How to calculate value of land?

Question

Leonard L. · Answer

@Nick Capriotti as you can tell from the responses above, there are two different ways that people value raw land.

The most obvious is answer to the question - what is land worth -- is derived from CMA, or competitive market analysis.  This is trying to answer the basic question of worth through extrapolation and adjustment of data from sales of similarly situated properties.  This is the approach described quite well by @John Becker above.

The other approach, and this is the one used by developers like myself, is residual value.  Residual value is that value that would remain after costs are deducted from revenue from sale of the entitled and/or developed lot.  That is the approach described by @J  Scott above.  What is the thing that makes sense to develop on the property, what would be revenue be from that development, and what are the costs of getting there.  Whatever is left after deducting all costs (other than land acquisition) from the sales proceeds of the development, is the residual value left over for the land.

The CMA value is handy if you are a passive investor.  But if you are going to add value through entitlements and/or ground up development, it is residual value you will want to understand.

J Scott · Answer

Determine the highest and best use of the land.  Determine the costs to build to the highest and best use.  Back that out, along with the fixed costs and the likely desired margins a developer would want to see to develop to the highest and best use.  That's the value of the land.

David Jacques · Answer

figure out what a comparable new home should sell for on a comparable lot

Deduct build costs

Deduct selling costs

Deduct land development costs

Deduct carry/ misc costs (overheads etc)

Deduct you're desired margin

What is left is what the land is worth to you. Value is subjective so it can vary from investor to investor. Compare your land cost with others and see where you fall in line.

Karen Margrave · Answer

@Nick Capriotti  In some areas a 50x100 foot lot may seem small, in areas such as coastal Orange County, CA, a 50' wide lot is HUGE! It all depends on your local market as to values on land. Is there an abundance of property, or is it rare? What is the selling price per square foot of homes in the neighborhood? Are they older, newer, etc.? There's many factors to consider, but @J  Scott has laid out some great guidelines.

John Becker · Answer

I'm new to BP but I've been buying and selling vacant land across the US for the last few years and here's what I do.

I would first go to the County Assessor's website and see what they have the value assessed at and then call them to find out the relationship between their value and market price. Many assessors will have a lower value than market. Especially in a rising market like we are in. This will give you a ballpark idea.

Then I go to a website like realtor.com or, if you are a licensed agent you could just use the MLS, and search for recent sales in the area. If there are enough then this will give you a pretty good idea what the market values the property at. If there aren't enough sales then you can see if there are any listings and discount those listing prices 10% to 15% to get a rough value.

Obviously, improved property with utilities in place has more value but how much is subject to many factors. Like what are the impact fees or costs to connect to those utilities when you build.

There are macro issues as well like the surrounding neighborhood, future development, zoning, easements, condition of the property, etc. that all can nudge the value one way or another.

And once you've done all that then take a quick look at the type of deed the property has, whether there are any liens on it, any special or upcoming assessments and are the taxes current. This should all be available on the county website as well. After all this, you should have a pretty good idea of what the property is worth.

Dion DePaoli · Answer

Break the Subject and it's comparable all down into price per square foot.  If the best comparable have already been built on, you can go back to the vacant land sale to see what the price is and try and adjust forward in time.  Obviously, sales more recent, that are the closest and are similar in features are best to use.

How to calculate value of land?

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