Selling house via estate agent vs selling property to developer, UK. Why price difference?

Question

Background: I am executor for my father's estate, and the major asset is his house. There is a minor difference of opinion amongst siblings whether to sell house via estate agent, or to a property developer. In case it helps frame the question, I am feeling risk averse here and want to sell "normally" via the estate agent. But I do feel I should take my sibling's opinions on the matter into account.

Looking into selling a house in UK, and I have estimates for two selling strategies. First, via an estate agent, we have a recommended offer of £300k. Second, via a property developer, we have a "maximum price" of £450k. Said property developer is claiming to take on all costs and risk (i.e. they apply for planning permission, perform land surveys etc) and that our "only risk is time", quoting a range from typical 3-4 months to 9 months or over, during which time we'd be locked into an exclusive contract to sell only to them.

My understanding of the developer's offer is that it is a fixed price option agreement on the land. The option would be exercised in full after the planning stage, if the developer decides to go ahead. We sell at that point and take no part in the building work, nor sales of the new buildings etc. There is no direct link between the value in the option and eventual value of the developed land.

In addition, the property developer has offered to purchase the house outright at £300k. So, it seems to me that they are claiming that the exclusive contract with the seller is worth up to £150k to them.

I am wondering what is driving this large price difference? I am most concerned about possible hidden extra costs to the seller beyond the contractual lock in. I would welcome understanding true value of services we are providing by holding the property, especially any that explain it as an honest and open difference.

My thoughts so far:

• There is some mechanism for the developer to offset or re-negotiate the price set in the option after the fact. Having read up on this, it seems unlikely, but I'd be interested to hear about real-world outcomes.

• Stamp duty payment is a sunk cost to the developer, so we hold that risk to them during planning at no real cost to us. This part seems like an honest transaction, and maybe worth a few thousand pounds to the developer (depending on percentage of developments they actually follow through with sales). I have used the UK tax office calculator to assess stamp duty on $300k house this year as £4.5k.

• Selling the house should planning fail might be an additional impact if the developer held the property. Again, this seems honest, but given property prices may increase, and the developer can perform property sales in-house, this may not even be a negative impact. Perhaps, as a corporation, the developer has additional costs at this stage?

• I can see that the owners, as well as holding the property, will also be paying council tax and other bills on it. Again my gut feeling is this cannot be worth more than a few thousand pounds.

• There are additional legal fees and due process that the seller has to perform that we are not aware of (and not being communicated by developer).

• In case it helps answer the question, the property sits on a reasonable-sized plot of land, so the developer is looking at demolishing the existing dwelling and replacing it with 3 or 4 smaller ones. I can understand why this would mean reasonable profits to the developer even after paying the higher price, but I don't see why they would have any incentive to share that profit with the seller, as we won't be partnering with them to build or sell the new buildings.

• Completion rates for this kind of project are very low, so we are gambling maybe a few thousand pounds opportunity cost on our side (for holding the house), for maybe a 1 in 10 chance of a large reward.

Back of envelope guesstimate: If option completes, the developer/buyer has spent maybe £25k on planning, £450k on the option itself, and then must build properties. At a complete guess, they could build 3 properties at cost £100k each, then sell them for £350k each (this seems reasonable from sales on same road). That gives an estimated profit margin of 1050 - 300 - 450 - 25 = £275k . . . on one successful property, to the developer. Whilst the seller has taken £150k of the potential £425k profit pot, for waiting under the developer's control. For a failed plan, the seller gets to pay (in time and opportunity cost) for the wait, and the developer has maybe a £25k loss.

I don't expect something for nothing, the difference in price offered by the developer has to be close IMO, to the difference it would cost them to take on what the property owner is doing - and very probably what multiple sellers are doing if there is some ratio success:failure for the planning. I am just stumped as to the nature of it, so do not know how much I can trust their offer.

Even knowing industry-wide success:failure rates would be incredibly useful to assess cost/benefit from seller's perspective.

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I want to understand why the large price difference (this is 3 years good salary in UK). Although clearly I will have to make a specific choice, I am not asking "What should I do?".

I believe that fully understanding the risks on my side and the financial drivers on the developer's side will help me make the correct decision.

Answer 1

They are suggesting 450k because you have a 300k offer and they want you to choose them instead.

Remember that 450k is the maximum. If they sell the property for 850k, that suggests they'd keep the excess 400k. But if they sell the house for 300k, you'd only get 300k (or even less, as they may get a sales commission; check the contract).

They don't want to buy the property outright, because as is, you carry the risk. If the property doesn't sell or sells for less than 300k, that's your problem. If they bought the property, it would be their problem.

They don't want to go through a real estate agent because the real estate agent will expect to be paid.

They are willing to pay you a hypothetical 150k if they sell the house for 450k or more. Their only risk is the 25k or so in planning fees. They are offering you a potential 150k out of the money they will receive for selling a house that the estate owns.

Assuming you don't mind the house getting bulldozed, this could be a good deal financially. Be very clear on what happens if

• They sell the house for less than 300k.
• They sell the house for 300k.
• They sell the house for more than 300k but no more than 450k.
• They sell the house for more than 450k.

For each situation, be sure you understand

• How much of that do they get?
• How much do you get?

I would recommend that you add in a clause saying that if they submit an offer for 300k or less, you can switch back to the real estate agent. Their exclusive deal is only valid for higher amounts.

I find it unlikely that they would pay 100k for an option. Assuming the planning fees estimate of 25k is accurate, 100k would quintuple the price that they have to pay upfront. They would be more likely to just look for another house in that situation.

What do they get for the 150k?

• They don't have to borrow 300k immediately to buy the house.
• They don't have to pay for the costs of maintaining the house.
• They can just walk away at any time, no more than 25k out of pocket.

If you want to get a better idea of how they value things, suggest a deal where

• They have the exclusive right to buy the house for 450k for one year (or whatever time period).
• They can instead offer to sell the house for you for whatever price (presumably lower than 450k). But if you refuse that offer, you are freed from the exclusive period.

Ideally you'd have them pay you a small amount for the exclusive right, perhaps 50 a month after the first six. The main point of this is to get them to release the exclusive right if they aren't going to use it.

The point of this offer is to see how likely they think the 450k is. If they expect to pay you this much, then they will likely agree. If they are expecting to sell the house for 300k, then this is a bad deal for them and they will refuse.

They should know within six months whether they can move forward with the project. The additional time would be to actually bulldoze the existing structure and build new.

Answer 2

If the developer buys the property as-is, they have to tie up a significant amount of capital for months or even years as they go through the planning process. At the end of that process, they will then proceed with the development or, if unsuccessful, would need to sell the property (which could take several more months).

While this is ongoing, there will be costs in owning the property (taxes, perhaps insurance and maintenance, security, interest costs on the capital) and risks (fire, flood, local or national market fluctuations). A failure to obtain planning permission could in itself slightly devalue the property as the plot would become less attractive to other speculators. Therefore it is not in their interest to own the property during the planning process if they can avoid it.

At the end of the process, they can choose to proceed if they think they can make enough money, or cut their losses and walk away if not, with no obligations. If planning permission is granted, then it is likely the plot would be worth much more than £450,000. They could then potentially sell on their option to buy for an immediate profit without having tied up any capital and shouldering minimal risk themselves, as you have held the risk and costs of owning the property.

More information may be held in the wording of the contract. When you get a solicitor to look through it (at your expense), you may find further unfavourable clauses or risks. What happens if planning is appealed and takes a couple of years? What happens if planning is granted but with restrictions that make the development less viable, would that affect the amount paid?

Answer 3

It's an Options agreement to buy the property at the agreed price. You are basically giving them the first and exclusive chance to buy the property.

The developer will invest time and money to get planning, designs and legals completed without having to own the property. Once they get the approval they can exercise the option and exchange contracts to purchase at the agreed price in the Options agreement.

note - there should be no costs to you, the developer should pay your sellers legal fees, this should be added to your contract.

The uplift in the price being offered is because you have to wait a period of time and the fact that your property is more desirable with planning permission on it.

Options agreements are in favour of developers, but as a seller, owner of a desirable piece of land you can always help sweeten the deal. I am going through the same thing: House is worth 1.3M and I'm selling on option agreement for 1.7M 15 x flats. I have negotiated a 5k non-refundable deposit (I can keep if it does not go through); Legal fees to be paid by developer, 6M completion (giving me time to find a new home); 2 weeks official occupancy after completion so that I have 2 weeks to move all my furniture rather than scrambling it all together on my final day.

Bottom line, to make it work you need to have mutual trust and respect and get your main points into the options agreement. Good luck.