The formula
Residual land value = GDV less build costs, professional fees, contingency, finance costs, sales and marketing costs, planning obligations and developer's profit. Acquisition costs, such as stamp duty and legal fees on the land, then come off to give the price you can offer.
See GDV explained for how the end value is worked out.
A worked example (illustrative)
A site has planning for six houses with a combined GDV of £2,000,000.
- GDV: £2,000,000
- Build costs: £900,000
- Professional fees at 10% of build: £90,000
- Contingency at 5% of build: £45,000
- Sales and legal costs at 2.5% of GDV: £50,000
- Finance costs: £120,000
- Developer's profit at 20% of GDV: £400,000
- Residual: £2,000,000 less £1,605,000 = £395,000
After allowing for stamp duty and legal costs on the purchase, the maximum offer is a little below £395,000. Pay more and the profit falls below the target. All figures are illustrations.
The inputs that matter most
Residual valuations are very sensitive. Because the land is what is left over, a small change in GDV or build costs has a large effect on the land value. In the example, a 5% fall in GDV, £100,000, reduces the residual by about a fifth. Test your appraisal with lower values and higher costs before you agree a price.
- GDV: use achieved prices for comparable new homes
- Build costs: a quantity surveyor's estimate or a contractor's tender
- Planning obligations: section 106 contributions, affordable housing and CIL
- Environmental requirements: biodiversity net gain and, in some catchments, nutrient neutrality; see our guide
- Programme: a longer build means more interest
Finance costs and the circular problem
Finance costs depend partly on the land price, and the land price depends on finance costs. In practice, developers estimate finance, calculate the residual, then rework the finance with that land price and repeat until the figures settle. Appraisal software does this automatically. See the true cost of development finance.
How lenders and valuers use it
Development lenders' valuers often use a residual appraisal, alongside comparable land sales, to value a site. If you pay more than the residual suggests, the lender may lend against the lower figure, leaving you to fund the difference. A realistic residual helps align your offer with what lenders will support. See how to write a development appraisal.
Planning and land value
The residual changes with planning. More units, a better mix or fewer obligations raise it; tighter conditions lower it. That is why land with planning is worth more than land without, and why some developers buy before consent with a land bridge. See planning gain and land value.
Work out your own figure with our residual land value calculator, then compare lenders on Instant Quotes and apply online.
Common questions
How do you calculate residual land value?
Take the GDV of the completed scheme and deduct build costs, fees, contingency, finance, sales costs, planning obligations and your target profit. What remains is the most you can pay for the land.
What profit margin should I use in a residual appraisal?
Commonly around 20% on cost or 15% to 20% on GDV for residential schemes, though it varies with risk and lender requirements.
Why is residual land value so sensitive?
Because the land is what is left over. A small change in GDV or costs produces a much larger change in the residual.
Do lenders use residual land value?
Often. Valuers use it alongside comparable land sales, and lenders may cap the day-one advance against the lower of price and value.
This guide is for general information only and should not be treated as legal, tax or financial advice. Lender requirements depend on the property and your circumstances.
