RES exam question on Real Estate Market: maximum price the developer should pay for the land

HardReal Estate Market & Government Intervention · Paper 1

A developer evaluates a vacant site for residential development. Completed, the site will yield 10 townhouses selling at $2,000,000 each. Total construction and professional fees are estimated at $9,000,000 and the developer requires a profit of $2,000,000. Using the Residual Method, what is the maximum price the developer should pay for the land?

A$7,000,000
B$11,000,000
C$9,000,000
D$13,000,000

Show answer & explanation

Answer

C. $9,000,000

Explanation

Residual Method: Gross Development Value (GDV) = 10 × $2,000,000 = $20,000,000. Less total costs (construction + professional fees): $9,000,000. Less developer's required profit: $2,000,000. Total deductions = $11,000,000. Residual site value = $20,000,000 − $11,000,000 = $9,000,000. This is the maximum a rational developer should pay for the land. The Residual Method is most appropriate for development sites (greenfield land, redevelopment sites) where the value derives from the future completed development rather than any current income stream.

Study the concept behind this question: Property Valuation: The 5 Methods (with worked examples)

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Original study material mapped to the public CEA RES syllabus. Verify any rate-based figures against current IRAS/CPF/MAS rules before relying on them.