Why the purchase price is only one part of the true cost of a property or development
opportunity
A property can appear to be a good deal because the purchase price looks attractive.
The location may be strong. The planning prospects may appear promising. The proposed development may show a healthy profit. On paper, the numbers can seem compelling.
However, the purchase price is only one part of the cost of acquiring and developing property.

Behind almost every development opportunity sits a series of additional costs. Some are easy to identify at the outset. Others only become apparent once investigations, surveys, planning or
construction begin. This is where an apparently attractive acquisition can change significantly.

An investor may believe they are buying a £500,000 property with a £150,000 development profit. Once professional fees, finance, infrastructure, abnormal construction costs, delays and other expenses are properly accounted for, that margin can reduce considerably.

The important question is therefore not simply:

“What is the purchase price?”

It is:

“What will this opportunity really cost from acquisition through to exit?”

That distinction is fundamental when assessing property and land opportunities.

1. The purchase price is only the beginning

The agreed purchase price is usually the most visible figure in a property appraisal. It is also one of the easiest figures to understand. The problem arises when an appraisal effectively treats that figure as the starting point and then adds an estimated construction cost and projected sales value.
A more robust appraisal needs to consider the wider cost of the project.

Depending on the opportunity, this can include:

• Stamp Duty Land Tax
• Legal and acquisition costs
• Surveys and investigations
• Planning costs
• Architectural and professional fees
• Construction costs
• Infrastructure and utility connections
• Finance costs
• Insurance
• Security and site management
• Holding costs
• Marketing and sales costs
• Contingency
• The cost of delays

The significance of these costs varies from project to project.

That is why a development appraisal should be built around the specific property and proposed strategy, rather than relying on a standard percentage allowance.

2. Professional fees can become substantial

Property development often requires a wide range of professional input. Depending on the nature of the project, this could include architects, planning consultants, structural engineers, quantity
surveyors, highways consultants, ecological consultants, drainage specialists, arboricultural consultants, environmental consultants and legal advisers.

Individually, these costs may appear manageable. Collectively, they can become significant.

For example, a small residential development may initially appear straightforward. However, if the site requires ecological surveys, drainage investigations, highway advice, planning work, architectural
drawings and structural design, the professional costs can quickly move beyond the original allowance.

There is also an important distinction between known costs and potential costs.

A known planning consultant’s fee can be budgeted.

A requirement for an additional specialist report following discussions with the planning authority may not have been anticipated. This is why early assessment matters.

The objective is not to predict every cost with absolute certainty. It is to identify where uncertainty exists and determine how that uncertainty could affect the investment.

3. Planning costs do not end with planning permission

Planning is often treated as a milestone that unlocks value. However, obtaining planning permission does not necessarily mean that the development is ready to build. There may be planning conditions to discharge, technical information to provide and further specialist work required before construction can commence.

There can also be a significant difference between obtaining permission for a scheme and obtaining permission for a scheme that is commercially viable.

For example, a site may receive permission for ten houses.

That sounds positive.

However, if the permission requires expensive highway improvements, extensive drainage works or other infrastructure obligations, the value of the permission may be considerably lower than the
headline number of ten units suggests.

The question should therefore be:

“What does the planning permission actually allow, and what will be required to implement it?”

4. Infrastructure and utilities can create unexpected costs

Utilities are one of the areas that can be underestimated during an initial appraisal. A development needs more than attractive buildings and planning permission. It needs appropriate access to water, electricity, drainage and telecommunications, together with the infrastructure required to connect and service the development.

The location of existing services matters. A site that appears to have houses immediatelyadjacent to it may give the impression that services will be straightforward to connect. That assumption should not be relied upon without investigation.

Connection requirements, capacity issues, reinforcement works or the distance between the development and available infrastructure can all affect cost.
For larger schemes, infrastructure requirements can become a material part of the overall development budget.

5. Abnormal construction costs can change the appraisal

One of the most important questions when assessing development land is:

“What is beneath the ground?”

Ground conditions can have a significant effect on development costs.

Potential issues include:

• Contamination
• Made ground
• Unstable ground
• Poor bearing capacity
• Difficult excavation
• Groundwater
• Flooding
• The need for retaining structures
• Demolition and site clearance
• Difficult topography

Consider two apparently similar development sites. Both have planning permission for ten houses.

Both have an estimated end value of £3 million.

However, Site A requires relativelys traightforward foundations.

Site B requires significant ground remediationand specialist foundation solutions.

The two sites may look comparable when viewed through the planning permission and end value.

They may be very different investments once the development costs are understood.

This is one reason why the cheapest land is not necessarily the best land.

6. Finance is a cost of development, not an afterthought

Development finance can have a significant effect on the final viability of a project.

The cost will depend upon the structure of the financing, the amount borrowed, the duration of the project and the terms agreed with the lender.

Interest is only one consideration. There can also be arrangement fees, valuation costs, monitoring fees and other finance-related expenses.

Perhaps more importantly, time affects finance costs. If a project expected to take 18 months takes 24 months, the additional six months can materially affect the financial position.

This makes the development programme an important part of the financial appraisal.

A projected profit that looks attractive over18 months may look considerably less attractive if the project takes two years or more.

7. Time itself has a cost

Time is often one of the least visible costs in property development. A delay in obtaining planning permission can postpone construction. A delay in discharging conditions can postpone the start date.
A construction delay can postpone sales. A slower sales programme can extend the period for which finance and other costs are incurred.

For an investor, there is also the opportunity cost of capital. Capital committed to one project cannot simultaneously be deployed elsewhere. This does not mean every delay makes a development unviable. It means that time should form part of the risk assessment.

A strong appraisal should therefore consider not only:

“What happens if everything goes according to plan?”

but also:

“What happens if the project takes longer than expected?”

8. Contingency should reflect the risk

A development appraisal without an appropriate contingency can create a false sense of security.

Construction rarely follows a perfectly predictable path.

Unexpected costs can arise from ground conditions, design changes, contractor issues, material costs, planning requirements or site conditions. The appropriate contingency will depend upon the project.

A straightforward refurbishment may carry a different risk profile from a complex brownfield redevelopment. Applying an arbitrary contingency percentage without understanding the underlying risks can therefore be misleading. The purpose of contingency is not to make an appraisal look conservative. It is to acknowledge uncertainty.

9. The exit strategy matters as much as the development strategy

A development appraisal can become overly focused on what can be built. However, what can be built is only part of the investment proposition. The eventual buyer, tenant or investor also matters.

For example, an investor may identify an opportunity to create a number of high-value properties.

The development may be technically achievable. But if the local market does not have sufficient demand for those properties at the assumed selling prices, the appraisal may be overstated.

This is why end values need to be supported by evidence.

The relevant question is not:

“What is the highest price that could potentially be achieved?”

It is:

“What is a realistic value supported by the market?”

That distinction can have a significant effecton the investment decision.

10. A practical example

Consider a hypothetical site purchased for £500,000. The initial appraisal might look attractive:

Item Initial appraisal

Purchase price £500,000

Construction £700,000

Other costs £100,000

Total cost £1,300,000

Projected end value £1,600,000

Projected profit £300,000

At first glance, the opportunity appears attractive. However, further investigation identifies:

• Additional professional fees
• Higher finance costs
• Drainage requirements
• More expensive groundworks
• Additional planning work
• Increased construction costs
• A longer development programme
  

The revised position could look very different:

Item Revised appraisal

Purchase price £500,000

Construction £780,000

Professional and planning costs £100,000

Infrastructure and abnormal costs £90,000

Finance and holding costs £90,000

Contingency £70,000

Other costs £40,000

Total cost £1,670,000

Projected end value £1,600,000

The opportunity has moved from a projected £300,000 profit to a £70,000 shortfall.

The important point is not the precise figures.

It is the principle.

The investment did not necessarily become worse because the property changed. The understanding of the property changed. That is why proper appraisal needs to take place before an investor becomes too committed to an opportunity.

TheThird Perspective: look beyond the headline numbers

When assessing a property or development opportunity, it is easy to become focused on the purchase price or projected profit.

An independent assessment should step back and consider the entire proposition.

The seller naturally wants to achieve the best possible price.

The investor wants to acquire an opportunity that meets their objectives and provides an appropriate return for the risk.

The Third Perspective asks a different question: What does the evidence actually support?

That means challenging the assumptions behind the appraisal.

Is the end value realistic?

Are construction costs properly supported?

Have abnormal costs been considered?

Are professional fees sufficient?

Is the finance cost realistic?

What happens if the project takes six months longer?

What happens if the final value is lower than expected?

And perhaps most importantly: Does the investment still work when realistic costs and risks are included?

Sometimes the answer is yes.

Sometimes the price needs to change.

Sometimes the deal needs to be restructured.

And sometimes the correct decision is to walk away.

All three can represent good investment decisions.

Frequently Asked Questions

What are the hidden costs of property development?

Hidden costs can include professional fees, planning requirements, utility connections, infrastructure, abnormal ground conditions, finance, holding costs, contingency and the cost of delays. The
specific costs will depend upon the property and development strategy.

Why is the purchase price not the true cost of a property?

The purchase price represents the cost of acquiring the asset. It does not necessarily include the costs required to obtain planning, develop the property, finance the project, hold the asset and
ultimately sell or refinance it.

How can an investor identify unexpected development costs?

Early due diligence is important. Reviewing planning information, title, access, utilities, ground conditions, environmental constraints, construction requirements and the local market can
identify potential costs before an investor becomes too committed.

Should contingency be included in a property development appraisal?

Yes. Development involves uncertainty, and an appropriate contingency should normally be considered. The amount should reflect the specific risk profile of the project rather than simply applying an arbitrary percentage.

Can adevelopment with planning permission still be a bad investment?

Yes. Planning permission can create development potential, but it does not automatically make a site commercially viable. Construction costs, infrastructure requirements, abnormal costs,
finance, market values and the purchase price all need to be considered.

Conclusion

A good property development opportunity is not necessarily the property with the lowest purchase price or the highest projected profit. It is the opportunity where the relationship between cost, risk, value and return has been properly understood.

The headline figures can be attractive. The underlying numbers may tell a different story.

That is why experienced property investors look beyond the purchase price and ask what the entire project is likely to require.

Before committing capital, the important question is not simply:

“How much could this property be worth?”

It is:

“What will it really cost to get there, what could prevent the strategy from working, and does the investment still make sense when those risks are properly accounted for?”

Good due diligence does not remove risk. It makes the risk visible.

And once the true cost of an opportunity is understood, an investor is in a much stronger position to decide whether to proceed, renegotiate, restructure the deal or walk away.