Most developers talk about margin as profit on GDV, which is your profit divided by what the finished scheme sells for. You'll also hear profit on cost, which is your profit divided by everything you spent. They're both fine, but they give different numbers for the same deal, so you need to know which one someone means.
Here's a deal on a house worth £400,000 once finished, bought for £230,000 as an additional property, with a £60,000 build.
| Item | Amount |
|---|---|
| Purchase | £230,000 |
| Stamp duty | £13,600 |
| Build | £60,000 |
| Professional fees (12% of build) | £7,200 |
| Contingency (10% of build) | £6,000 |
| Finance | £18,850 |
| Selling costs (1.5% of GDV) | £6,000 |
| Total cost | £341,650 |
| Profit | £58,350 |
That's 14.6% on GDV, or 17.1% on cost. Same deal, same £58,350, but if you only ever quote the second figure it sounds healthier than it is. Lenders mostly look at profit on GDV, so it's worth getting used to working in that.
As for what to aim for, around 20% on GDV is where most people are comfortable and roughly what a lot of lenders want to see. Between 12% and 20% it can work, but you're relying on things going more or less to plan. Under 12% there isn't really enough room for anything to go wrong. That's how Avalor gives its verdict.
The reason the margin matters isn't the profit itself. It's the buffer. In the example above, a 10% build overrun costs you about £6,000, which is annoying but survivable. A 5% drop in the sale price costs you nearly £20,000, and takes the margin down to about 10%. Most people worry about the build going over, but the sale price usually has more power to hurt you.
Time matters too, and it's easy to ignore. Twenty percent over six months is a very different result to twenty percent over two years, especially if your own money is sat in the job the whole time.
A few costs get missed a lot. Stamp duty at the additional property rate, finance on the purchase and not just the build, and the cost of selling at the end. Holding costs like council tax, insurance and utilities while the job's running are easy to forget as well. Avalor doesn't add those separately, so on a long job it's worth making sure your contingency covers them.
And don't count on your contingency as profit. If you get to the end and haven't used it, great, but it's there because something usually goes wrong.
Avalor works out profit and margin on every appraisal, and you can drag the sale price or build cost down to see how much it'd take for a deal to stop working.