This article sets out 20 pieces of information, from both a legal and practical perspective, for future property developers and buy-to-let landlords in their 20’s.
A successful development requires a team of professionals including estate agents, brokers, accountants, solicitors, planners, architects, engineers, building contractors and surveyors. There are various property seminars and presentations offered by these professionals and property forums which can offer free advice and the opportunity to meet professionals and build your team.
You need to consider whether you want to develop the properties for sale or buy-to-let. Selling the properties following completion of the development will allow you to realise your investments quickly, but maintaining a property-portfolio will give you a steady stream of income. This should be thought out carefully and discussed with your professional team.
3. Research the type of property
This may sound obvious, but the type of development will be dictated by the location and type of property or site you purchase. A vacant plot of land in the countryside requires a different strategy to a commercial high rise in a city. You need to consider the type of building you intend to construct (houses, flats, commercial units or mixed use). If you intend to develop buy-to-lets, will these be for the general market or students and if so which geographical locations should you focus on.
4. Consider auctions
Auctions can be risky but they can be a chance to obtain a property quickly and at a lower cost. If you intend to purchase a property at auction, it is imperative that you ask your solicitor to review the auction pack before the auction and if you require funding, that your lender has confirmed it is happy to lend for this particular property. The property may have hidden legal issues which would not only impact the value but the future saleability of the property.
5. Set up an SPV
Whilst you can purchase a property in your own name or the name of your trading company, most developers set a company for the purpose of purchasing, developing and selling the property (called a Special Purpose Vehicle or SPV) due to various tax advantages and spreading the risk, we suggest that you speak to an accountant about the advantages and disadvantages.
No matter what type of development you intend to undertake we always recommend instructing a surveyor/ valuer for the site and development. They will ensure that you are not paying above the odds for the site, but will also be able to give you an estimate for the gross development value (or GDV) following completion of works and the likely sale prices for each of the dwellings.
7. View the property
It is important to deal with issues as soon as possible and many such issues are noticeable from inspection. When viewing the property, be mindful of common issues such as access and boundaries. Is there any land between the boundary of the property and road? Are there any private access roads? Are the boundary lines clear? Does anyone other than the Seller appear to be using the Property? If you suspect any issues raise these with your solicitor as soon as possible.
8. Planning Application
If a site does not yet have planning permission, it is important to discuss the likelihood of obtaining planning consent with a planner.
9. Additional Consents and Licences
Whilst applying for planning permissions, be mindful that you may require additional consents. It pays to be organised in applying for them as it will save a lot of time in the future, this includes House of Multiple Occupancy licences and selective licences.
10. Consider option agreements
You do not want to be contractually obliged to purchase a site for development until you have obtained planning permission in case planning permission is never obtained and you are effectively left with a useless site. At the same time you do not want the site to be bought by someone else whilst you are in the process of investing time and money into obtaining planning permission. An option agreement offers a viable solution. You and seller will enter into an agreement that you will purchase the site only after planning permission has been granted.
Traditionally a buyer will purchase a site for a set figure, agreed before exchange of contracts and paid at completion. Where a site is to be developed, you may instead agree with a seller that you pay a significantly lower price for the site at completion, and then pay an additional share to them once planning has been granted or the dwellings are sold (called an overage payment). The amount payable to the seller will usually be a percentage of the net profit of the development. This offers greater flexibility to a developer and incentive for a seller.
It is important to understand the costs of the development before you enter into any binding contract to purchase the land. We recommend obtaining professional help from accounts and project monitor surveyors to assist.
13. Community Infrastructure Levey
When considering the costs of the development you should consider whether or not the relevant local authority has adopted a Community Infrastructure Levy (CIL). CIL was introduced to help deliver infrastructure to support development. If CIL is payable it is important to know how much and when you will have to pay it.
14. Not on s106s/affordable housing
Before granting any planning consent, a local planning authority may impose various obligations on a development, this can include financial contributions but may also include the need to use apprentices in your development, local labour or to contribute to local projects. They may also require a certain percentage of the development to be dedicated as affordable housing.
The nature of the conditions are documented in a document called a s106 Agreement and its content will depend upon the development and local authority in question. S106 agreements can be lengthy and take time to, agree it is therefore important to begin the negotiation process with the council as soon as possible.
15. Stamp Duty Land Tax
The rates of SDLT payable for a commercial property and residential property are different and the rules can be complex when the purchase involves any mixed used properties (residential and commercial) or agricultural land. We suggest taking advice from your solicitor and accountant before you commit to purchasing the site.
As part of the due diligence process your solicitor will obtain various searches for the site. This will include a local authority search, environmental search, water and drainage, chancel repair and a utility search. The search’s will establish, amongst other issues: if the property is listed; in a conservation area (in which case you may require additional consents for development) or if any enforcement notices have been served on the property; if there was a history of contamination, ground instability or flooding at the site; if the site is, or would easily be connected to mains drainage and sewerage system and whether there is a sewer underneath the site and whether or not the property is situated in a district where a property may be liable to contribute towards the cost of maintaining a local church. A utility search will show the connection points for the utilities (including gas, electricity and telecommunications). This will allow you to determine how you will connect the development to these utilities, but also ensures that there is no equipment situated on the property owned by the utility companies which you would need to work around.
17. Title review
Your solicitor will also review the property’s title to ensure that, amongst other issues, that there are no restrictive covenants which would prevent the development. If there are any restrictive covenants which would impact the development it is important that you discuss these with your solicitor and make no approaches to any third parities (including the seller) until you have discussed the potential options. Approaching a third party would prevent you from obtaining breach of restrictive covenant indemnity insurance policy at a later date.
It is important to arrange any funding you need for a development as early as possible. There are various options available to you which a broker will be able to advise on. Once you have arranged your finance, the lender will instruct their own valuer, project monitoring surveyor and solicitor. It is important to note that whilst you may take a view on some of the legal issues that your solicitor has advised during the due diligence process a bank and their solicitor may not take the same approach. For this reason it is important to ensure that all funding is arranged before you commit to your purchase by exchanging contracts.
It is also worth establishing early the type of security your lender will require. They will as standard require a charge over the property and a debenture over the assets of the company (this may be problematic if the company has already entered into a debenture with another lender). The lender may also require some form of personal guarantee from the directors (or any third party).
20. Sale of the dwellings
Once the dwellings have been built you will of course wish to sell them as soon as possible. Prior to any buyer making a reservation you and your solicitor will need to prepare the form of contract, transfer and document bundle. This will include any management company details, service charge budgets, legal conveyance plans showing the dwellings boundaries and details of the new home warrant provider.