Due diligence for Property Developers: What to do before acquiring property
When taking on a new development project, deadlines and funds can be tight. You’ll need to get your ducks in a row in order for everything to run smoothly and for the project to be profitable.
Doing your due diligence thoroughly beforehand can eliminate risks and increase your chances of a successful development.
But, there’s a lot to consider.
This article will cover the main areas you need to consider when doing due diligence on property development.
Before viewing the site, it’s worth understanding the local area and how it would benefit from your development. Consider the local demand and any other developments that are taking place.
If the development is residential, you should also consider the type of people living in that area or the ideal resident for your development (professionals, families, first-time buyers etc).
What price are the properties in the area and what is the average rental yield? This will be determined fully later on in the project, but you should still have some sort of idea from the get-go.
What you don’t want to do is develop something that sounds, but realistically, there’s no demand or interest for it in that area.
Assessing the site
When assessing the site, you’ll need to establish if it meets the requirements of your development.
Consider the price, size, accessibility and anything surrounding it that could affect the build or the finished result.
You will also need to assess the condition of the land. Boggy land, tipped areas or running sand can be a sign of poor ground conditions that might need additional investigation and costly foundations. Your building control inspector will be able to give you a good idea of what lies underneath the topsoil.
Before exchanging contracts on the site, you should carry out a variety of additional surveys to determine the time, budget and design required for the project and most importantly, highlight any potential risks.
Utilities and services
You will need to establish any site constraints such as overhead or buried utility services and whether the site has current or future connections to the utility mains. Understanding this early on is essential as it can affect your designs and your budget, which can cause huge implications.
This can be done by contacting the relevant utility companies in your area that have plans, maps and details about any services running across your site. If there are services currently in place, check if they are accessible without accessing someone else’s land, and do they have the capacity for your development.
Carry out site legal checks
This involves reviewing any legal implications or restrictions regarding the site. Some checks are minor and relatively straight forward, but some sites can be extremely complex.
Your solicitor will need to carry out these checks for you by reviewing the land registry information for the site and then providing you with a report and the relevant advice.
The findings of the checks could mean you need to adapt your development or take out specific insurance policies.
Obtaining planning permission
Planning permission is required for any work being carried out that meets the statutory definition of ‘development’. This includes building operations such as structural alterations, construction, rebuilding, most demolition and the subdivision of a building.
You should enquire about planning permission early on in order to establish if the development will be allowed and establish the costs involved.
This can be done by contacting your local authority as they have professional planning officers that can offer planning advice and information regarding the law for your area.
Some local planning authorities charge for pre-application advice and if further advice is needed from a professional planning consultant.
Development financial feasibility
In order for the development to be a success and provide a certain level of profit, a financial feasibility should be carried out during the due diligence phase. The sole purpose of this is to make sure the numbers stack up.
- What is the maximum you can pay for the site? (and any other costs for acquiring the site such as stamp duty and tax).
- What fees will I have to pay? (legal, conveyancing, professional services, utilities etc.)
- What finance will I need and what costs are involved?
- What costs are involved with the construction work? (labour and materials etc.)
- What insurance is required and at what cost?
- What marketing and costs are required with selling / holding the development?
- Should you develop and sell or develop and hold?
- What is the development income and margin?
It is extremely rare for the initial financial feasibility to exactly mirror the final outcome as there will always be changes along the way. However, having a strong understanding of what’s involved from the get-go and preparing for any risks will improve the chance of your development being a profitable success.
At Ramsay & White, we have a proven track record in development finance, working closely with both developer and finance institutions.
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