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.
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.