The common sense guide to self builds

Building a property of your own has a number of advantages and pitfalls. The advantages are numerous and include the property being built to your specification, the instant equity that should ensure once the property is finished, the dream home factor or the ability to sell the property for a profit and become a property developer.
Building a property of your own has a number of advantages and pitfalls. The advantages are numerous and include the property being built to your specification, the instant equity that should ensure once the property is finished, the dream home factor or the ability to sell the property for a profit and become a property developer.

The pitfalls are as numerous including managing a unfamiliar project with no experience of the building trade, under estimating costs, inclement weather delaying the progess, running out of money, planning problems and of course the dreaded problem with the builder.

If you have decided that you are not put off by the problems then self building is a fantastic and rewarding opportunity of a life time. You now need to do your research with regard to the plot, planning granted, cost to build and end values and also finance. Let us address these in order.

The Plot

Consider what you are looking for and what your budget is for the land; you should be looking to pay no more than a maximum of 50% of the end value of the property once it is built. Don’t think that acres of land add significant value; the only land that adds value is land that has, or will gain planning permission in the future.

If the site comes with 20 acres of land then it's only the acreage with planning that has significant value, land with no value has a maximum value of £10,000 after the first acre as a general rule and normally as little as £2,000 - £5,000 typically.

Planning permission

This is the most important element of how you will be able to finance the project. The plot will either have no planning permission, outline planning permission or full planning permission.

No planning permission means that it cannot be mortgaged on a residential basis, although there may be a commercial mortgage available. Outline planning permission is a plan to build a property has been granted in principle pending a full application which will be accepted as long as the outline plan is the same.

Full planning is a specific plan that has been agreed to build a specific building. Planning can always be applied for or altered, this will take time to reach a decision from the local council, typically eight weeks, and anyone can apply for planning permission as you do not need to be the owner of the plot in question.

Cost to build and end values

This needs to considered carefully and done by experts rather than the 'back of a cigarette packet' approach. Get an architect and builders involved, get quotes and contracts drawn up with these people and include reasonable penalty clauses. Most professional builders who are confident in their quotes should agree to this clause (They may ask for a clause protecting them in the event of drawings being wrong, changes and delays out of their control i.e. weather and problems with the ground).

Once you have your professional quotes make sure that you have three to compare and contrast and get references as the cheapest builder isn’t always the best. Allow a contingency fund of a minimum of 10% as there will be delays and problems. Decide what you want from the project - is it instant equity, as should happen if you build the property correctly, or your dream home at a top specification?

A typical self build property should, once you have financed the land and build, leave you with approximately 30% equity on the property if not more. If you are building your dream home then the equity may be less important but do consider resale in future as extreme features may make the sale of the property harder in the future.

Finance

This needs to be addressed and considered before you agree to any project. If you are looking at a commercial mortgage then typically a maximum of 50% of the land can be financed (and 75% of the build at present) and this will be paid in stages, in arrears. This means that you will need to finance the stage build, have this signed off by either the local authority or architects and then have the plot surveyed and the lender will typically send the funds in seven days from this point.

If you go down the traditional route the finance breaks down in to two types of lenders; those that will lend against the land and the build cost and those that will only lend on the build costs. You will find that the traditional high street big names are not the best at self build mortgage as they are a niche product that a number of smaller building societies specialise in with an individual approach to underwriting projects, this is where an independent mortgage broker with knowledge of this market will save you thousands.

Typically at this time that you will find lenders will give up to 75% of the land value if they will lend against the land. The lending against the build costs will again be limited to a maximum of 75% of the cost. These figures will also be limited against the end value of the property, again to no more than 75% of the end value of the property. All of these figures will be decided by the mortgage company's surveyor, so just because you have paid more at auction to secure the plot the true value may not be reflected once surveyed by a professional. Don’t agree to any valuations until there has been a survey and planning has been looked at.

The subject of what to do with people in properties who want to stay in the current property until the new one is built is not a universal answer. Some lenders will take off the mortgage payment annualised from the applicant’s income. Other lenders will take the whole value of the outstanding mortgage before applying the income multiple leaving the applicant's income to not be sufficient. The other option is selling the property and moving into rented accommodation or living on site.