Scribd
Upload
191 views15 pages

Residual Method

The Residual Method is a valuation technique used to determine the value of land for development by estimating the residual value after deducting development costs and profit from the Gross Development Value (GDV). It is crucial for developers to assess the financial viability of projects, set budgets, and ensure profitability. Key inputs include GDV, construction costs, professional fees, and the developer's profit margin, with the method being sensitive to market conditions and cost estimates.

Uploaded by

TEE Yu Yang TEE
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
191 views15 pages

Residual Method

The Residual Method is a valuation technique used to determine the value of land for development by estimating the residual value after deducting development costs and profit from the Gross Development Value (GDV). It is crucial for developers to assess the financial viability of projects, set budgets, and ensure profitability. Key inputs include GDV, construction costs, professional fees, and the developer's profit margin, with the method being sensitive to market conditions and cost estimates.

Uploaded by

TEE Yu Yang TEE
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 15

PROPERTY

VALUATION USING
THE RESIDUAL
METHOD
INTRODUCTION TO THE
RESIDUAL METHOD
Residual Method

A method used to determine the value of land for


development by estimating the residual value after
deducting development costs and profit from the
final value (GDV).

Used primarily by developers for land acquisition


decisions.

In the context of the Residual Method of Valuation,


residual value is the amount a developer can afford
to pay for a piece of land after deducting all costs and
profit from the estimated final value of the completed
development.
Why Is Residual Value
Important?
• Decision-Making: Helps developers, investors, or
businesses decide if an investment is financially
viable.

• Profitability: Ensures a clear understanding of costs


versus returns, especially in real estate and
development.

• Budgeting: Guides buyers in determining the


maximum amount they can pay for land or assets
without compromising profitability.

In summary, residual value is crucial in evaluating


investments and planning development projects to
ensure profitability and long-term financial stability.
IMPORTANCE OF THE
RESIDUAL METHOD
• Focuses on the potential of a
development project rather
than current land value.
• Helps developers and investors
assess whether a project is
financially viable before
purchasing land.
KEY INPUTS TO THE
RESIDUAL METHOD
Formula of the Residual Method

Land Value = GDV – (Construction + Fees + Profit)

• GDV: Gross Development Value.

• Construction Costs: All building-related costs.

• Professional Fees: Fees for architects, engineers, legal,


etc.

• Developer's Profit: The required profit margin to make


the project viable.
KEY CONCEPT: GROSS
DEVELOPMENT VALUE (GDV)
GDV: The total estimated value of the development once completed. Often based on
market values, using comparable sales or income methods.

Residual Value (Land Value) = Gross Development Value (GDV) −


(Development Costs + Fees + Profit)

Gross Development Value (GDV): The total expected market value of the
completed development.

Development Costs: Includes construction costs, professional fees, and other


related expenses.

Profit: The developer's required return.

If the completed development (GDV) is estimated at $5 million, and the total


development costs and profit add up to $4 million, the residual value (land value) is:

Residual Value = 5,000,000 − 4,000,000 = 1,000,000

In this case, the developer can afford to pay $1 million for the land.
STEP 1: ESTIMATING GROSS
DEVELOPMENT VALUE
(GDV)

How to estimate GDV:


• Use comparable sales of
similar completed
developments.
• Consider factors such as
location, property type,
and market trends.
STEP 2: ESTIMATING
DEVELOPMENT COSTS
• Construction Costs: Includes
costs for materials, labor, and
contingencies.
• Professional Fees: Architect,
engineer, project
management, and legal fees.
Accurate estimation is
important
STEP 3: SETTING
DEVELOPER'S PROFIT
• Profit is typically set as a
percentage of GDV (e.g.,
15-20%).
• This figure ensures the
developer's financial
reward for undertaking
the project.
FINAL STEP: CALCULATING
RESIDUAL LAND VALUE
• Subtract development
costs and profit from GDV
to determine the
residual value.
• This is the maximum
amount the developer
should pay for the land.
EXAMPLE CALCULATION

GDV = $6 million.
Construction Costs = $3.5 million.
Fees = $500,000.
Profit = $1 million.
So, how much should you pay for
the land?
ADVANTAGES OF THE
RESIDUAL METHOD

i. Helps set a clear budget for


land acquisition.
ii. Encourages detailed planning
and cost estimation before
purchasing land.
iii. Ensures profitability is
considered from the outset
(very beginning).
LIMITATIONS OF THE
RESIDUAL METHOD

i. Highly sensitive to inaccurate


cost estimates.
ii. Relies on market stability for
GDV estimates.
iii. Unexpected costs or market
changes can significantly
affect profitability.
RESIDUAL METHOD AND
MARKET TRENDS
The method is influenced by external
factors such as:
• Economic conditions
• Property market trends
• Interest rates and inflation
Important to regularly re-assess
estimates during the development
process.
THANK YOU
Ts. Dr. Khoo Terh Jing
[email protected]

You might also like