The development or residual method is often used to consider the re-development value of bare land.
It also determines the value of the asset underdeveloped relative to the potential sale price of the completed development.
The method involves making estimates regarding the total cost of the project and of the gross development value created.
Costs to consider include construction and landscaping, professional fees, finance costs, marketing costs, contigency allowance, developers profit and purchasers costs.
After making a reasonable allowance for profit and contingency, the difference between the gross development value and costs (including profit and interest accrued on capital borrowed over the development period, build costs and professional fees) represents the value of the land. *
The adoption of a consistent methodology using assumptions based upon realistic property market scenarios reduces uncertainty and risk.
*It must be stated that the residual method of valuation is open to possible inaccuracy, as a small variation in any input can lead to large variation in the end result.