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a family member has just got planning permission in their garden to build a single family home. They don’t have the skills or money to build.
There has been 3 other houses built on a piece of land next door and the developer has approached them to build the house to do a 50/50 split of the profit.
A caveat to this is they would consider moving into the house based on the plans so would want first refusal on the property.
Is this a viable strategy? Is there anything that should be considered?
Clearly a formal legal agreement would be drawn up to outline both parties responsibilities. Open to advice on the structure and potential pitfalls.
You are correct that you would need a legal agreement, written by a solicitor experienced in these matters.
Your relative would need to receive 100% of the plot value, as would be obtained if they sold it away to a third party in the market.
- Deduct the plot value from the sale price and your relative receives this amount.
- The developer deducts the build costs from the sales price and is reimbursed this if they are the ones funding it.
The remaining 'profit' could be split 50:50 (if this is what is agreed).
The developer has to share the profit unlike if they bought the plot themselves but they gain because their capital invested is much less. The return on capital could be be much higher for them as a result.
I have no direct experience of these agreements but you do need professional advice from a Chartered Surveyor specialising in development and agreeing heads of terms for these arrangements which are then converted to a legal contract by a solicitor. You/they would need to value and agree the Market Value of the plot as a starting point.
Rural Practice Chartered Surveyor. Experienced in estate management, residential investments, planning and development and rights for utility apparatus. All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.
I think this is a big risk. Without the knowledge, which you accept you do not have, how are you going to police the cost to determine the profit. For example the builder employs his son to switch on the lights at the site (which he does not bother to do) and is paid £50k. That's probably a legitimate cost (albeit inappropriate cost). So you will find no profit!
You would also need to secure the land value to yourself. as otherwise 50:50 seems generous to him if your costs are nil.
Chartered Accountant, Tax Advisor and Mortgage broker
(and BTL portfolio owner)
Apologies I think the word profit is misleading.
Their idea is to split the proceeds of the sale 50/50.
I still think you have loads of issues. So if he builds it badly and the value is low then he gets the property cheaply ... mmm?
You have an asset worth X when its built out its worth Y. The difference between X & Y is build cost (inc. builders profit) and development profit (DP). Why are you offering to share DP? He won't share builders profit.
Are you sure your value is the same as his build cost? Too many risks - walk and walk immediately. Tell him he can put in an offer to you and save you the hassle but that should be X plus DP.
To do this properly would mean that you need to spend a fortune on fees to document and manage this. If you tell him you are getting an architect to project manage to be funded from the project it he will walk away.
KEEP IT SIMPLE. you put in the land and the builder puts in the build to an agreed spec.
My first post so not too sure how to begin here.
In response to Joe Bloggs, "how would the agreed spec be managed?"
I have had a similar approach but for a development site with planning for 4 bed detached properties.
Any help appreciated.