Whether you are a seasoned property developer or just starting out, we understand that maximising your return on investment is a key driver. One of the first steps in your project is identifying and acquiring the site to develop. Unfortunately for property developers, particularly those with limited resources, the cost of overpaying for a site can seriously impact your project’s profitability, while misjudging value may result in missed opportunities or disputes with stakeholders.
In this article, our skilled commercial property solicitors explore why site valuation errors occur, the risks involved, and how to safeguard and maximise your investment. From understanding the lack of transparency in the valuation process together with the legal and financial risks involved, to knowing when to seek expert legal advice, this guide will help you make smarter decisions in property acquisition.
Contents:
- Key questions
- Common mistakes developers make when valuing sites
- What are the legal and financial risks of misjudging site value?
- The role of commercial property lawyers in ensuring accurate site valuation – how we can help
- What can you do to avoid mistakes?
- How to negotiate a good deal and get the land you want
Key questions
- What are the most common mistakes developers make when valuing sites? Are there any examples we can use to give context (without naming anyone)?
- What are the legal and financial risks of misjudging site value?
- What role do commercial property lawyers play in ensuring accurate site valuation?
- What steps can developers take to avoid overpaying or misjudging site value? Don’t give everything away here – we want them to instruct us, but help them to understand the risk vs benefit of instructing lawyers
Common mistakes developers make when valuing sites
While you may feel pressured to grab what seems at first glance, a great deal, before it goes to someone else, it is crucial that you do some groundwork before rushing ahead. Although not an exhaustive list, here are some common mistakes that property developers often overlook when site searching that can cause problems further down the line:
Underestimating planning restrictions
Overlook or underestimate the impact of local planning policies and restrictions at your peril. Not having a full understanding of the planning picture of the site can be problematic further down the line. For instance, you may purchase a site with planning permission to develop into residential units, only to later find that planning conditions restrict building heights or density. This could result in the need for costly redesigns, or at worst render a project unviable. This is where the skills and experience of a commercial property solicitor are indispensable. We can thoroughly review the planning landscape of the site, and clarify whether it meets your objectives.
Overreliance on automated valuations
It may be tempting to go in at the asking price to secure the land from a real estate agent or rely on desktop valuations. These provide quick estimates based on historical data without considering the specifics. While convenient and cost-effective, sometimes delving deeper into automated valuations or investigating the offer price can uncover inaccuracies. There are several factors to take into account when valuing property, including size, location, sales comparisons, planning restrictions, local amenities, market dynamics, and potential for re-sale or lettings. Unless automated valuations or the price proposed by the vendor account for all of these, you may not be getting the full picture. There is, after all, no substitute for physical inspection of the site, armed with a certified valuer and feasibility studies. While this inevitably involves more time and costs, you are more likely to capture all the site-specific factors to make an informed decision that pays off in the long run.
Neglecting environmental assessments
Developers can fail to conduct thorough environmental assessments before purchasing a site. For instance, you might acquire a brownfield site without appreciating the extent and impact of contamination. The remediation costs can be substantial and may turn a profitable project into a financial burden. While we are commercial property lawyers and not environmental specialists, we can help you identify potential legal risks and guide you on engaging the appropriate experts to address environmental concerns effectively.
Not considering title or site-restrictions
Although it might seem unlucky, sadly many developers find that their plans are restricted by third-party rights, wayleaves, or restrictions on the title. For example, a first-time property developer may purchase an old residential building with a view to converting it into commercial premises, only to find a restriction on the title that it is not to be used for business purposes.
Another issue that developers come across is purchasing a site only to find out they need to negotiate new rights over adjacent land for access to the nearest public highway. Not only can this significantly impact your ability to commence the works, but adjacent owners might demand high fees for granting rights across their land. This all impacts the financials and timelines of your project. Physical inspection of the land you intend to acquire can help unearth some of these difficulties. For complete peace of mind, engaging an experienced commercial property solicitor at an early stage can help you identify the potential risks and restrictions involved, including renegotiating the deal if necessary.
Failing to take into account additional costs
Even if the price you opt to purchase a site may seem reasonable, it is important to factor in the other associated acquisition costs into your budgets. As well as any professional fees such as legal, agency or valuer/assessor fees, there are finance costs if you are taking out a loan, as well as stamp duty to pay. These expenses will all eat into your project profits, so it is important to ensure that the price you pay for the land takes these into account.
What are the legal and financial risks of misjudging site value?
Legal Risks
Miscalculating site value can lead to significant legal implications. If you purchase a site based on an inflated valuation and later discover that it cannot be developed as intended due to planning laws or title restrictions, you might find yourself facing legal disputes with the seller or other stakeholders who have invested in the success of the project.
If planning permissions are not properly obtained or works carried out in breach of restrictions or environmental laws, you may incur penalties, face legal claims, or be compelled to dismantle unauthorised structures.
Financial risks
From a financial perspective, misjudging site value can lead to overextension of budgets and negatively impact return on investment. Factoring in additional costs or re-negotiating the deal at early stages based on site-specific investigations that feed into feasibility studies can be a game changer. Sometimes, you have to walk away from a project if there are serious concerns about the accuracy of its value and challenges you will likely face along the way. For example, the costs and time associated with cleaning up contaminated land may squeeze profit margins to such an extent that the project is no longer viable. Similarly, redesigning the development in such a way as to account for onerous planning obligations/conditions may significantly and negatively impact what you expect to receive in return at the outset. Even if you can address some of the issues, the additional time and delays can lead to cost overruns and cash-flow issues.
The role of commercial property lawyers in ensuring accurate site valuation – how we can help
Commercial property lawyers play a crucial role in helping developers identify and address the risks associated with overpaying or misjudging site value. By onboarding the expert help and guidance of a trusted legal advisory team, you can benefit from our experience in:
Conducting due diligence
Commercial property lawyers are instrumental in performing thorough due diligence on potential sites. This includes reviewing title deeds, understanding any encumbrances, and ensuring that there are no disputes related to ownership that could complicate the acquisition process. We investigate planning permissions and potential legal restrictions, providing developers with a clear picture of what they can and cannot do with the site which can influence the price you are willing to pay. We can also advise you on the terms of any agreements (whether proposed or existing) that affect the land – for example, overages reserved by sellers and how this will affect the transaction/profitability.
Other areas we can assist with include project finance, which involves reviewing the terms of any loan offered to you by lenders to protect your interests. The costs of finance and any risks and liabilities associated can all influence your budget and financial outcomes from the project.
Mitigating risks and negotiating terms
By identifying potential risks early in the acquisition process, we can help developers negotiate better terms in purchase agreements. Sometimes the results of due diligence searches and investigations may not be available right at the outset before you commit to a price. That said, the sooner we get started the quicker we can uncover any issues that can warrant renegotiation in price and enable the deal to continue. We can also advise you on structuring the deal in a way that protects you, for example negotiating conditional contracts, option agreements and promotion agreements, to include contingencies based on planning outcomes.
What can you do to avoid mistakes?
- Engage professionals early: Developers should prioritise hiring experienced commercial property lawyers and professional valuers at the beginning of the site acquisition process. This not only provides access to expert advice but also helps developers understand the complexities involved in property transactions, ensuring they are better equipped to make informed decisions.
- Conduct comprehensive due diligence: Developers should commit to comprehensive due diligence, which includes legal, environmental, and market assessments. This may involve engaging surveyors for physical inspections, environmental consultants for contamination assessments, and commercial property lawyers to review broader and local plans to understand the legal landscape and future developments that may impact site values.
- Understand the full financial picture: Developers should not only focus on purchase price but also consider all associated costs, including legal fees, planning application fees, and potential remediation costs. By preparing a comprehensive financial model that factors in these elements, with the help, insights, and input of experienced professionals - you can help avoid the pitfalls of overpaying due to a lack of understanding of the total investment required.
How to negotiate a good deal and get the land you want
While every deal is different, there are some common strategies you can employ to better your chances of securing the land you want on commercially realistic terms, including:
- Research and preparation: From market analysis to understanding the local planning landscape, knowing the current market conditions can help you leverage negotiating power. This is particularly in the case of high supply and low demand, slower market periods, or even government drives and initiatives to encourage development.
- Building Relationships: Establishing a rapport with stakeholders including local planning authorities, real estate professionals and even the seller can go a long way. Building trust and credibility amongst these key players in the property acquisition and development market can lead to cooperation and facilitation in the negotiation process. Understand the seller’s motivations to inform negotiations – are they looking for a quick sale or do they have any specific timelines or expectations?
- Determine Negotiation Strategies: Some developers opt to start with a lower initial offer than a maximum willingness to pay to allow room for negotiation. It might be helpful to provide a rationale for any offers based on your research and preparation. At the same time, it is important to be aware that negotiations can often involve compromises. Identify your priorities, including your non-negotiables and areas where you can be flexible. You might even want to consider exploring creative solutions with the help of a skilled lawyer, such as making your offer contingent on suitable planning permission, satisfactory surveys and assessments, or even negotiating phased payments.
There can be serious unforeseen legal and financial liabilities tied to overpaying for a site or misjudging land value. Fortunately, commercial property solicitors like Harper James have a wealth of experience to help you navigate these complexities. With our expert support and guidance, we can help you avoid financial losses and maximise return on investment. Ultimately, this can also enhance your professional reputation through successful project execution.
If you are looking to acquire a site for development or have any questions about how we can help you, get in touch with our skilled and friendly commercial property experts today.
