How do I find the value of a vacant lot

Question

I posted this on another board but I wanted to see if I could get some info from a builder's perspective as well...

I've got a buyer wanting to find some vacant lots in my area to build on.  I'm planning to treat this like a wholesale transaction so that I get paid a finders fee.  In valuing the vacant lot, do I use comps the same way that I would value a built property?  What if there are no other vacants in the vicinity?  Any advice?  Thanks.

Manny Cirino · Answer

@Steven McPherson wholesaling land is definitely a good avenue to take. It something I have been preaching heavily on my last few post. Many investors are tripping over each other trying to find quality houses to flip that the competition is causing home prices to be over bid which is killing a deal. You have the buy and hold investor willing to pay more than the fix n flip investor. And then there are the land developers looking for the best residential areas to build in. Selling to the larger companies is going to be close to impossible as they have departments dedicated to sourcing, negotiating and acquiring deals. But there are a lot of beginners out there flying blind and those are the investors who are going to bite.

There are a few things you will have to get familiar with before you attack these deals. Things such as average cost-to-build in your local market, the different types of construction possible (sip, modular etc...) zoning, cost for permits, engineering & geo reports etc...

The second method @J Scott recommended is probably the truest way to evaluate the land cost. The area in which the land is located will ultimately put a cap on the value of the land. Take a look at the recently sold/newly renovated properties in the area and work backwards deducting the cost to build, holding cost, selling cost, desired profit and that leaves you with value of the land.

Example:

Say you are looking at a lot in a residential area where the houses are all between 1200-1400 sqft. and selling at $250,000

$250,000 - ARV

$119,000 - $85 per sqft. to build a 1,400 sqft. structure ($85 x 1400=$119,000)

$15,000 - 6% commission of $250,000

$10,000 - Closing cost(buying and selling)

$1,000 -  Permits (building, electrical, plumbing, mechanicals, roofing etc...)

$10,000 - architects, engineers

$40,000 - desired profit

$55,000 - Land Value

Keep in mind this is just an example I'm missing all sorts of cost in this equation. Also that your negotiated wholesale price should be deducted from that land value.

J Scott · Answer

Yes, but also more minor stuff like, is it on a corner?  What are your neighbors doing with the adjacent lots (are they eyesores?)?  How tough would it be to get utilities to the property?  What is the frontage?  Etc...

Even two similar lots on the same street could be very different in these respects...

Vernon Miller · Answer

Very good example but let me say those estimates also depend on location.

If the investor is a flipper and wants his ROI back sooner ,then the old saying is'location,location,location.

That said, average good reliable construction in a productive area will lean more towards $95 to $110 a square foot.

It would be great to pocket $40 k after all expenses but $25000 to $30000 will be more of reliable amount in a market where they are a ALOT of SFH for sell at the moment.

Pricing the investment for a quick flip is crucial in 2016.

Manny Cirino · Answer

@Steven McPherson here is a link I came across that reminded me of this post. just a list of thinks to consider and ask when negotiating.

http://buildingadvisor.com/buying-land/land-buying-checklist/

Bill Gulley · Answer

I suggest you use seller financing, 100% with a call feature due on sale, you close then you sell sub-2 the note, to your buyer and payoff your note. Very simple, there are 2 settlements, but you own it to sell it, this way you aren't breaking any brokerage laws and what you charge is no longer an issue as to what your "service" is worth but more to the value of the property sold by an owner.

In real estate valuations from a market, legal and financial side, intrinsic values are not in the game, unless they can be shown in the market. Some of this is called external obsolescence or external valuation such as a lot on a lake shore or in an exclusive area, these values can be identified in the market by comps.

You have other situations where beauty is in the eye of the beholder, you might ask for 20K more for that million dollar view, but if it can't be shown in the market at some point it's going to hit a lender's desk and if it's not justified the premium will be ignored. The buyer will need to pay the additional amount, for that desired stream running through it, but they cannot really finance it.

You need to learn the process as I mentioned above in order to justify values. Intrinsic values cannot be proven so much and therefore are not used to appraise real property, if we were selling antiques on that antique road show, buyer demand plays  more of an economic role in the auction frenzy. What a buyer is willing to pay becomes more of the guide.

Now, in reality, if an appraiser really loves the view but can't justify that value, they may make other adjustments in their opinion that could influence the value of that view, but that too is within appraisal guidelines and percentage limits of value.

There are other valuation considerations for real estate as there are other reasons to assess value, legal aspects such as estate valuations, bankruptcy, business termination and liquidation, but here we look to an open market approach along with the cost and replacement approaches as applicable, the cost approach is really not applicable to a residential lot and replacement is only applicable to improvements.

Just start learning, LOL  :)

Manny Cirino · Answer

@Steven McPherson If you have local Real Estate Investors Association I suggest visiting one and shaking a couples of hands. I am sure someone in there has experience and be willing to provide you those answers. Just know the cost will very depending on the type of construction know cost on all types is a good thing to know.

Steven McPherson · Answer

This is all very good information.  Thank you all for your help.

@J Scott when you say adjust for intangibles of the property, can you elaborate?  Are you talking about things like market demand, good schools, crime, things that a customer looks for in location?

@Manny Cirino the good thing is, I work for my City's building inspections department (which is why the builder came to me for this information), so I will be able to help in the permit and zoning process.  I guess in order to find an average of the cost-to-build, profits, etc., I'm going to have to start getting some information from local builders, correct?  Are builders usually ok with giving out this information?

@Bill Gulley very good point in that last paragraph.  I don't want to be taken advantage of, which is why I plan on treating it as a wholesale deal or utilize some other form of creative financing.

Eventually, after work my way up and gain the experience, I will become a builder myself.  I figured this is a good starting point that might be overlooked in my market.

Manny Cirino · Answer

@Bill Gulley has a good point @Steven McPherson I wasn't going to include info on financing options. But when it comes to land having full control of the lot is major. Creative financing are always go options for these as they are usually easy sells. Take title via owner financing or lease the land with an exclusive option to purchase it and you can then flip your interest in the property that way. Any investor with half a brain should be educated enough to locate the owner on there own and cut you straight out.

There are many different variables when it comes to selling land most you will learn along the way but to stick to the topic of the forum what I posted earlier is a great entry point. All readers should be aware that most cost is always subjective to your local market.

Bill Gulley · Answer

Well, not really, look at the market approach, look at the comps and you'll need to deduct improvements on a cost basis after depreciation. The more comps the better because you're adjustments will far exceed the value, in other words you're deducting about 20 to 30 % of the sale price.

Location factors in as well as to what the area will support for the new home. Generally a new home builder will not want to exceed 15-20% for an unimproved lot, you can then add for utilities and streets. Lenders will look at 25% of the sale being the lot value and above that will begin to reduce the excess value.

Another point is excess land, when you meet the building requirements for a residential home, say a quarter acre, if your lot is a 1/3 acre, the excess is not valued at the same rate per foot as the first 1/4 acre. Lots can get much larger and become more of a liability in a retail sale. Think as it as 5 acres costing less per acre than a required 3 acre lot for similar locations. What to do with the extra 2 acres, can't build on it, you're looking at demand for a 5 ace lot when 3 would do it. There can be exceptions but this is excess land valuation.

If there is any real money involved I'd suggest you have it appraised.

I'd also suggest you read some wholesaling threads. How often do you think this builder is willing to work with you, because if its just one deal or a few this month, you can't cover yourself if the builder cuts you out by going to the owner! There are some pretty sly new home builders in your neck of the woods.

So,  take title, then sell  it! :)

J Scott · Answer

Yes, if there are comps to use, you can typically get a reasonable estimate that way.  Though keep in mind that no two lots are identical and you'll have to adjust for the tangible differences and the intangibles.

The other way to do it is to determine the lot's "highest and best use," and then work backwards from the ultimate value of the property given its highest and best use, subtracting out the hard costs, the soft costs, the builder's desired profit, etc.  From there, you can get a value that would allow you to sell it to builder who would put the land to highest and best use, and then make his desired profit.

How do I find the value of a vacant lot

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