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How accurate is the rule of thirds for development for builders?


Moonshine

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As per the title, i have heard the rule of thirds bounded about for development, based on the selling value, a third is land cost, a third is development cost, and the final third is profit (i presume gross).

 

How accurate is this for builders? as i would have thought that the land and development cost would be more like 80% of the final sale price.

 

What do you think typical plot value is as a percentage of selling price?

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It's a bit like asking how long is a piece of string, but I suspect the days of a one third profit are, in all but a very few cases, long gone and 20% is much more realistic.

 

I know a small developer who built a pair of 3-bed semis and a 4-bed detached, sold them collectively for £1.23 million and made a gross profit of little over £200k.

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As above.  I was talking about this with a small developer around 6 or 7 years ago, and he reckoned that the profit element had decreased to between 10 and 15%.  Land costs are now higher in many areas and build costs have risen, partly due to increased material cost, partly due to skilled labour shortages in some areas increasing wage costs.

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When evaluating viability for the purposes of calculating Section 106 contributions when there is a dispute, I believe the allowed profit element in the model is 15%.

 

I think that industry bodies regretted not pushing for 20% years ago when it was agreed.

 

And no ... the rule of thirds is IMO a dead duck. you can create a new rule, but it varies by area. Also, if you are coming into a S106 regime, that can swallow a fifth or more of the whole development value.

 

Ferdinand

Edited by Ferdinand
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It's a cyclical industry. Land values are high atm. That's why the most successful builders have land banks and options on land 

 

I reckon in the Midlands plots are regularly going up for up to 50% of final value. Scandalous 

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2 minutes ago, Oz07 said:

I reckon in the Midlands plots are regularly going up for up to 50% of final value. Scandalous 

 

 

Ouch, i wonder what the big builder build cost / m2 is? The sale price cost / m2 for big builder detached houses in my area is £3 - 3.5k / m2.

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1 hour ago, Moonshine said:

@NSSthat was my gut sort of feel, do you know what that small developer paid for the land and build?

 

 @epsilonGreedy i am thinking either a self builder or local developer.

No, but I believe he got the land for a very reasonable cost compared to similar plots in the area.

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Just to show how things are so skewed by land prices.  I paid £50K for my plot. I wish I could have built a house for £50K

 

I also agree that there is almost no profit in building at the present time, in spite of cries of houses being over priced.

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I'm pretty sure this was discussed on a long running thread a while ago.

 

 Generally the definition of profit would vary between a self builder or developer

 

As an example a developer will probably factor into their profit calculation financing costs as part of the overall project, however a self builder would probably not see their interest on self build mortgage as a part of the overall project cost. 

 

Another would be that a self build would probably not add an value to the overall project cost, to factor in that they have accepted a reduction in the standard living whilst living in a caravan or moved in with family members during the self build.

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5 minutes ago, Thedreamer said:

I'm pretty sure this was discussed on a long running thread a while ago.

 

 Generally the definition of profit would vary between a self builder or developer

 

As an example a developer will probably factor into their profit calculation financing costs as part of the overall project, however a self builder would probably not see their interest on self build mortgage as a part of the overall project cost. 

 

Another would be that a self build would probably not add an value to the overall project cost, to factor in that they have accepted a reduction in the standard living whilst living in a caravan or moved in with family members during the self build.

 

 

I think you're spot on, and right that it has come up here before.

 

I doubt many self-builders make a "profit", probably only those who do a great deal of the work themselves, and perhaps then then only look at it as a way to get a home they couldn't otherwise afford.  I know our costs. excluding the value of my time, came to only a bit less than the market value of the completed house.  In our case it's not helped by the fact that everyone in the local area refers to it as "the ecohouse", something that the valuer pointed out reduces its market value by around 5%.

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1 hour ago, Moonshine said:

 

 

Ouch, i wonder what the big builder build cost / m2 is? The sale price cost / m2 for big builder detached houses in my area is £3 - 3.5k / m2.

 

Here is a dev at Burton on Trent - OK but not Worcester or Lichfield.

 

https://cameronhomes.co.uk/developments/lawnswood?gclid=CjwKCAjw1KLkBRBZEiwARzyE72yLYNVKEoBsUzY4y6YBH_7hYyNj-1bIwWLvXNJLBDbDJfU7S2ak4hoCEz4QAvD_BwE

 

1st 2 houses - 5 bed £505k for 190 sqm = £2600 per sqm.

and a 4 bed £340k for 125 sqm = £2720 per sqm.

 

F

 

Edited by Ferdinand
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9 minutes ago, Ferdinand said:

1st 2 houses - 5 bed £505k for 190 sqm = £2600 per sqm.

and a 4 bed £340k for 125 sqm = £2720 per sqm

 

Cheers, but those are the sale price cost / m2, i was wondering what the build cost / m2 is for a big builder / local builder.

Edited by Moonshine
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Quote
  10 minutes ago, Ferdinand said:

1st 2 houses - 5 bed £505k for 190 sqm = £2600 per sqm.

and a 4 bed £340k for 125 sqm = £2720 per sqm

 

Cheers, but those are the sale price cost / m2, i was wondering what the build cost / m2 is for a big builder.

 

Reverse engineer the number on the approx. ratios for a developer, using a more convincing model than 33:33:33. This is for a small-medium housing estate. 

 

1 - Profit: 10-20%.

2 - Planning, Paperwork, Professionals, Fees: 10%

3 - Planning Gain Taxes: 10-15% 

4 - Groundworks and Infrastructure: 10-15%

5 - Land: 10-40%

6 - Build Cost: 25-35%

 

Obvs adds up to 100%, and all those numbers can move. So the naked build cost is a fraction of the above, depending on what you include. Happy to see others' estimates.

 

33:33:33 ignores things such as 2, 3, 4 - eg just putting in a sewage pumping station will add 250-500k for a medium sized estate.

 

Ferdinand

Edited by Ferdinand
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friend of mine bought a plot in 2012. Had to change planning but recently sold all the units on the site. Paid slightly less than 10% GDV for the site. No that isn't a typo either. Banks were desperate for cash even then. 

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13 minutes ago, Oz07 said:

friend of mine bought a plot in 2012. Had to change planning but recently sold all the units on the site. Paid slightly less than 10% GDV for the site. No that isn't a typo either. Banks were desperate for cash even then. 

 

Fits my model ?

 

Though there's a slider where Planning Gain and other known quantified value-reducers come 1:1 off the land value. If the value-reducer is not quantified, a pro-buyer will make a range assessment and try for as high a value as can be justified.

 

eg What is it going to cost to a) move that electrical wire that will use b) 20% of the land as a safety buffer if it stays there? The seller stands to gain (b-a) money if they can prove how to do it for £X . 

 

F

Edited by Ferdinand
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This would be typical for one of our developments:

 

Profit 17%

 

Acquisition cost includes SDLT, survey, valuations and legal fees. 32.5%

 

Construction costs (to include S106 / CIL). 40%

 

Professional fees. 4%

 

Disposal fees. 1.5%

 

Finance costs. 5%

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49 minutes ago, Mr Punter said:

This would be typical for one of our developments:

 

Thanks for the insight, very enlightening. To be pedantic 4.5% has slipped away somewhere.

 

Based on a 120m2 £400k house, the construction cost comes out about £1,220/monce CIL is taken out.

 

Also i am surprised at how low the finance percentage is.

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