Submitted by: Mark Aucamp
The residual method of valuation is utilized to estimate the amount that it is worth paying for land or buildings that is to be developed or redeveloped.
The application of the residual method is based upon the principle that the price to be paid for a property that agrees with for development is equal to the difference between i. the completed value of the highest and best form of permitted development and ii. the total Residual Method of Valuation cost of doing that development.
Hence, the net capital value of the finished development is evaluated after deducting any costs of sale on the assumption that it has been created for the most valuable form of development, and from that value is deducted the cost of all construction and building work required to perform the development, including all ancillary costs, e.g. purchase costs, letting fees, finance, etc., as well as an appropriate allowance for profit on the development.
The residual method of valuation may be used to estimate the value of a property that is being held for development, or is to be offered for sale, as well as being adapted to estimate the anticipated profit from a development project. In practice, it is the principal means of development analysis and is widely adopted as the basis for setting up the budget for most development projects. The residual method of valuation, by its nature, is based on a considerable number of variables -rental, financial investment yield, construction costs, building period, letting or sales period, finance costs, fees, property taxes and all other ancillary costs- and these must be assessed on the basis of the valuer’s outlooks of the future. So, it is a highly subjective method of valuation and should be used with care.
It has been said, in connection with an application to the Lands Tribunal to ascertain compulsory purchase compensation, that “it is a feature of the residual valuation that comparatively simple adjustments to the constituent numbers can have a major effect on results …” and “once valuers are let loose on residual valuations, nevertheless honest the valuers and however reasoned their argument they can prove almost anything”, First Garden City Ltd v Letchworth Garden City Corporation 1966, 200 EG 123, 460. Accordingly, the residual valuation will be agreed to by the Lands Tribunal as a method of ‘last resort’. See also abstraction approach AmE, building residual technique US, development property, land residual technique US, project valuation, residual process US.
Bibliographical references for Residual Method of Valuation:.
J. Armatys et al. Basic principles of Valuation London: 2009, Ch. 9 ‘The Residual Method’.
C. Darlow. Valuation and Development Appraisal – London: 1982, pp. 1– 28. Residual Method of Valuation.
E. Shapiro et al. Modern Approaches to Valuation 11th ed. London: 2012, Ch. 11 ‘Residual Method of Valuation’.
It’s a variant, used in the USA, for a method of appraisal, based on the income approach, that is used to determine the value of a plot of land omitting any buildings thereon, or to estimate the value of a building independent from the land.
An income is assessed that is considered appropriate to the plot of land, or the building– normally by deducting from the income receivable from the land and buildings together an income estimated as suitable for the land, or buildings, alone. This income is then find more at realestatedefined.com. Also called ‘highest and best use analysis’, especially when used to determine the value of the land for its highest and best use. Called ‘highest and best use analysis’, especially when used to ascertain the value of the land for its highest and best use. See also Construction residual technique, land residual technique.
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RESIDUAL METHOD OF VALUATION