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How much is my land worth?
Most developers use the same method when calculating the price of land called the 'residual valuation method', which involves:
- Estimating the total price that properties are sold for once built (GDV)
- minus the estimated total costs
- minus the required, and industry standard profit margin of 20%
= The residual land value
Could you explain this further?
Of course. While there may be very specific and sometimes complex considerations to be made when assessing a project, the basic components to calculate the land value, remain the same. These are:
- Gross Development Value (GDV). Gross Development Value (GDV) represents the total price at which properties are expected to be sold once they are constructed. It involves a certain level of prediction since the state of the property market once construction has completed, is uncertain.
- Total costs which include:
A) Construction costs. These encompass more than just labour and materials as construction costs also include highway costs, utility works and 'abnormal' costs such as excavating or removing hazardous ground or contaminants, and these can vary depending on the location and specifications of the build.
B) Professional fees. When undertaking a project without planning permission, the initial stages of the development require a core team of professionals, including architects and planning consultants. It’s important to note that the key to maximising the GDV, is using great professionals. While some developers may choose lower-cost professionals to maximise their profit margins, they run the risk of compromising the project's value compared to what could have been achieved with top-tier professionals.
C) Funding costs. Most developers use bank funding and other sources of finance to deliver a project, meaning interest and financing fees must be considered in the calculation of costs.
- Profit Margin. The lenders who fund development projects do so with the expectation to receive a return on their investment. With this in mind, they require at least 20% of profit margin on costs and if they do not believe that this is achievable, the developer is unlike to secure funding to proceed with the project.
After the total costs and required profit has been deducted from the GDV, this leaves the residual land value.
How much could a developer offer?
Let's suggest a developer has identified your land for development. To calculate the price they can offer the landowner, the developer estimates:
- They could build 10 houses on the land that would sell for a total market value (GDV) = £4.5 million
- Minus the total cost to build these houses including fees (TDC): £2.5 million
- Minus the lender's / developer's required profit margin (20% of GDV or in this example £900,000)
Therefore, the developer could offer the landowner £1,100,000 for their land.
Why Choose Us?
At Park Grove Homes we will:
- Listen to understand your goals and perspective before we discuss your property.
- Value you as a partner, as our aim is to find a tailored and mutually beneficial approach that aligns with your aspirations.
- Unlock your property’s potential by combining considered design, considerate construction and our expert team, we'll deliver maximised returns and high-quality homes.
Our experience
Book a call today to find out what we could offer for your land!
