The ResDual value method - the residual value of the land in the real estate project
What is the residual value method? The definition
Die Residual value method Is an evaluation method used in the real estate sector to Value of a plot of land to determine which is currently not being used optimally. This method offers property developers a way to calculate the market value when Comparative prices are missing and conventional evaluation methods do not apply.
Calculation: The residual value is obtained by subtracting the Construction and marketing costs as well as a profit from the potential proceeds of the planned real estate project. The method is therefore often used to calculate the maximum land value that an investor is willing to pay in order to achieve a specific return.
How is the residual value calculated?
Several parameters are taken into account to calculate the residual value:
- Expected sales revenue: The potential revenue of the finished project, estimated through market analyses or comparative values.
- Project costs: All relevant costs for planning, construction and marketing, including:
- Demolition costs
- Construction and ancillary construction costs
- Financing costs
- marketing expenses
- Development profit: An appropriate risk premium that the project developer expects. This is usually 15-20% of investment costs.
Sample calculation:
- Sales revenue: 6,000,000 CHF
- Project costs including profit: CHF 3,900,000
- Maximum land value: 2,100,000 CHF
upshot: The investor should not pay more than 2,100,000 CHF for the property in order to have a profitable project
Advantages and disadvantages of the residual value method
benefits
- No comparative prices required: Particularly useful in regions or markets without many comparative values.
- Economic evaluation: Allows you to calculate the project development profit and shows whether a project is profitable.
- flexibility: Suitable for complex projects with high investment requirements.
drawbacks
- Dependent on assumptions: The result can vary significantly as many parameters must be estimated, such as future sales price and construction costs.
- High level of expertise required: The process requires extensive market knowledge and experience, so it is best carried out by a certified expert.
- Rough orientation only: Due to the many assumptions, the method offers less accuracy than other evaluation methods such as the comparative value method.
When is the residual value method useful?
The residual value method is often used in the project development used to calculate the value of land for new buildings or extensive reuses. This method is particularly suitable when no or only a few comparative values and the market situation is uncertain. With the help of the process, property developers can assess whether a project is financially worthwhile under the given circumstances and what is the maximum amount they should spend on the building land.
Note: Do you own a plot of land that is suitable for internal densification? We would be happy to advise you on a calculation using the residual value method.
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