One of the most common questions I get asked is a variation of 'how do I know what the land is worth'? When it has planning its fairly simple as you know exactly what it is you are valuing (the size and number of units etc.). When it doesn't have planning it's much more difficult as you also have to answer the question, 'what can I build on the land in order to maximise value?'
Knowing how to answer this last question is the #1 skill of a successful developer and I'll explain more in later articles. Either way, the method used to value land is known as a residual valuation. The same process is also known as a development appraisal, a residual appraisal, a viability appraisal or a viability assessment. You might also hear people talking about doing a 'stack' (basically running the numbers to see how the deal 'stacks-up') or a quick 'fag-packet' (from the days when smoking was healthy and we used to use our fag packets to do some quick calculations on the back).
In principle, the method of approach is to ascertain the Gross Development Value (the 'GDV' - which is the total gross sale price of the completed development) and then to deduct from that the required profit and the costs of everything needed to design, build, finance and sell the development.
So, the very basic formula for a Residual Valuation is: Gross Development Value Less Costs and Profit Equals Amount available for Land Purchase
That is, after deducting all of your costs and required profit from the estimated value of the completed scheme, what's left over (the 'residual') is what you can afford to pay for the land.