Plot due diligence
Plots are scarce and hard to find so there can often be a tendency through sheer frustration to end up paying too much which then inevitably puts pressure on your subsequent, and more exciting, building stages. To reduce financial exposure, sensible purchasers should consider an independent survey or plot assessment by a professional third party, just like any other property acquisition. There is a lot that can be gleaned from a detailed inspection including boundary treatments, tree and/or plant growth, spongy or exposed soils, access issues, overhead cables, neighbour activities, contour, orientation, probable service positions and so much more.
An existing house ripe for demolition can often be a distraction as it might complicate your ultimate vision until cleared but, conversely, its condition could reveal useful information about ground stability. Existing foundations certainly need to be factored in as their removal will add cost to the demolition process as well as possible ground remediation before new foundations are installed. If there’s time you are always best to have a formal soil test carried out to determine indicative foundation design and any potential signs of ground contamination and a willing vendor should always grant their consent for this. The above should be balanced with a thorough desk top analysis of environmental matters (flood, radon, bedrock), mining activities and, of course, the site’s planning history.
Planning permission
Planning is central to any valuation and all of the wider stakeholders involved, principally your lender, their surveyors and then your legal advisers, will want this to be transparent and absolute. Expired planning carries no weight and a consent with less than 6 months to run is considered weak. If you’re replacing a dwelling then, firstly, it must be of current habitable status to count and, secondly, its replacement with anything bigger cannot be guaranteed without risk.
When planning is approved it also comes with conditions; sometimes there are only two or three which would be likely to refer to a three year life-span for the consent, the drawing numbers (and revisions) for the agreed design and maybe an obligation to agree the external building material’s palette. However, some approvals can have up to 20 conditions and these all need to be read and understood as they will ultimately need to be followed or formally discharged.
Where planning is vague and/or not properly tested, you might want to consider agreeing a purchase subject to a fresh planning approval carried out at your expense. This would give the vendor certainty of a sale at a given price when planning was ultimately approved and eliminate the risks for you of not securing the consent that you want before final commitment to the purchase.
Lender profiles
Lending on land is not straight forward as the value arising from planning consent is only temporary until all conditions have been discharged and a material start has been made. Agricultural land might have a notional value of £5,000 to £10,000 per acre whereas a quarter acre plot (with planning) might have a value of £100,000 to £300,000 dependent on your area. A lender might be prepared to give you 60 to 80% of the plot’s value as a loan but they’ll either want this repaid before the consent expires (usually with a 12 month safety margin) or a guarantee that the project will start by a certain date. Some might seek a charge on another sizeable (and sufficient) asset or possibly a personal guarantee or a third party guarantor.
Self-build mortgage lenders are much more comfortable with land acquisition and some will lend on land and others specifically preclude this. Specialist brokers here are vital as they will help you navigate the market and direct you to the most appropriate product and, crucially, help you to prepare properly.
Self-build mortgage requirements
However, a self-build mortgage application must include detailed information about the subsequent build which will demonstrate to the lender that you have thought through the building costs. So, armed with your identified plot, its planning approval and the drawings that go with that, you will also need to provide:
- Your build methodology; i.e. assumptions about whether you will be managing the build process yourself or seeking one contractor to manage this on your behalf.
- What materials do you intend to use; i.e. are you considering traditional bricks and blocks, timber frame or some alternative technologies like SIPS (structurally insulated panels) of ICF (insulated concrete formwork).
- Detailed costing bearing in mind the above two assumptions.
- Cashflow models to indicate what cash will be required and when.
- Answers to any specific statutory requirements which might arise from the planning conditions and wider property search.
- Demonstration of affordability; here you’ll need to be clear about income, lifestyle expenditure, whether you intend to continue servicing your existing mortgage alongside the new self-build mortgage or, if you have already sold-up, that you can afford to service the new rental payments instead.
Those lenders who lend on land will expect this information to accompany your application before extending an offer, however, once you have that offer, you can proceed to completion on your plot. Their contribution to the plot cost is unlikely to be higher than 80% of the agreed purchase price.
Agreeing the price
Some land vendors will be in and rush and happy to sell their plot to the first cash-rich property developer that they come across. But, some will hold out for best price and others are keen to work with self-builders, especially when the plot is next door to their own house so that they have some idea of who their new neighbours are going to be.
Land valuation is usually arrived at by residual valuation which means subtracting indicative design and construction costs from an indicative final market value. This would be the very maximum that anyone should pay and speculative developers will want to secure land at much lower costs than this as they, of course, will be seeking a healthy profit from the project.
There will be a guide price but, as demonstrated above, you need to be thorough with your due diligence to be sure about your maximum bid price. Your ideal scenario will be to negotiate an agreeable price with a vendor after taking anywhere between two and 20 weeks dependent on whether or not you need a mortgage offer. If you need a new consent, the process may even take longer and some vendors may be looking for a non-refundable holding fee (otherwise known as an option) to allow you time and space to carry out this work.
If there is a lot of competitive interest, then those of you who are reliant on mortgages may not be able to compete quickly enough without finding the cash from some other source. In highly competitive situations, the selling agent may shift the process to a sealed bid exercise where the vendor then has the opportunity to consider best price and best purchaser profile after a given date.
The conveyance process
Your lawyer will treat your plot purchase just like any other property transaction. They’re likely to follow the guidelines of the Conveyancing Protocol especially if you are reliant on a mortgage as they will usually act for both you and your lender. As a matter of course your lawyer will carry out searches on your behalf which usually include, drainage and services and an environmental assessment. These are pretty standard documents and are based upon providers searching databases/maps from utility companies like, water, drainage, power and gas as well as the Environment Agency, British Geological Survey, Radon UK etc. They are useful but not absolute and full of caveats but nonetheless a good place to start. Sometimes, physical inspections on site are required (at cost) to obtain physical evidence of where services may be located. These need to be studied as your lawyer will expect you to rely on the information contained within these reports and not their interpretation of them.
And then there is the thorny issue of title. Most land, but not all, is registered with the land registry and sensible vendors who secure planning permission in their gardens will have registered the land that they want to sell under a sperate title. But title plans and the deed narrative are often difficult to interpret. On the title plan, the theory is that the red line around the site indicates your boundary positions and the plot dimensions and the submitted plan will usually follow current guidelines which call for a scale of 1:2500 or 1;1250 for the location plan together with a site plan of 1:500. Older deposits may simply be at a 1;2500 scale. The narrative is designed to tell the story of who sold what to who and when and what who may be the beneficiary of any legal covenants. Teasing these out and understanding them properly takes experience and your lawyer will advise you of anything which appears to be a problem. Sometimes insurance can be used for old covenants where the current beneficiaries are not traceable.
Contracts will then be exchanged and completed when both sides are ready to do so just like any other property and your lawyer will handle all aspects of this transaction for you.
Things to do immediately after purchase
As soon as you have acquired your plot, or possibly a house which you intend to demolish, don’t forget to make the site secure with gates and fencing where appropriate. Any main services should be disconnected to prevent flood, fire or explosion and to save unnecessary standing charges. The site needs to be insured just like any other property but, crucially, with public liability as a minimum so that you are protected against any claims from third parties who might injure themselves on your land regardless of whether they should have been there or not! And don’t forget to make regular inspections to ensure that an army of squatters have not set up home.
Typical issues to resolve
- Title. Your lawyer may identify discrepancies between the title plan and the plot marketing materials. It happens and sometimes the two are not properly correlated and planning may have been secured too close to a boundary or where land appears to be under another title. Some lawyers will ask you to get this checked or to engage a surveyor to do this for you.
- Legal covenants. You may find a covenant that restricts development on site in terms of footprint, design, height or simply without the beneficiary’s consent. This can be disastrous if the beneficiary cannot be found or, worse, will not consent. Take covenants seriously and use insurance where this is the last option.
- Access. You have to be sure that your access is free and unencumbered and, importantly, big enough to take a fire engine otherwise you will not meet your fire safety obligations.
- Ransom strips. These are usually small strips of land that cannot be crossed without the owner’s consent. Where they prohibit development, their value could be very significant; i.e. up to half the value of the site.
- Drainage. This might seem an easy one to resolve but you plot might be landlocked, on an incline and with heavy clay soils where there is no permeability. If you can’t dispose of rainwater off new hard surfaces like roofs and drives, then you can’t build.
- Other services. Unless you are seriously rural, you can usually get the minimum main services to your site. But at what cost? These costs, if they are excessive, should come off the land value.
- Environmental issues. Take these seriously as bats, badgers and newts (amongst others) are protected species as are specimen trees with preservation orders. Contamination on the land can also prevent building without full remediation of the land which can involve huge costs.
- Tax; stamp duty and CIL. Stamp duty will be paid on the land purchase price only based upon the current published property scales and your lawyer will do this for you at the time of the conveyance. CIL (community infrastructure levy) does not apply to self-builders but only if you complete the right forms at the right time to demonstrate your exemption.
Written and published in December 2019
