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Buying land without an option

THE QUESTION

I have a deal on a plot of land for £30k and GDV will be £410-420k, build cost will be £150k, my profit will be about £240k.

I have paid the planning consultant to check the plans and he is confident that we will get planning.  The owner of the land won’t get a lawyer to sign an option agreement; he only wants to give us word of mouth.

I have told him we both need a solicitor to do an option agreement, that after we get planning approval, he will only charge us £30k for the land. We have invested almost £500 on the deal so far and we’re not sure what to do, do we walk away?

If we get planning but have no option agreement, he can change the price on us or back out without any paperwork.

THE ANSWER

Developers use a lock out option contract to tie the seller in for a period (usually 12 months, but can be longer) so they have time to apply for planning.  If they get it, they exercise the option and buy the property at the price in the contract.  If they don’t, they let the contract expire. This is standard practice and any developer will want the same restriction on the seller only being able to sell to them for a restricted period.

The key reason developers succeed in getting land owners to agree to a lock out option is they offer the owner more, sometimes significantly more, than the land is worth currently.

Now looking at your figures, the GDV is £410-420k, you estimate the build cost is £150k, leaving you with a profit of £240k after paying £30k for the land. £240k profit is 58% of GDV.  That is a brilliant deal for you, but a rubbish deal for the seller. It is hardly surprising he doesn’t want to sign a contract with you if he gets £30k while you get nigh on 10 x that.  If fact he would be crazy to agree to such a bum deal.

Developers expect to have to pay 30-40% of GDV for a site with planning.  So, with a GDV of £410k, that land with planning permission would be worth at least £120k.

If the owner had any sense, he would tell you to take a long hike with your miserly £30k offer, get planning approved himself and have developers queuing up to pay him £100k more than you are offering him.

If you want to get the owner to sign a lock out option agreement with you, make him an offer that benefits him as well as you.  Rather than your derisory £30k, give him a decent return and agree to pay him £100k+ if you achieve planning.  

It is not really surprising he won’t play ball with you, when all you have given him is a win/lose offer that is all in your favour.  Open your mind to a win/win scenario and you might find the owner more co-operative.

 

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