to be a suitable access, but do you have a legal right? It’s best to have access directly off a public highway. Ideally, you should own the access, rather than sharing it. There should be sufficient room at the entrance to construct the necessary visibility splays and provide safe access and egress.
Remember the access needs to be suitable for construction traffic and material deliveries. Mains services will more than likely need to be brought down the access way to connect to your new home too.
Be cautious when considering a plot that only has a right of way. This may not provide you with the necessary easements for services. Someone else may even be able to control or limit how you access your building site.
Make sure your plot is not bound by a ransom strip. This is a small piece of land owned by a third party that prevents you from legally being able to cross over to your plot. These can be expensive and could cost you as much as 40% of the development uplift value to resolve.
Will I be able to ‘service’ the plot?
It’s essential that your home has the benefit of mains water, electricity and drainage. It will also need to be suitable for other connections such as the internet. Make sure connections to essential services are possible, and the cost of the connection work is affordable.
Am I paying the right price?
Quite literally, the million-dollar question. Valuing a building plot is much more difficult than valuing a house as there are many more variables. You need to know what you want to build and understand the type of property the land will support. You will also need an accurate build cost and how much legal and professional fees could be. Even for costs that don’t apply to you as a self-builder such as CIL. As they will impact how other people value the plot.
Beaten by a builder
Builders are not prepared to pay any more than they have to for a plot because they need to make a profit. They will probably pay less than a self-builder as they understand the cost to develop. If you are really serious about buying a plot, think like a builder. Do your homework, understand costs, identify the potential value and the risk involved.
