Residual value method
Residual value method (also known as the investor method or property developer method) is a term used in property valuation to determine the maximum land purchase price. The procedure is usually used in the context of project development when an investor is interested in the question of what maximum property price he can pay in order to realize the project economically.
First of all, the provisional market value of the completed property is determined using the discounted earnings or comparative value method . A simplified capitalized earnings method can be used.
Afterwards, all costs necessary for the realization of the construction measure including the (interim) financing costs are deducted. This results in the max. sustainable land value ( residual ).
Parameters are sales prices / rents to determine the market value, construction costs , property developer profits , financing costs . The value is discounted ( discounted ) over the expected waiting time until realization .