How Exactly You Can Value a Plot of Land

11 April 2019 Potton News
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Figuring out how to value a plot of land for your building construction is much easier than you’d think — it’s just a case of working out what kind of house a plot will support, as well as understanding its end value, and then deducting the total cost of development — simple.

So why does this issue strike fear into the hearts of most “would be” self-builders and which steps throughout the valuation process create such uncertainty?  Here’s the ultimate guide to buying a plot of land.

How is a Plot of Land Valued?

The asking prices for plots are often based solely on someone’s opinion of what the market will pay — not what it's worth. This concept isn’t necessarily wrong, but you can’t escape the fact that if you spend too much and don’t understand the costs involved, your project could prove to be an expensive venture.
What price the market will pay for a plot is highly variable. Good plots in prime locations are hard to come by and therefore when they hit the market, some people will pay more to grasp the opportunity of building their own home.

The valuation process is highly sensitive to understanding these variables. While we all may know that different size houses with different architectural styles have different values, it’s knowing what could be approved and understanding the cost of building that can be difficult to figure out. This can significantly affect plot valuation, so it’s best to learn as much as you can about these variables.

How Do I Pay the Right Price for a Plot?

Image of finding a plot logo
First, it's best to understand the valuation method in a little more detail, as well as learn how it applies in practice. The basic calculation, known as the residual valuation method is an essential tool to quickly identify the value of a development site, land or existing buildings that have the potential to be developed or redeveloped.

Plot Value = End Value – Development Costs – Desired Equity

The idea is that you establish what the proposed home (when finished) is worth and then progressively identify and deduct all the costs involved in designing and building the house. What’s left is a surplus which provides for the desired development profit or equity and of course, the sum you need to buy the plot. This is essentially its valuation. The calculation is simple, but it is unfortunately sensitive to many variables — which are where valuation difficulties arise.

The issues which should be carefully considered 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 the local planning authority (LPA) will approve. Once a clear vision of what’s possible has been established, working out its end value is fairly 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, which will probably never be approved by the planners.

Development Cost

These cover all the costs of building your home from professional fees to finishes and everything in between. Understanding what should be included and the level of cost involved is a challenge for even the most experienced self-builder. This is where professional builders have the advantage over self-builders as they have a better understanding and the experience necessary to identify and reduce building costs, thereby increasing their profit of what they could potentially offer for the land.

Things to consider here would include:

Design Services

This covers the professional support you will need to ensure the house is designed as per planning requirements and building regulations. To figure out what should be allowed, you have two principal choices:
1. Put together a wide-ranging team of professionals and build up a cost.
2. Work with a package-company, such as Potton who include most of the professional fees as part of their package.
The design costs of package companies tend to be more cost effective then architects as they are fundamentally connected into the construction process, offering clarity of fees and predictability of building costs due to their familiarity with their systems.

Build Costs

Identifying the expected build cost is possibly the most important part of calculating the plot valuation as it’s the biggest slice of the cake and most likely to suffer different views. Ideally, build costs should be based on actual quotations, but as this isn’t possible at the plot buying stage, alternative information must be used.

If you want to build a Potton home then it’s easy — simply use our price guide, which sets out the detailed build costs and talk to one of our Self-build Consultants to find out the cost implications if you want to make design changes. Alternatively, you can use online cost calculators, but be warned as these can be too generalised and probably overstate the build costs, which will have a negative effect on the plot valuation.

Route to Build

Depending on your preferred route to build, it’s possible to reduce the build cost, which means that you may be able to pay more for the plot. Using a turnkey contractor may be the most convenient build route — however, little things such as overheads and profits will increase costs negatively impacting on plot valuation. Self-builders who take either a self-managed route or employ a project manager to work on their behalf will generally enjoy lower build costs, which means they can increase what they can pay for the plot (to make sure they secure it).

Fees

There will be a plethora of fees that must be paid to be able to develop the plot. These will range from planning fees to surveys and investigations as well as taxes such as stamp duty and CIL (Community Infrastructure Levy). Allowances also need to be included for site insurance and warranty provision. The self-builder has the advantage when it comes to fees as they are exempt from CIL, which can cost tens of thousands. By not having to include CIL payments within the valuation calculation, self-builders can afford to pay more for a plot than say a builder who cannot claim the same exemption.

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 this principle rings true. What changes from plot to plot are what’s known as the site abnormals, which are the costs associated with the specific issues unique to that plot. Examples of abnormals would be excessive foundations or expensive services connections or maybe dealing with on-site demolition or contamination etc.

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 and therefore an allowance must be made for unforeseen costs which are known as a contingency. Generally speaking, contingency allowances should range between 5% and 10% of the construction cost depending upon the complexity of the project and the due diligence you have done in understanding and dealing with potential plot problems.

Level of Specification and Individualism

The personalisation of a plot to increase the quality of the finish and functionality of a house can prove to be both a good and bad thing in terms of plot valuation. Always try to think about the impact of individualism and whether the features you crave really do add value or compromise the plot valuation by increasing costs.

Equity

This is the profit you expect to make from your efforts in developing the plot. Unfortunately, the level of equity is subjective and while some see this as essential (builders and the like), others aren’t that interested in profitability as the opportunity to build a unique home is sufficient reward for the trouble involved. This means that those who are not concerned with profit will not deduct an allowance and consequently will pay more for the plot driving up its value.

Now we’ve explained the plot valuation process along with some of the finer details, you can now get on with valuing your plot accordingly. Remember, the unwritten rule of valuations is perspective — and different people will have different objectives meaning plot valuation is not an exact science.

Greenbelt

Attend Our Masterclass

If you’d like to learn more about plot valuations and how to improve your chances of successfully acquiring a building plot, attend our Masterclass: How to Find and Appraise a Build Plot.

View all of our Self-Build courses here.

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