How to value a building plot
Updated: May 8, 2019
Calculating what a building plot is worth is relatively straightforward if you follow these simple guidelines. You will need a valuation calculation which is often known as the "Residual Valuation Method"
Valuation = End Value - Build Costs - Plot
The idea is that you establish the market value of the new home you are about to build. Go and visit several estate agents in the area and get their opinion. Then do lots of research on the internet. RightMove has an option where you can see what properties in that specific postcode have sold for to give you an idea of the current selling prices. If similar homes in that street/road have not sold for more than £500k, it's highly unlikely your new build will sell for £850k irrespective of the spec as buyers are very savvy and will not pay more than the going rate.
Once you have a good idea of the potential end value, you will then progressively identify and deduct all the costs involved in designing and building the house plus the actual plot purchase. Whilst this seems simple, all these costs are subject to variables.
The skill here is to work out what the plot will support and what the local planning authority will approve. Be mindful not to overdevelop the plot and then find the council has harsh restrictions i.e conservation areas
This is perhaps the most important part of the process. You can do some rough calculations using self build magazines and online sites. Builders would be unlikely to get involved at this stage as there are so many variables to cover off. Best to get them in once you have planning and architectural drawings in place.
Imagine you have found a small bungalow on a street where most 2 storey homes sell for approximately £700k. With some tweaking you think your new build would be worth £730k when finished. For example - £730k (end value) - £250k (build costs) = £480k - this is the maximum you should pay for the plot including all the necessary fees involved in purchasing the property.
There WILL be unforeseen costs and it is essential you plan for this. Generally, it's a good idea to put 10% of the total build cost aside.
If you manage to sell the property for more than anticipated or if your build costs come in at less you can quite legitimately make yourself a small profit, especially if it is the only home you own as you won't have to pay capital gains tax.