What Is The Formula To Calculate Interest On A Loan Calculating How Much to Pay For Development Property Or Land – A Residual Valuation

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Calculating How Much to Pay For Development Property Or Land – A Residual Valuation

Many amateur real estate developers are not sure how much they should pay for the property or land they want to develop for profit. What many also don’t realize is that there is a reasonably simple formula for calculating the value of a property in need of development.

The starting point for finding the value to pay for a property or land is to find the value of the completed project, for this you need to have a clear idea of ​​how you intend to develop it. real estate or land, you should in any case have a clear idea of ​​what you intend to do before starting such a project.

The best way to find the development value of a property or land is to find properties similar to the proposed development that are currently for sale or that have recently sold. If you are looking at a property that is already on the market, remember that in these tough economic times, people are unlikely to pay the full asking price for a property and are more likely to make an offer below the asking price. It is probably much better to look at properties that have recently sold. In the UK, you can get property prices for sale from a number of free websites or pay for them from the Land Office.

It may be that there aren’t exactly similar properties near the one you are planning to buy, and in that case you need to find something that is similar in some ways and adjust the prices accordingly when you add an extra bedroom. to the value of a few thousand and so on. Alternatively, if you find similar properties in the next city, you can use their price as a base price and adjust for the price difference between the two areas.

This can all seem quite complicated and an easy way to estimate the value of a development is to speak to a number of estate agents who will be happy to advise you as they will all be interested in selling the completed development for you.

Once you have calculated the value of the completed development, you are ready to start working out your residual valuation, this is called a residual valuation because you start with the final figure you get and subtract all your costs from that final figure, including the Amount for your developers profit and what you are left with is what you get for the property or land to make an offer.

Once your proposed development has been assessed, take that number and subtract the construction and development costs, you will need to ask the builder or architect for the construction costs for that part. Once you know the construction costs and have deducted them from your original figure, the next thing you need to do is calculate the amount of interest you will have to pay on the money used to pay for the construction costs, now understand here that although you may not need to borrow any money, to calculate the value you should properly pay, you have to consider the interest on the money spent during the development period, because even if you don’t pay it to the bank or loan company, you are actually keeping interest that you could have earned. your money until it is invested. Ignoring it would result in a misjudgment.

In addition to the construction costs, the professional costs of architects and surveyors are added, for this you can allocate 12.5% ​​of the construction costs, and then you also want to take into account the interest of paid professional fees.

You need to factor in the cost of estate agent fees when it’s time to sell the completed development, and you’ll want to factor in a 5% contingency fund for those unexpected expenses that always pop up.

In the end, you should deduct about 15-20% of the developers profit from the completed development value and you are left with what you can afford to bid on the property or land and that is the residual value.

While following the example you can find the value you should be paying for the development property, be aware that in the current economic climate property values ​​can drop significantly and your intended final value may vary by the time the development is completed, this is an Entrepreneurship risk, if only everyone could do it easily. Good luck.

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