Investment approach
Residual method: how to work out the most to pay for a villa plot
The residual method works backwards from revenue: costs and margin come off the sale price, leaving the land price ceiling. In the six-villa example it is 4,96 M€; a 10% lower price moves it by 23%.
The residual method answers how much a developer can pay for land and still make the project work. Revenue from the sale of all the villas is reduced by costs and the target margin, and what remains is the maximum value of the plot including taxes and purchase formalities. The Spanish valuation methodology writes this as the formula F = VM × (1 − b) − ΣCi (art. 42 Orden ECO/805/2003, the ministerial order on property valuation). In the worked example for six villas, the plot price ceiling is 4.955 M€, and a 10% fall in the sale price cuts it by almost a quarter.
How does the residual method work?
Revenue first, then deductions, and the land only at the end. For a villa project the order is:
- Estimate revenue VM: the price of each villa on the sale date, summed across the project.
- Deduct costs: construction, design and supervision, licence and ICIO (construction tax), insurance, contingency, sales and financing.
- Deduct the developer's margin b.
- The remainder F covers the land together with the taxes and costs of the purchase.
- Divide F by (1 + the share of taxes and formalities): the result is the price you can name to the seller.
Orden ECO/805/2003 distinguishes two variants. The static one works when construction can start within a year at most (art. 34.3), and for other cases the dynamic one is needed, with a payment flow and a discount rate (art. 36–38). In a regulated valuation the margin is set by the valuer at the level usual for similar projects (art. 41). The order itself is mandatory only for the purposes listed in its art. 2: mortgage loans that form part of the cover for a bank's mortgage bonds (wording from 12.08.2025), insurers, real estate investment funds and pension funds. For a private deal it is reference logic, not a requirement.
What does the calculation look like for six villas?
Worked example, not a forecast. The inputs are rounded and are not market figures: six villas of 400 m² built area each, a price of 2.8 M€ per villa, construction at 2 500 € per m², land from a private seller, and taxes and purchase costs at 12% of the plot price.
| Item | Assumption | Amount, € |
|---|---|---|
| Revenue | 6 × 2 800 000 | 16 800 000 |
| Construction works | 2 400 m² × 2 500 | 6 000 000 |
| Design and supervision | 8% of works | 480 000 |
| Licence and ICIO | 3% of works | 180 000 |
| Contingency | 5% of works | 300 000 |
| Insurance | 1,5% of works | 90 000 |
| Sales | 3% of revenue | 504 000 |
| Financing | 2% of revenue | 336 000 |
| Total costs | 7 890 000 | |
| Developer's margin | 20% of revenue | 3 360 000 |
| Remainder for land with taxes | 16 800 000 − 7 890 000 − 3 360 000 | 5 550 000 |
| Plot price ceiling | 5 550 000 ÷ 1,12, rounded | 4 955 000 |
That is about 826 000 € per villa. The amounts in this and the next table are rounded to thousands of euros. I took the 12% tax share to keep the arithmetic round: under the ATC scale (the Catalan tax agency) in force since 27.06.2025, ITP (transfer tax) on a plot of about 5 M€ averages roughly 12,4%, plus notary and registry, so on a purchase with ITP the real ceiling will be lower. By law ICIO cannot exceed 4% (art. 102 RDLeg 2/2004); the example uses 3%. If the plot's seller is a business, IVA (VAT) at 21% and AJD (stamp duty) apply instead of ITP, and the tax share in the calculation is different (IVA on a plot).
What happens to the ceiling if the sale price is off by 10%?
The land price ceiling reacts more strongly than the prices themselves. The remainder is small compared with revenue, so an error in revenue falls almost entirely on the land.
| Sale price \ margin | 15% | 20% | 25% |
|---|---|---|---|
| −10% | 4 505 000 | 3 830 000 | 3 155 000 |
| Base | 5 705 000 | 4 955 000 | 4 205 000 |
| +10% | 6 905 000 | 6 080 000 | 5 255 000 |
A 10% lower price moves the ceiling by 22,7%, and a 10% higher construction cost lowers it by 12,7%. Now the other side: the plot was bought for 4.955 M€ and the villas sold 10% cheaper. The project result before corporate income tax falls from 3 360 000 to 1.764 M€, almost by half. With a 20% price fall, 168 000 € remains, which is 1,2% of revenue. So when negotiating for land it helps to know the ceiling and, separately, the price at which the project still holds.
Where do the inputs come from?
There is no single public construction price per m² for a villa. The Mòdul Bàsic of 677 € that the Col·legi d'Arquitectes de Catalunya (Catalan architects' association) set for 2026 (COAC) is a base for calculating professional fees on works whose visado (professional endorsement) began before 1.10.2010, and it is not the cost of building a metre. Prices of individual work items come from the BEDEC database (ITeC), and the estimate is built from measurements (how to build a budget). Sale prices come from closed transactions, not listings (the gap between asking and closing price). I chose the 20% margin arbitrarily: there is no open norm for villas. Calculating profit when the land price is already known is covered in the article on the economics of developing a plot.
When does the residual method not work?
It does not work while the land's status is unknown: if the plot is not a solar (land ready to build on), urbanisation and cessions are added to the costs (the owner's obligations), and without a plan and a project there is no "most probable development", which art. 35 requires. It does not work without a price forecast: the method transfers the whole revenue error onto the land. And it does not replace comparison with land sales: if the calculation gives a price half the seller's ask, the question is usually in the sale price assumptions, and those are checked first.
Put your own inputs into the investor calculator and check the assumptions against the methodology. The approach to projects involving land is described on the land strategies page.
Questions and answers
What is the residual method in plain terms?
It is a calculation of land from the end: the sale price of the finished houses minus all costs and the developer's margin. What is left is what the developer can pay for the plot, including taxes and formalities.
How does it differ from calculating the project's profit?
In a profit calculation the land price is known and the result is what you look for. In the residual method the target margin is known and you look for the maximum land price. The first answers a question about the project, the second about the negotiation.
What developer's margin should you use?
There is no open norm for villas. In Orden ECO/805/2003 the margin is set by the valuer at the level usual for similar projects. In the example, 20% is an assumption and should be checked against transactions.
Is it mandatory to calculate under Orden ECO/805/2003?
No. The order is mandatory for the purposes in its art. 2: mortgage loans in the cover of mortgage bonds, insurers, real estate investment funds, pension funds. In a private deal it is used as reference logic.
