How To Quickly Tell If A Million Pound Property Development Is Going To Make You Any Money

28 Jan

“We’ve just taken on a probate property yesterday.  It’s on at £750,000, but when done, you’re looking at a million pound property”.  Said the estate agent.

With a £250,000 paygap it sounded like a property development that needed to be seen.

But here’s the thing – there’s really only one question you need to ask yourself when presented with a potential property development: will it make money?

So here’s the property – a three bedroom semi-detached in Northfields, Ealing, London. (I’ve switched to doing a lot more videos lately because it gives you a better idea/ memory of what the property was actually like.  Photos are still really useful – but more so in terms of specific areas of focus, or issues you want to highlight).

As you can see, the property is in need of some works!

First impressions:

I really liked the property.  It’s spacious, well-proportioned and has a good footprint.  There’s plenty of scope for extension both outwards into the garden and also up into the attic.

I liked the location with it’s close proximity to the tube (less than a 5 minute walk) and the park at the end of the street – making this a cul-de-sac situated property.

BUT there were a couple of issues I had with the property.

1. The street did not feel like a million pound street.

Yes, the houses all looked in nice condition and I saw a couple of places having work done to them, but the cars didn’t look particularly expensive and the neighbourhood did not have the sort of salubrious feel that you would want with such a price tag. Expensive and aspiring was not in the air.  Well, not up my nose anyhow.

2. The property needed a heck of a lot of work to get it anywhere near that sort of asking price.

Development of that scope will take time and a lot of money.  While much of the property development could be done within permitted development rights, I still had a question mark over how much real value you were actually adding versus adding additional square footage.

In property development the key question you always need to ask yourself is: will this make money?

So I hopped onto Rightmove and Zoopla to check out the competition.  And I have to admit to feeling dubious about a £1 million pound asking price – most other comparable properties were in the region of £900-950,000.  However, I could find none that were newly renovated and so I decided, hesitantly, that maybe you could just about get to the million pound mark given recent land registry prices and local area growth.

It may be toppy, but with the wind behind you and a decent finish it just may well be achievable.

Anyway, getting down to business – what do you need to do to achieve that price?

In a nutshell, I would say at least £125,000 of work.

And so I started to work with those ballpark figures:

£750,000 purchase

£2,500 legals

£27,500 stamp

£125,000 refubishment costs

And then I stopped.

Because I tallied those expenses so far: £905,000

Already – before you add financing costs and any sort of contingency for renovation works, you are operating at less than 10% on this property development.

And for me, to do a development like this for less than 10%, is dangerous territory.

Not only do you need to break the price ceiling in the street – but you also need the works to come in at estimate and no major problems to arise.  Operating on a project of this size without a contingency budget is akin to financial suicide.

So I stopped.

For me in my humble opinion, this property will make a wonderful family home.  I fully envisage a family buying this, doing the works to their spec and living there happily for a few years and the value will increase nicely.  However as a property development, this is a non-starter.  There’s too much risk and too little reward.

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