The financial viability of building a home in Spain

How to Assess the financial viability of building a home in Spain boils down to two figures:

  1. The value of your finished home
  2. The costs of designing and building it and the cost of the land

Calculating these figures requires gathering a lot of information and using your judgement. There is no quick or easy solution.

Estimate The Value of Your Finished Home

As an RICS registered Valuer I can tell you more or less how we value residential property in Spain. There is a lot of judgement involved and obviously I cannot transfer to you the market knowledge and experience that go into a professional valuation or the assumptions we are required to make by the RICS in London.

Nonetheless I do think you can go quite far yourself and I think it is a very useful exercise because it will sharpen your thinking and get you asking yourself the right questions.

You will need to know where you want to live, how a big a house you want, and what kind of style. These are questions you need to ask yourself anyway so this process of assessing the financial viability is all part of the process and getting closer to your decision.

Start a spread sheet and do some market research. List villas for sale that are comparable to the one you intend to build. Have a column for the location, the number of bedrooms, the built area, the asking price, the asking price per square metre, and the link so you can go back to the listing. Have a column for your comments. You will need to introduce the formula in the spreadsheet for the asking price per square metre. Calculate the average asking price per square metre. Apply this rate to your building. If you contact me I will send you a template.

The spreadsheet itself is not complicated. The research is not particularly complicated. The skill comes in applying this information to come up with an estimated value of your home. There are a series of questions you need to ask yourself. For example

  • What is the state of the market in general and specifically in this area?
  • Is the difference between asking prices and achieved prices 5% 20%? what is it?
  • Will your building be particularly attractive and so valuable because of its unique qualities such as the views, the design you intend to work on with your architect and so on?
  • How comparable are the examples in your spreadsheet to the home you intend to build?

You should go through your list deciding what qualities in your key examples are better / worse than the villa you intend to build.

Indeed, what kind of villa do you intend to build? This last question is obviously something we would like to help you with.

Your spreadsheet may throw up asking prices that seem to be well out of line with the market. That is because in Spain it is quite common for sellers to have a completely unrealistic view of what their property is worth and ignore the advice from their estate agent and the state of the market. Where you come across these simply delete them from the spreadsheet as being irrelevant.

You may not be able to answer these questions until you have a plot and have engaged your architect. So it is an analysis that will grow. There are many judgements you will have to make. Going through this exercise will help you in your decision making later on during the design phase.

Estimate How Much You Home will Cost to Design and Build?

This is the big question weighing on your mind at the moment. How much will it cost? What will I get that for that money? How can I find out? And you may even be asking yourself “Why won’t anybody give me a meaningful answer?”. By the way if anyone claims to know they are either lying or mistaken in their beliefs.

Homes vary widely in how much they cost to build. There are thousands of decisions that go into designing and building a home. In order to know how much it costs to design and build you have to define the home by specifying the quality and quantity of every ingredient. You then have to invite different building companies to tender for the business. Only when you have done this will you have the answer.

You may have noticed that we work systematically with you to make this an efficient and enjoyable process.

The problem is it’s not practical to carry out a full design project and specification before you buy your plot. Indeed you may be reading this having already bought your plot.

So you have to work with estimates but they need to be good estimates not back-of-the fag-packet estimates. And here is the danger. You may find people who talk about a “high quality” specification. What is “high quality” to you are to me? It’s an impossible question. Yet the accuracy of our estimates, and your financial viability study, depend on a shared understanding.

This is where we can help you. We show you examples of villas we have built so you can see the quality of the finishes and know what was included / excluded and we tell you how much it costs. You are still working with estimates but they are informed estimates.

You will find, working with us, that we move systematically towards that “how much” figure so your financial viability study becomes increasingly accurate as we work through our steps.

We give you a complete list of items to cost including licenses, taxes, professional fees so there are, hopefully, no nasty surprises later on.

At any stage you can adjust the specification so the project is viable. We can stay within your budget.

Finally we put the specification and bill of quantities out to tender so you can be sure you are getting the best possible value for money.

So depending on where you are with your cost estimates you now have the two figures:

  1. The value of your finished home
  2. The costs of designing and building it and the cost of the land

One will be bigger than the other!!

You can now use these tools to improve and control the financial viability of your project and remove the uncertainties.

How do I Know How Much I Can Afford to Pay for my Plot of Land?

As discussed above you will be doing a financial viability study based on informed estimates.

The arithmetic is: the value of the finished home less the cost of the build (professional fees, build cost, taxes etc) = the maximum you can pay for the plot of land.

You can reasonably expect to make a developers profit to to compensate you for the time trouble and risk you are taking. There is no doubt that many of our clients have made a considerable “paper” profit and are enjoying their tailor made villa for much less than it would have been possible to buy for.

You can also do a check on the market by compiling a spreadsheet of all the plots for sale in the area and working out an average asking price per square metre. As I said you wil need to use your judgment as to how the plots differ in location, views, steepness etc.

Free Site Appraisal

For sincere clients we offer a free (oral) site appraisal which includes meeting with you on site to discuss the pros and cons of the site, looking at access and whether this might affect the costs, any other possible significant costs you may not have thought about, services(water electricity, sewerage) and a discussion with the local planning authorities about what it is possible to build.

Call us to discuss and tell us about your plans.