Buying development land and making a profit
Approach with Caution: Get Advice from the Start
As many as 25% of sites have major problems that mean they either cannot be developed or will not make a profit so getting an expert property development solicitor involved, before you purchase the land, is crucial to resolve potential problems or manage any risk.
In order to make a profit from buying and developing land there are a number of important factors to take into account.
Know what the problems might be
The problems are often a mix of legal problems and physical problems and your solicitor will know what to look for and advise you accordingly:
- Rushed documentation - badly drafted contracts, option agreements or conditional contracts
- Restrictive covenants that have not been released
- Planning conditions where compliance is difficult
- Infrastructure complications such as other land being necessary for infrastructure works
- Boundary issues and ransom strips
- Highways problems such as access issues
- Clawback and overage payments
- Time - under-estimating the time it will take to resolve issues before building can start and the time it will take to complete and sell the units
- Cost - under-estimating the cost involved in a project
- Environmental problems - if there has been past land use, the land may be 'contaminated'.
Beware the Bargain
Beware of a seemingly good buy which is being sold by a developer - there must be a good reason why they are not developing it themselves. There is so much demand for development land by would-be developers that the prices of small development plots are being pushed up to uneconomic levels and so a "bargain" may have unforeseen problems. Beware of property consultants offering quick returns, especially those that tell you that you do not need a solicitor's help to invest. There have been a few major fraudulent schemes in operation and investors have lost large sums of money because of failures properly to investigate the scheme offered.
Avoid buying any land at auction unless prior to the auction you have fully researched the planning, title, infrastructure and other physical aspects, as the wrong results can make the land worth much less than it might seem at first glance. Often specialist advice is needed well before you consider bidding. If you win the auction you have to buy the lot regardless of what you find out afterwards. It is better to get that advice before you bid to avoid losing all your capital on a loss making project.
Options and Conditional Contracts
It is best to see if you can get an option or at least an 'exclusivity agreement' if even for a short period to give you breathing space so that you can look into matters. Once you have fully satisfied yourself that it is a profitable investment you can then exercise the option and proceed to buy it with your eyes open. Options come in many forms and there is no such thing as a standard option. They may be fixed price or market value price and be for a fixed period, or extendable.
Land without Planning Permission
Where a developer has to apply for planning permission they may negotiate an option to buy the land at say 50- 80% of market value to compensate them for the costs and risks of making a planning application that may be unsuccessful. Normally there is no obligation on the developer to make a planning application, however. It also means that the seller will probably be unable to sell the land until the end of the option period.
Sellers in a strong position may insist that the developer enters into a 'conditional contract'. This usually forces the developer to make a specified planning application within a time period and if this results in a planning permission that is deemed to be acceptable then the developer must buy the land. The price is usually assessed as a percentage of the market value of the land with planning permission as assessed by an independent valuer.
How can we help?
As experienced development lawyers we will check and report to you on the position regarding the title, restrictions on use, the rights you have and those you will need to acquire. We will make searches and enquiries of the relevant bodies to check there is nothing registered that would prevent you developing the site.
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.