What is the residual value of a plot?
The residual value is used to estimate the value of buildable land. It is based on a simple principle:
Land value = Market value upon completion – Total investment costs
In other words, you start with the estimated market value of the finished project and subtract all the costs required to complete it (construction, professional fees, various expenses, etc.). What remains is the value of the land — the residual value.
This method makes it possible to assess the value of a plot while accounting for project-related costs, allowing for a well-reasoned and market-aligned sale price.
Concrete Example
You own a plot of land where a residential building can be developed:
- Estimated value of the completed project: CHF 2.5 million
- Total construction and development costs: CHF 1.8 million
Land value = 2.5M – 1.8M = CHF 700,000
Uses of residual value
The residual method isn’t just useful for valuing land based on a specific project. It can also be used to:
1. Assess the economic feasibility of a real estate project
Before committing to a project, a developer or investor can use the residual method to determine whether the operation will be profitable. By modeling construction costs, operating expenses, and expected revenue (from sales or rents), they can verify whether the project will generate a sufficient margin.
2. Determine the maximum price a buyer can pay for land
For a buyer, the method helps calculate the maximum price they can afford to pay for land without undermining the profitability of their development. This helps secure the investment and provides a clear rationale during price negotiations.
3. Simulate different scenarios based on local planning rules
The same parcel of land may allow for various types of developments (rental building, condominiums, commercial space, etc.) depending on zoning regulations (floor area ratio, coverage ratio, height limits, land use, etc.). By applying the residual method to several scenarios, it's possible to identify the most profitable use — or the one that limits the land's value the most. This approach is valuable for both developers and municipalities in the context of urban planning.
Why consult an expert?
The residual method is a powerful tool, but it heavily depends on:
- Local building and zoning regulations,
- Realistic cost assumptions,
- In-depth knowledge of the real estate market.
That’s why it is highly recommended to consult a real estate expert in order to avoid mistakes and maximize the value of your land.
