As experienced property developers will tell you, looking at land development opportunities comes with significant risk and therefore a stringent due diligence process is essential.
A big part of this process is establishing the feasibility of the development, and in particular what price can realistically be paid for the land, and how this may impact upon the project itself and how viable any potential scheme or land purchase actually is. At Ashdan Estates, increasing our land development portfolio is a key part of our business strategy for 2022. However, with every piece of land offered for sale, the real question that should be asked is, how much is it really worth?
Firstly, the value of a piece of land is absolutely not determined by what the seller may ask for it, nor necessarily what their estate agent may tell them it is worth. The value of any piece of land is principally determined by two factors. The outcome of what can be done with it, and what people will pay for it. In the main, the answer to the first question determines what anyone will, or should, pay. This is where a Feasibility Analysis is required.
Contrary to what the seller may hope, the value of the land is not the first consideration when undertaking such an exercise – it is the last!
What can be paid for the land is the amount remaining after the total value of the completed development has been established, and from that amount, the developer’s profit, construction, and other costs such as legal fees, sales fees and interest on funding have been deducted.
When assessing the value of any piece of development land, it is essential that this process is followed in this order, otherwise a financial disaster may be looming for the inexperienced developer!
