Why can’t I get a deal to stack up? This is one of the most common questions we get from both those new to development and those that have been around a few years. Regardless of how an opportunity is sourced at some point value/price becomes an issue. Most of us are familiar with the main factors in a financial appraisal: End value - always subjective with sellers and motivated buyers inflating them to fit the deal. Some buyers will use todays values and maybe even allow for a drop. Total project costs - there are very few, if any, known fixed costs so these are often subjective with the sellers and motivated buyers generally lowering them to make the deal work. The more cautious buyers will allow for todays costs and add projected increases. Purchase price - regardless of the financial appraisal this comes down to negotiation. Timeframes and terms are key to negotiations and agreement. So a lot of moving parts and motivations, no wonder we see so many different values for the same opportunity. For those new to development costs are an unknown and some take advice from professionals and others seem to take numbers spoken about on courses and social media. When we talk to the developers who have completed a few deals over the last 10 years we find that some of them have cost data they use to appraise current opportunities. Of course, there are many factors that impact project costs so in order to get a better understanding they need to be broken down. We use: Acquistion Professional Developer contributions Build Sales/exit Finance When we are doing residual valuations, of course, we also include profit. Whilst it is generally excepted that asking prices/expected values are mostly too high, in order to understand what the value/purchase price is to ’you’ it’s vital to work with costs that relate to ‘your’ circumstances and are deliverable. Numbers that we see: Values between 91% and 123% of local sold. Build costs £132sq ft to £300sq ft plus. Professional fees - 6% to 26% of build costs Finance 6% to 18% pa Costs need to be agreed with development funders and sometimes it’s difficult to convince their QS’s that projected costs can be delivered. Recently we had a prefinance valuation where the QS ‘calculated’ abnormal build costs of more than £4m. Looking at the breakdown of these projections it was clear to us that the costs will be closer to £1.25-1.5m. Discussions with the QS concluded with their agreement that £1.5m is deliverable. If we didn’t query these numbers and get them changed development finance would’ve been almost impossible to access. This may seem to be an extreme example however whilst the numbers are big the %change isn’t unusual at all from some professionally produced costings. We sometimes share our residual valuations with the vendors and/or their agents and use projected values, and on occasion costs, to agree purchase price and overage payments and timelines. How do you sense check your numbers? With my Development Advice hat on both new and experienced developers make offers and purchases taking too many risks. We also see appraisals that show residual valuations lower than they could be which results in lost opportunities. A recent example where we used a cashflow model to reduce finance costs by 40% allowing the offer price to increase by almost £400k making it a lot more attractive to the vendors. In this case we were also able to suggest potential additional value to the landowners using overages. If you are struggling to make those desks stack up maybe it’s time to look at how you appraise.

Posted by Richard Little at 2025-04-21 15:04:09 UTC