Residual land value

There is only one honest way to price a development site: decide what the finished product will sell for, subtract everything it costs to get there, subtract the profit you require for taking the risk, and whatever is left is what you can pay for the land. That leftover is the residual land value.

Most people do it the other way round. They start with the asking price, add a build cost, and check whether the answer "works". It always works, because the inputs get adjusted until it does. Working backwards removes that freedom.

Why it has to be solved rather than calculated

Three of the largest costs in the model depend on the land price itself:

• Conveyance duty is a percentage of what you pay.
• Finance is charged on total development cost, and land is usually the largest single line in it.
• GST under the margin scheme is one eleventh of the margin between the sale price and the land cost — so paying more for the land reduces the GST, which partly offsets the extra price.

The costs you enter are GST-inclusive, which is how they are quoted. Under the margin scheme you give up the input tax credit on the land, but you keep it on everything you buy to build and sell — so one eleventh of the build, site works, contingency and selling costs comes back, and the model deducts it. Not the Lease Variation Charge, titling or duty: those sit outside the GST net.

You cannot rearrange that algebraically into "land equals". So the tool solves it: it guesses a land price, calculates the resulting margin, and narrows the range until the margin equals your target. Eighty halvings of the interval gets there to the cent, and takes about a millisecond.

That result is the whole point. The residual is below the unimproved value, which means the land is worth more as a single-dwelling site than under this scheme. No amount of negotiating on price fixes that. See why unimproved value is your floor.

What to be careful with

The residual is extremely sensitive to the end value — roughly $267,000 of land value for every $100,000 of price per dwelling on a three-dwelling scheme. That is a feature of the arithmetic, not of this tool, and it means the number you argue hardest about should be the sale price, derived from a real comparable, with a haircut for unit title and for having less land than the house you compared it to.