Question
Use the Residual Hypothetical Development Method to determine the purchase price (land value) that should be paid for a real estate development site with the
Use the Residual Hypothetical Development Method to determine the purchase price (land value) that should be paid for a real estate development site with the following charteristics:
No of units | 35 |
Average sale price per unit | $ 690,000.00 |
Cost of Sale | 5% |
Profit & Risk Rate | 17% |
Surveying fees | $ 50,000.00 |
Town Planning Fees | $ 100,000.00 |
Council Headworks Charges (per unit) | $ 5,000.00 |
Build Project Manager Fees | $ 150,000.00 |
Construction Costs (per unit) | $ 300,000.00 |
Architect/Engineering/Other Fees as a percentage of construction costs | 4% |
Mortgage Establishment Fee | $ 80,000.00 |
Development Period (months) | 18 |
Selling Period (months) | 18 |
Debt funding Interest Rate (per annum) | 8% |
Land Tax to be paid by the developer | $ 25,000.00 |
Rates to be paid by the developer | $ 25,000.00 |
Planning approval period (months) | 6 |
Acquisition Costs (percentage of land purchase price) | 4% |
For the purposes of this exercise do not consider GST.
Assume that the developer is concerned about the development and wants to do a sensitivy analysis based upon a number of variables changing. What price should the developer pay for the land if the Average sale price per unit reduced to $650,000, the Profit & Risk rate increased to 20%, the construction costs increased to $325,000 per unit and the expected development period increased to 24 months?
Once you have created this spreadsheet, see if you can use it for a very simplistic and rough calculation to work out the value of development with the following characteristics:
No of units | 10 |
Average sale price per unit | $ 750,000.00 |
Cost of Sale | 5% |
Profit & Risk Rate | 15% |
Construction Costs (per unit) including all fees and debt establishment costs | $ 450,000.00 |
Development Period (months) | 12 |
Selling Period (months) | 6 |
Debt funding Interest Rate (per annum) | 8% |
Land Tax to be paid by the developer | $ 10,000.00 |
Rates to be paid by the developer | $ 10,000.00 |
Approval period (months) | 3 |
Acquisition Costs (percentage of land purchase price) | 4% |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started