Created on Sunday, October 25, 2015
Updated on Monday, February 26, 2018
by Land Century
Every parcel can be judged in three different ways to determine the actual value of the land.
Note: This is based off of pure land valuation and doesnt include the actual value of any structures that may exist on the land itself.
Lets take a look at a few of the most common valuation methods used in land appraisal:
Land Value Estimation
The value of raw land is actually more difficult to judge than land that already has a structure on it. This is because the land is seen as a blank canvas. Why? Because it matters what the person plans to do with the land.
It makes sense that a piece of land used for commercial activity would be worth more than a piece of land for a home.
This is the same idea that goes into determining the value of land. In most cases, commercially-zoned land will come at a higher premium than residential or farm land.
All valuation comes with the necessity of a land survey. This is often done by a professional and will allow you to know exactly what land you have. This will include the exact borders and parameters of the land, so you know what part of the land belongs to you.
The survey will also help you understand:
* Street frontage
* Buildable land
With large parcels, youll find that youll have sparse buildable land and land that needs to be improved to be built on. A surveyor will help you determine the base cost to improve the land to a state that is proper for building, and will tell you what land you have that can currently be built upon. Its very important to know exactly what you can expect from the land itself.
In a comparison-based valuation, youll be comparing different properties that have been sold in recent years. This is what youll hear when a realtor is selling a property and gives the seller a market value for their home based on recent sales. There is a price that the market is willing to pay for the land, and a comparison will give you an estimate of that price.
The total value of the land should be done per square foot rather than as a whole. Youll need to compare several lots of comparable size and makeup to determine the cost of the land. And, you may have premium land if youre on a lake, pond or beachfront.
If the land has any improvements, be it fencing or enhanced draining or anything that adds value to it, you would use what is called the cost approach. What this approach offers is a way to determine the value of the property before the structures were put in place.
This is derived from the following equation: current sale cost improvements. The idea behind the cost approach is that the lands value should not be more than the same plot of land plus the improvements made on the property. For example, a 1 acre lot with a fence may be for sale for $20,000. If the fences value with the installation is calculated to be $5,000, an identical parcel without a fence should cost no more than $15,000.
Valuation by Residual Value
The residual value valuation is used when you cannot determine the comparison value. This is done by determining:
* What can be built on the property (i.e. a 2,000sq. ft. home)
* Determining the cost of the structure
* What the home would sell for after being built
You can also do this by finding other real estate in the area, and looking at the home value and land value estimates. For example, if the home itself cost $200,000 to build and the entire lot with the home is selling for $230,000, the land value would be worth $30,000. This is much like the cost approach that was discussed earlier.
Land doesnt always have a standardized cost as listed above. Instead, some land does have income potential that will need to be determined into the cost of the land. A good example of this would be a piece of farmland that used to produce $100,000 worth of crops per year.
The land may now have been reclaimed, but that doesnt mean it doesnt have income potential. In this case, the potential income of the property would be $100,000 per year with depreciation and various costs deducted. You may need to put nutrients into the land to bring it back to a farmable state, and you also may have to clear out trees and add drainage, which would obviously reduce the income potential of the land.
Again, youll need to account for anything you would need to do to bring in the same value from the land as the previous owner. Income potential is best derived by a professional to fully determine what the lands true value should be.
Factors that Affect Land Value
Not all land is created equal. There are several factors that need to be considered when valuing land:
* The current state of the land.
* What needs to be done to build on the land?
* Utility hookup and sewer options on the property.
* The cost to clear the land if needed.
* Where the land is located. Downtown or oceanfront property is more expensive and rare.
* Soil quality (farming land).
Youll also need to look at neighborhood value for the land and how much competing properties are selling for in the current market. These factors all need to be considered to determine the value of the land.
And, if youre planning on keeping the land and selling it in the future, it will be worth much more if it can easily be built on and there are utilities in place that need to be hooked up.