Residual Method of Land & Site Valuation

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  • 0:04 What Is the Residual Method?
  • 0:49 When to Use the…
  • 1:48 Residual Method Example
  • 3:33 Residual Method Disadvantages
  • 4:40 Lesson Summary
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Lesson Transcript
Instructor: Kyle Aken

Kyle is a journalist and marketer that has taught writing to a number of different children and adults after graduating from college with a degree in Journalism. He has a passion for not just the written word, but for finding the universal truths of the world.

The residual method of land and site evaluation is used to predict the profitability of land and buildings that are to be purchased for development or redevelopment. This is a risky method and should be used cautiously.

What Is the Residual Method?

There are several methods for valuation of sites, land, and property. One of these methods is the residual method, which is used to estimate the value of land or buildings that are going to be developed and/or redeveloped. This is used to attempt to calculate the potential profitability of the property after development. Specifically, the method calculates the residual land value, which is the value of the site or land after development has been completed, minus the cost of purchase, plus developing, maintaining, or reselling the land.

The method does have its drawbacks, and should only be utilized by knowledgeable and experienced professionals. It's best done with a team of individuals who are experts in their specific areas of the process, whether it be the real estate transactions, the development, the maintenance of the property, or any other factor in the development project.

When to Use the Residual Method

This method is ideal when an individual or entity wants to develop or redevelop property, most often to be resold or utilized in some other way to make a profit. This is done with both residential and commercial properties. This method is often used before buying or developing the land to determine whether or not the purchase and development will be profitable after calculating what will be paid for the developmental land.

It's important for developers to use this method when purchasing land/property so that they do not buy the land at a cost that would stand to make them lose money instead of profiting from the project. A development analysis should be completed to determine the ideal budget to make the purchase and development project profitable. The residual method is a crucial part of this development analysis and can involve calculating many varying costs that come along with land development. Some of these considerations include (but are certainly not limited to) cost of construction, building period, investment yield, rent, fees, property taxes, finance costs, and any other additional costs.

Residual Method Example

If land is bought for $20,000, and development, maintenance, and reselling total $100,000, and it is sold for $200,000, then the residual value of the land is $80,000. This is calculated by totaling the cost of purchase plus the cost of development, maintenance, and reselling, then subtracting that total from the final selling price. The equation for this example would look as follows:

20,000 + 100,000 = 120,000

200,000 - 120,000 = 80,000


200,000 - (100,000 + 20,000)

200,000 - 120,000 = 80,000

If land is bought for $50,000, and development and maintenance total $200,000, and it is sold for $300,000, then the residual land value of the land is $50,000. The equation for this example would look as follows:

50,000 + 200,000 = 250,000

300,000 - 250,000 = 50,000


300,000 - (50,000 + 200,000)

300,000 - 250,000 = 50,000

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