Residual land value on one page: the inputs, and the ones that move it most

On a four townhouse project where the land works at $423,431, sale prices 5% lower take $148,615 off what you can pay for it. Build costs 10% higher take $251,320. A residual land value exaggerates every other number on the page, so the inputs deserve more care than the formula.

The formula is short: net revenue, less every cost of the project and the profit you need, leaves the most you can pay for the land. What follows is the page of inputs behind it.

Residual land value inputs, by where they come from

Collect them in this order. Each group depends on a different person, and the first group sets the ceiling for everything after it.

From the market

• Net sales revenue. Sale prices from settled sales of comparable stock, not listings, less GST and selling costs.
• Time to sell. How long after completion the last settlement lands, which is how long the full loan stays outstanding.

From the design and the builder

• Number of dwellings and their average size.
• Construction rate per square metre, priced for this design rather than taken from a regional average.
• Build duration.

Percentages you set

• Professional fees, as a percentage of construction.
• Contingency, as a percentage of construction, falling as the design firms up.
• Target margin, labelled as margin on cost or profit on revenue.

From the lender, the state and your accountant

• Interest rate and loan to cost.
• Holding costs while you own the land: rates, land tax and insurance.
• Stamp duty and transfer costs, at your state's rates.
• GST method, confirmed by your accountant before you rely on the answer.

Do not skip the last one. Feasly's guide to residual land value in Australia notes the GST margin scheme can swing land values by hundreds of thousands of dollars.

The land price sits on both sides of the calculation

Some costs depend on the price you are solving for. Stamp duty is charged on the land price, and interest is charged on the money borrowed to pay it. Every extra dollar offered for the land therefore costs more than a dollar.

In the example below, each $1 of land adds about $1.12 to total cost once duty and a year of interest are counted. Leave those off the land line and the calculation says you can pay $474,863, which is $51,432 too much.

A worked example

Four townhouses of 180 square metres each, $4,000,000 of net sales revenue, construction at $3,300 per square metre and a 20% target margin on cost. The remaining figures are assumptions for this example: fees of 10% and contingency of 5% of construction, $40,000 of holding costs, 5.5% of the land price for duty and transfer costs, and 9% interest on 70% of costs for one year, with half the development costs outstanding on average.

• Construction: $2,376,000.00
• Professional fees: $237,600.00
• Contingency: $118,800.00
• Holding costs: $40,000.00
• Interest: $114,213.92
• Stamp duty and transfer costs: $23,288.69
• Residual land value: $423,430.72
• Total development cost: $3,333,333.33
• Profit: $666,666.67, which is 20% on cost and 16.67% of revenue

The inputs that move residual land value most

Change one input at a time from the example and read the land value again:

• Sale prices 5% lower: $274,816, down 35%.
• Construction 10% dearer: $172,110, down 59%.
• Both at once: $23,495, down 94%.

The land takes every change because it is what is left over. A few percent of a large number is a large percent of a small one. Run these two tests before you make an offer, not after contracts are exchanged.

Margin on cost is not profit on revenue

A 20% margin on cost is about 16.67% of revenue. If a lender needs 20% profit on revenue and you solve for 20% on cost, you will offer $423,431 for land that only works at $304,539.

Write which basis a margin is on beside the number, every time it appears in the feasibility.