When an agent appraises your home, they look at what similar homes nearby have sold for. A developer works the other way around. We start from the finished project and subtract our way back to the land. The method is called residual land value.
Two numbers people mix up
Owners often treat these as one figure. They are two different things.
- Value as a home. What an owner-occupier or investor would pay for the house as it stands. Driven by comparable sales, condition, the street and the school zone.
- Residual land value. What the site is worth once you allow for the revenue, cost and risk of developing it. If the house is coming down, it barely counts here.
The two can land a long way apart, and either one can be the higher. On one block a developer will pay well beyond what any home buyer would. On the next, a family will pay far more than the numbers let a developer offer. Neither figure is the "real" value. They answer different questions.
Prefer an answer for your own block? Request a free assessment — no cost, no obligation.
The formula
Take everything the finished development will sell for. Subtract everything it costs to deliver. What's left — the residue — is the most a developer can rationally pay for your land.
Land value = end sale values − selling costs − construction & subdivision − fees, approvals & GST − holding & finance − contingency − developer's margin
The margin isn't greed. It's the return for carrying real risk: markets moving, costs blowing out, approvals dragging. For residential work it's commonly around 15% of project cost.
Go below that and a developer is exposed. A small move in construction costs or sale values wipes the margin out and turns the project into a loss. The banks funding these projects know it. They read the feasibility, and if it doesn't show a commercial margin, they decline the loan.
A worked example (illustrative numbers)
What follows is a simplified breakdown of what a real project may look like, and how the residual land value would be calculated.
Say your 1,000 m² block can take four allotments. Each carries a new home that would sell for around $900,000.
| End sale value (4 × $900,000) | $3,600,000 |
| Selling & marketing | − $90,000 |
| Construction (4 homes) | − $1,600,000 |
| Demolition, subdivision, civils, approvals | − $160,000 |
| Holding & finance | − $180,000 |
| GST, after margin-scheme credits | − $76,000 |
| Contingency | − $60,000 |
| Developer's margin | − $450,000 |
| Residual land value (max rational offer) | ≈ $984,000 |
|---|
More homes doesn't always mean more land value
The instinct is understandable. If four is good, five must be better.
Sometimes. Not always. An extra dwelling can force smaller homes, tighter access, community title instead of Torrens, more retaining and a longer build.
The right question isn't "how many fit?" It's "which proposal is the best and highest use for the site?"
When the existing house still matters
Developers get described as only valuing the dirt. That's not always right.
The house can add value when it can be kept. Retained while a new allotment is created behind or beside it. Rented through the approval period. Renovated and sold as part of the project.
A house on one side of a wide block is useful. It may let you create a new allotment without demolishing anything. A house planted across the middle does the opposite. If it blocks the subdivision, it has to go. It wouldn't matter if it were in excellent condition. Once it has to go, it's a liability, not an asset.
Whether the house helps or gets in the way is what decides its value.
When residual value beats market value — and when it doesn't
If your block supports extra dwellings, the residual value of the land can exceed what the property fetches as a home. That gap is the "development premium". It's why a developer can sometimes genuinely outbid the open market. If your block supports nothing extra, there is no premium, and you should sell through an agent to the buyer who loves the house.
What to ask a developer
It pays to ask the developer questions so that you understand their offer:
- What have you assumed I can build here?
- How many allotments or homes, and Torrens or community title?
- What finished sales did you compare against?
- Is the offer conditional on finance, planning or due diligence, and for how long?
- What deposit, and when does it go unconditional?
- What have you built before?
A developer who has done the work can explain the reasoning in plain terms.
Curious what the numbers say about your block? Our free assessment runs this same calculation on your property. We work out what the site can take, what the finished homes would sell for, and what it costs to deliver them. What's left is your land's residual value. You'll get that number, and the thinking behind it, explained in plain English.