Residual Land Value Analysis
The residual land value analysis is utilized extensively in the real estate Industry by those professionals evaluating the merits of acquiring a specific parcel of land for development. This analysis is a tool for estimating what the underlying land is worth, based on numerous assumptions, of course. It is a methodology used by developers and homebuilders, as well as appraisers, in order to estimate what one should be paying for the land parcel under consideration. Specifically, (i) this value analysis starts with establishing likely revenues for the sales price of the homes, (ii) then subtracts the total costs (both direct and indirect) of producing those homes and (iii) then finally subtracts the builder’s desired profit margin – what is left is the value attributable to the land; or the residual land value.
As stated above, the formula for estimating the value of the land is: Revenues – Costs – Profit Margin = Land Value. Revenues comprise the base price of the home plus lot premiums (size, view, location) plus options/upgrades. The costs to produce the homes include such major cost categories as (i) entitlements, (ii) land development (onsite and offsite), (iii) house construction (direct and in-direct), (iv) finance, (v) marketing and sales, (vi) insurance, (vii) selling and closing, (viii) legal, (ix) governmental fees, (x) bond premiums, (xi) property taxes, (xii) options and upgrades, (xiii) warranty, (xiv) overhead and (xv) contingency. The builder profit margin can vary from as low as say 6 or 7% to a high of say 18%; with most builders seeking a profit margin of around 10% of the gross revenues.
During his tenure in the Industry, Mr. Ryan has performed well over 100 residual land value analyses. He has projected the revenues numbers based on market research/analysis of comps and has reviewed and critiqued construction cost estimates utilized in each analysis. As a result of this experience, Mr. Ryan is extremely knowledgeable in evaluating the value of land by utilizing the residual land value analysis methodology.