Land Valuation questions

[Matthew Harris]

I'm looking for advice on land valuation in the Seattle metro area (Bothell, Lynnwood, Kenmore, Lake Forest Park, Woodinville, Kirkland). I have a desire to build a passive house and I've been looking for land. It seems like desirable land is hard to come by so I've been looking at tear-down houses or manufactured homes that can be removed. I've been reading about Residual Land Value to determine if a piece of property is reasonably priced. The way I understand it is as follows: Determine final value based on comps, subtract 7% for agent fees, subtract cost to build SFR, subtract a percentage to keep as profit.

As an example, let's say I want to build a 2000 sq. ft. house that can sell for 900k.  Subtracting 7% = 837k.  The cost to build a 2000 sq. ft. house (depends on who you ask, but I'll go with $200 per sq. ft.), 400k, leaves 437k.  If I want to make a 20% profit (is this too high?) then subtract 180k (900k*20%).  This leaves a valuation of 257k for the land.

I haven't seen a piece of buildable land on Zillow for that low of a price for a long time. I know the Residual Land Valuation method is based on a lot of assumptions and you can argue every assumption I made in the example. Are deals on the MLS just over priced or am I missing something? What are typical lots going for? Are most good deals off market?

[Michael Haas]

@Matthew Harris everyone runs numbers differently, so take this with a grain of salt :). 2 recommendations for you:

1. Not a lot of new builds are selling for just $900k, especially new builds that are environmentally friendly or have some other unique features. What if you target a higher exit price (like $1.2 mil). How does that affect your calcs?

2. Profit may be a little high for where we are in the market - we are conservative and target 15-18% profit after all fees. Often real profit exceeds this because we don't assume any appreciation between purchase and resale, and of course our market can appreciate a lot in 6-8 months :).

Always happy to chat more. Sounds like a cool project!