How do developers decide what to pay for land?
A developer works backward from the finished lots. It projects what the lots or pads would sell for, subtracts development costs, profit and marketing, and discounts what is left over the time needed to get approvals, build and sell. The remainder, the residual, is what the raw land can bear; federal appraisal standards treat this method as support for sales comparison.
Price the finished lots before pricing the ground under them
The calculation starts at the far end of the project, with lots or pads that do not exist yet, and walks back to the raw land. The Uniform Appraisal Standards for Federal Land Acquisitions describe the first move of what they call the subdivision development method this way.
first determines or projects both how the land would be subdivided and the prices at which those lots would sell.
Uniform Appraisal Standards for Federal Land Acquisitions
Two projections sit inside that sentence: a layout and a price for each lot. The layout depends on how many lots the ground can hold, which is its own subtraction, explained in what lot yield is. The price depends on what finished lots of that kind would bring.
Before either projection means anything, the use has to be one the land can actually carry. The same standards say that to be a property's highest and best use, a use must be physically possible, legally permissible, financially feasible and result in the highest value. They add that zoning, permits and other land use restrictions are therefore of critical importance, because they restrict the uses to which property can lawfully be devoted. Both the physical and the legal side of that test are read factor by factor in the five-factor method for reading land.
No public source gives a finished lot price, a cost per lot or a residual value for any tract in Carroll County or the counties around it, so this page prints none. A number a lender will rely on comes from a licensed appraiser.
Take out the cost of building the lots, the marketing and the developer's own profit
From the projected lot sales, the method deducts everything it takes to produce and sell those lots, and it counts the developer's profit as one of those costs.
The projected gross sale proceeds for all lots in the tract are then aggregated and a deduction is made for all projected direct and indirect costs of maintenance and sale, including development [i.e., the developer’s anticipated profit] and marketing.
Uniform Appraisal Standards for Federal Land Acquisitions
The physical costs include the ones a lender names when it describes a land development loan: infrastructure such as sewer and water pipes, utility cables, grading and street construction, according to the OCC's handbook on commercial real estate lending. What those cost on a given tract is the buyer's engineer's estimate, not a listing agent's.
Some costs come from statute rather than from a contractor. Where land is taxed on its use under land use taxation, Va. Code 58.1-3237 A subjects it to roll-back taxes when the qualifying use changes to a nonqualifying use or, except as a subsection G ordinance provides, when its zoning is changed to a more intensive use at the request of the owner or the owner's agent. Which events do and do not bring rollback taxes is its own question, and a parcel's classification is a question for the commissioner of the revenue.
Opening the ground is another. Outside a Chesapeake Bay Preservation Area, Va. Code 62.1-44.15:34 applies soil erosion control requirements to any activity that disturbs 10,000 square feet or more, although the locality may reduce that threshold. What an erosion and sediment control plan involves is covered in what an E and S plan is.
Carroll County's 2024 comprehensive plan adds a local caution that shows up as cost: it records slope, drainage, habitat and compatibility constraints at many of its planned commercial sites near the interchanges, which are set out in how far from an interstate exit is still commercial ground.
Discount the net for the years between today and the last lot sold
Lots sell over time, and money that arrives years from now is worth less today. The method discounts the net proceeds to present value over an absorption period, the stretch in which the lots would be sold given projected demand.
This time lag must provide for the time necessary to procure all land use permits and approvals, as well as the time necessary for the physical construction of the infrastructure that will be required to convert the land into marketable lots.
Uniform Appraisal Standards for Federal Land Acquisitions
In Carroll County the calendar has a fixed gate. Under the county's subdivision ordinance any division of a lot or parcel is a subdivision, and no parcel in one is sold before its approved plat is recorded, so plat approval is part of the time lag. How that rule reaches a sale of part of a commercial parcel is covered in what a pad site is.
The standards call selection of the discount rate one of the most critical factors in the technique. A lender reads the absorption period closely too: the OCC handbook says an appraisal of raw land valued as developed lots should reflect a reasonable development time frame, with the absorption period supported by a feasibility study or market analysis. What that study covers is explained in what a feasibility study is.
What survives the subtraction and the discount is the value of the raw ground
After the lot sales, the costs, the profit and the discount, one number is left.
The remaining sum (the residual) is said to represent the market value of the raw land on the date of value.
Uniform Appraisal Standards for Federal Land Acquisitions
The standards list other names for the same technique, including the land residual approach and the developer's residual approach. Whatever it is called, every input is an estimate, and a report using it has to present market support for each one: lot sale price, absorption rate, development costs, expenses, time lag and discount rate.
That list explains why two developers can look at one tract and arrive at different prices. A slightly lower lot price, a longer approval calendar or a higher required return each come off the same remainder at the end, so the raw land absorbs every difference in the assumptions above it.
A lender's appraisal starts from the land as it stands. The OCC handbook says the market value in a raw land appraisal should reflect the property's actual physical condition, use and zoning designation as of the appraisal date. How the subtraction plays out on a specific tract, and what a feasibility read covers, is on the land development and feasibility page.
Test the residual against comparable sales, and expect the lender to be cautious
In federal land acquisition appraisal standards, the residual method is not the first tool for valuing land.
When the subject property is unimproved or the cost approach is being used, the primary method of land valuation is the sales comparison approach
Uniform Appraisal Standards for Federal Land Acquisitions
The same standards say the subdivision development method may be appropriate when highest and best use is subdivision, comparable sales do not exist, and adequate market or technical data are available. They call the approach complex, note that it often requires the assistance of other experts, and reserve it for rare cases, better used as additional support for sales comparison. In an appraisal under those standards, then, the residual supports comparable sales rather than replacing them. A comparative market analysis starts from those sales too.
Financing adds its own caution. The OCC handbook calls land acquisition loans among the riskiest types of commercial real estate loans, because undeveloped land generates no cash flow in most cases and needs other sources of funds to service the debt. Carrying land that earns nothing through the approval years is part of what the time lag and the discount rate have to account for.
Income property is valued a different way, by capitalizing a stabilized income, and that method is explained in what a cap rate is.
What does a developer's residual math mean for the price of your tract?
Tell Lowell the acreage, the road frontage and what a developer might build there, and he will name the approvals and site questions a developer's math will subtract before any offer arrives. No cost, no obligation.
Got it. Thank you.
We'll be in touch shortly with an honest read.
Questions this raises
Why do two developers offer different prices for the same tract?
Because the land is what is left after everyone's assumptions. Each developer projects its own lot prices, development costs, profit, marketing, approval calendar and discount rate, and the residual method subtracts all of them from the projected lot sales. Every difference near the top lands on the remainder at the bottom, which is the price the raw land can bear.
Is a developer's residual calculation the same as an appraisal?
No. The residual, or subdivision development, method is one technique an appraiser may use. The Uniform Appraisal Standards for Federal Land Acquisitions make sales comparison the primary method for unimproved land and reserve the residual method for rare cases, as additional support. A lender's appraisal of raw land values it in its as-is condition, use and zoning designation.
Why does a long approval process lower what land is worth to a developer?
The method discounts future lot sales to present value, and the time lag it has to allow for includes procuring all land use permits and approvals and building the infrastructure before lots become marketable. The longer that stretch, the more the future proceeds are discounted, and the smaller the residual left for the raw land.
Where this page's facts come from
Every rule, office and figure above traces to one of these. Rules change; check the office before you act on one.
- Uniform Appraisal Standards for Federal Land Acquisitions: highest and best use, sales comparison and the subdivision development method U.S. Department of Justice
- Comptroller's Handbook, Commercial Real Estate Lending, Version 2.0, March 2022 Office of the Comptroller of the Currency
- Va. Code 58.1-3237, roll-back taxes Code of Virginia
- Va. Code 62.1-44.15:34, soil erosion control thresholds Code of Virginia
- 2024 Comprehensive Plan: commercial and industrial areas at the interchanges and their constraints Carroll County, Virginia
- Land Use and Planning: any division of a lot or parcel is a subdivision Carroll County, Virginia