THE APPLICATION OF RESIDUAL ANALYSIS IN REAL ESTATE DOWNLOAD PDF

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The Application of Residual Analysis in Real Estate

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The Application of Residual Analysis in Real Estate

The residual appraisal technique involves a fairly simple calculation that helps property developers to determine a realistic value for the land or property purchase.

The numbers that go behind the equation may be more complex but once these have been determined the residual method of appraisal is a fairly simple calculation to perform but can prove to be incredibly powerful. Recognizing a truthful idea of land or property morals in this way helps a property developer to determine other expenditure and the maximum that they can afford to spend on say site preparation, land remediation, building costs, professional fees etc.

 To achieve a profitable project outcome. The equation for the residual method of valuation in its simplest form is as follows: Land/Property = GDV – (Construction + Fees + Profit):

Residual technique is implemented when determining the value of real estate which can be subject to development, expansion, modernization or other improvements.

The paper which aimed at determining when residual technique can be use so as developers can realize a profitable project outcome, also unrevealed the rationales for residual technique  and

argued that residual represent the maximum bid a developer can afford to pay for a development site and that it is a WORTH to the developer but not VALUE.

Furthermore, it was also found from the literature that though the technique has its drawbacks, like other appraisal techniques but it still the best method to calculate the potential profitability of a project and should only be utilized by knowledgeable and experienced professionals. It is best done with a team of individuals who are experts in their specific areas of the process, whether it is the real estate transactions, the development, the maintenance of the property, or any other factor in the development project.

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It is essential to ascertain the uses for which planning permission could be obtained and to prepare outline scheme for development or redevelopment of the site. There may be a number of alternatives schemes, in which case it is necessary to determine which will give the greatest return.

1.1  INTRODUCTION

In USA, the residual appraisal technique or ‘residual approach’ refers to a method of appraisal, based on the income approach, that is used to estimate the value of a plot of land excluding any buildings thereon, or to estimate the value of a building separate from the land.

An income is assessed that is considered appropriate to the plot of land, or the building – usually by deducting from the income receivable from the land and buildings together an income estimated as appropriate for the land, or buildings, alone.

Generally, in real estate development circles the residual technique of valuation is an essential valuation tool for any aspiring developer as it helps to quickly identify the value of a development site

The development valuation which is also known as residual technique is adopted in the valuation of development property. This may be of bare land which is to be developed or land with existing buildings which are either to be altered and improved, an exercise commonly termed refurbishment, or to be demolished and redeveloped with entirely new buildings.

The application of the residual technique of valuation is based on the principle that the price to be paid for a property that is suitable 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 cost of carrying out that development. Thus, the net capital value of the completed development is assessed (after deducting any costs of sale) on the assumption that it has been developed for the most valuable form of development, and from that value is deducted the cost of all construction and building work required to carry out 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.

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It is essential to ascertain the uses for which planning permission could be obtained and to prepare outline scheme for development or redevelopment of the site. There may be a number of alternatives schemes, in which case it is necessary to determine which will give the greatest return.

 

 

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