Many amateur property developers are unsure how much they should pay for property or land which they want to develop to make a profit. Many also do not realise that there is a reasonably simple formula for calculating the value of a property that requires developing.
The starting point to finding the value which should be paid for a piece of property or land is to find the value of the completed project, to be able to do this you need to have a clear idea of how you are going to develop the said property or land, you should in any case have a clear idea of what you intend to do before you begin on such a project.
The best method of finding the developed value of the property or land is to find similar properties to the planned development which are currently for sale or which have recently been sold. If you look at properties which are already on the market remember that in these difficult 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 property which has recently sold. In the UK you may get price data for properties sold from a number of free websites or you can pay for it from Land Registry.
It may be that there are no exactly similar properties in the vicinity to your planned purchase and in this case you have to find something that is similar in some ways and make price adjustments according to the differences, if there's an extra bedroom you add on a few thousand to the value and so on. Alternatively if you can find similar properties in the next town over you can use the price of these as a base price and adjust according to the price differences of the two areas.
This may all sound quite complicated and a simple way to judge the developed value is to talk to a number of Estate Agents who will be happy to advise you as they will all be interested in selling the finished development for you.
Once you have calculated the value of the finished development you are ready to start producing your residual valuation, it is called a residual valuation because you start with the final figure which you will receive and you deduct all of your cost from that final figure including an amount for your developers profit and what remains is what you can bid for the property or land.
Once your planned development is valued, you then take that figure and deduct the building and development costs from it, you will need to ask a builder or an architect to establish the building costs for this part. Once you know the building costs and have deducted them from your initial figure you next need to calculate the amount of interest you will have to pay on the money used to pay for the building costs, now realise here that although you may not need to borrow any money, to calculate the value you should pay properly you need to account for interest on the money spent during the development period because even if you do not pay it to a bank or loan company you do actually forsake interest you could have earned on your own money whilst it is invested. To ignore this would give an incorrect valuation.
On top of the building costs there will be professional costs for architects and surveyors, you may allocate 12.5% of building costs for this, and then you also will want to account for interest on the professional fees paid out.
You need to allow for the costs of estate agent fees incurred when it comes time to sell the completed development and you would want to factor in a 5% contingency fund for those unexpected expenses that always crop up.
Finally you would need to deduct around 15 to 20% developers profit from the completed development value and what you are left with is what you could afford to bid for the property or land and this is the residual value.
Whilst following the example can find the value which you should pay for a development property it should be noted that in the current economic climate property values could well drop and your planned final value could be different by the time the development is complete, this is the risk of entrepreneurialism, if what easy everybody would be doing it. Good luck.