“What’s It Worth To Ya? Tell Him He’s Dreaming…!!”
If you’ve ever watched the classic Australian comedy The Castle, there’s a hilarious scene where the father and son are sitting around the dinner table talking about the value of jousting sticks. It’s a great moral and lesson to be learned, as it shows us that any item has value and it’s likely to be different depending on who you talk to. If you haven’t seen the movie, I highly highly recommend it!
From a development perspective, it’s typically unlikely that you would value a piece of land (that you intend to develop) in a way that the general public would.
The public look at a property from an emotional and functional/needs basis. They aren’t looking at a site to see what they can do with it necessarily, more about how they would live there, the condition of the house and how many bedrooms it has and how it would meet their family’s needs etc.
Having said that, these buyers may well represent our market pool once we’ve developed it, so whilst it’s beyond the scope of this message, market research is a highly important aspect. I’ll cover that in a separate post.
When we value land, we look at it from a yield perspective and consider a multitude of things, but ultimately how much potential it has from a development perspective.
Hence-wise, we need to calculate its value completely differently.
Whilst we still do work to understand what the public would likely pay for it, we must go further to also measure it from a residual basis.
What that means is we calculate our end value (based on the market value of what we believe we can achieve once we’ve developed it) and subtract our profit margin for the risk we take and the necessary costs to transform it from its current state to the end result. What’s left is the ‘residual’ value of the land.
This in general terms is the residual land value method. And we therefore must reconcile that with what we believe the public would pay for it now.
As our focus is largely on in-fill development, we are competing against the public for property/land though our intentions are often different.
So if you happen to stop by a site and ask him what she thinks her site’s worth … what do you do?? “TELL HIM HE’S DREAMING..!!!” ;-)