Land prices

buy land to build onYou may have heard stories about how buying a plot of land and then building a house on it will make you big profits, or save you £1000’s over buying a ready built house. In theory this could be the case, but there are a lot of variables that can really eat into your potential profits. The first thing you need to understand is land prices and how the value of the price of land is calculated.

Land prices – how much does a plot of land cost?

If you are buying a plot of land through and estate agent or a surveyor the way these people calculate the sale price of the land is to estimate how much a finished new build house in this location would cost, and then subtract the costs involved in building the house. They then take another % off this price so that any house builder can make some profit. For example, a house that would sell for £250,000 might cost around £100,000 to build (these are just approximate numbers). So £250,000 minus £100,000 leaves £150,000. The estate agent or surveyor will take off a further 25% or so, and in this particular example they’d list the land at about £110,000. This, from the outside looks a decent deal, a nice £40,000 profit that is up for grabs. However…

Hidden costs – more than just land and raw material costs

If the land costs and the build costs were the only costs involved when building a house yourself, then all is good. Unfortunately there are other costs to take into account. Chances are you have taken out some kind of finance to get the funds together for the build (particularly if it is a large build). Finance costs are notorious for chipping away at your profit margins. If interest rates increase and you can’t shift the house quickly after the build is complete your monthly repayment costs add up alarmingly fast. Increasing interest rates are a double whammy for those building their own properties. Not only are their increase repayments, but if you are looking to sell the property quickly, those who would be interesting in buying may not be able to get their finances together at this particular time. Worse still, the actual prices of property may decrease, which is another added worry.

All is not doom and gloom, if it were nobody would build houses. On the flip side house prices can rise during your build, adding extra percentages to your already healthy gross profits. Also, as a rough rule of thumb, about half of the costs during a self-build are on labour, so doing a lot more of this yourself and getting rid of some labourers will save you money. It’s not an easy job though, and you will be essentially working for a tiny hourly wage compared to a normal office job if you add up the hours spent working against the final profits you (may) make.

Maybe you should just buy some land – there may be more profit in that !

It is true, it may be far easier to make a good profit if you buy some land and then secure planning permission for a property to be built on it. Once planning permission is agreed, you can ask many times more for the land that what is was once worth, even up to 100 times in some cases.
In the UK, you would expect land (standard agricultural land) to be worth something like £2000 to £4000 per acre. If you manage to secure planning permission (which by the way is not necessarily that easy – this will be covered more later), you can see this price rising into the hundreds of thousands per acre. This however is currently beyond the scope of this website, so you will have to source information elsewhere if you are interested in buying land, obtaining planning permission, then selling it on for significant profits.

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