What is Residual Land Value?
Residual land value is a metric that equals the value of the land, after all costs of developing have been subtracted. For example, if an investor purchased land for $500,000 and spent $1 million building an office park, which they then sold for $2 million, the residual value of the land would be $500,000.
The Land Residual Technique
Another method of calculating the residual land value is called the land residual technique. Instead of actually using the investor/developer’s cost of improving the land, any buildings or structures are instead valued at their replacement cost or depreciated value. And, instead of using the sale price of the building, this calculation instead uses the appraised value off the land. Unlike the traditional residual land value calculation, which may be best for investors interested in developing raw land, the land residual technique is generally superior for investors who are considering purchasing a property with improvements and who are considering demolishing them to make way for new development.
Profit-Oriented Techniques for Calculating Land Residual Value
Another technique for calculating land residual value includes subtracting a pre-calculated developer profit from the cost of development in order to determine the maximum amount that an investor should pay for land for development. For example, if an investor wanted to purchase land and knew that they would need to invest $1 million to improve the land and sell it, they could enter in a specific equity multiple into an excel formula in order to determine the most they should pay for the land in order to generate that profit (assuming they also estimated a sale price).