Residual land value is the most you can pay for a site and still make the profit you're after. It's worked out backwards. You start with what the finished scheme will sell for, take off everything it'll cost to get there including your profit, and whatever's left over is what the land is worth to you.
That's why it's useful. Most of an appraisal tells you whether a deal works at a given price. Residual land value tells you what price would make it work, which is the number you actually want when you're about to put an offer in.
Here's a simple example on a scheme worth £400,000 once finished, with an £80,000 build.
| Item | Amount |
|---|---|
| Finished value (GDV) | £400,000 |
| Less build cost | £80,000 |
| Less professional fees (12% of build) | £9,600 |
| Less contingency (10% of build) | £8,000 |
| Less selling costs (1.5% of GDV) | £6,000 |
| Less finance | £18,100 |
| Less your profit (20% of GDV) | £80,000 |
| Residual land value | £198,300 |
Those percentages are what Avalor uses, but in practice they move with location, the type of build and how much you're doing yourself. Some people carry a bigger contingency on older buildings where you don't know what you'll find until the walls come off.
The profit line is the one people question. It feels odd to take profit off before you've bought anything, but leave it out and all you've worked out is your break even price, which doesn't help much. Twenty percent of GDV is a common target and roughly where a lot of lenders want to see you. Plenty of people work to 15% on smaller, simpler jobs. Just be aware that lowering your target is the easiest way to talk yourself into paying too much.
Finance is a bit awkward because it depends on the land price, and that's the thing you're trying to work out. Avalor gets round this by costing the finance on the residual value itself, so the answer doesn't change every time you type in a different purchase price. Its default allows 6.5% of the purchase and build, but you can put in your own rate if you've been quoted one.
If you're paying cash there's no finance cost at all, and you can tell Avalor that. The residual value goes up by whatever the finance would have been. In the example that's £18,100, taking it to about £216,400. Cash isn't completely free though. Money tied up in a project for a year isn't earning anything anywhere else, and some people still allow for that.
This figure is before stamp duty. Stamp duty is charged on whatever you pay for the site, so it comes on top. In the example, buying at £198,300 as an additional property would mean around £11,400 of stamp duty, so your real ceiling is lower than the table suggests.
It's also more sensitive than people expect. If the finished value came in 10% lower in that example, the residual land value would drop by about 15%. A small miss on the sale price turns into a bigger miss on what you can afford to pay, which is another reason to be careful with your GDV.
Avalor works out residual land value on every appraisal and shows the full breakdown, so you can see exactly what's been taken off. If the defaults don't fit your job you can put in your own build cost or sale value and it'll recalculate.