Land Valuation - How Does Evaluating Land's Worth Work?

Land Valuation - How Does Evaluating Land's Worth Work?

Land Valuation - How Does Evaluating Land's Worth Work?
Evaluating a home’s value is relatively simple and straightforward, but when it comes to land valuation, things can be get a little tricky. It’s not quite as easy as comparing recent comparable sales in the area. A land assessment will take a variety of factors into account.

How Land Valuations Work

A land appraisal is, more or less, an expert opinion of the land’s market value. This opinion is supported by facts and data – it’s not a number drawn out of thin air.

Part of the assessment process involves the valuation of rights to possess or use the land. This includes:

Water rights, Timber rights, Mineral rights, Grazing rights, Hunting rights, Access rights, Fishing rights, Air rights. Naturally, assessors will also base their valuation on basic economic principles. These include:

Supply and Demand: The value of the land will increase if supply remains the same, and demand increases. The value will decrease if demand is weaker. Because the supply of land is fixed (they’re not making any more of it), value will always be driven by demand.

Substitution: Property value is set by the price a buyer would pay to purchase a substitute property that’s equally desirable.

Anticipation: Land value may increase or decrease based on anticipation of a future event, detriment or benefit.

Conformity: The site’s value will reach its maximum level when used in a way that conforms to the social and economic standards in the neighborhood.

Other Factors that Affect Land Value

In addition to property rights and basic economic principles, there are several other factors that will impact value, such as:

Economic: What is the land’s potential income? Availability of land, growth opportunities, new construction and vacancies will also affect the value of the property.

Physical: The land’s physical attributes are important as well. This includes the location of the property as well as the climate, fertility of the soil, water and sewer availability, depth, frontage, and topography. The more attractive the physical attributes and location, the more valuable the land will be.

Governmental: Governmental factors include zoning laws, building requirements, property taxes, restrictions, and planning.

Social: The land’s value will also take into account social factors, like population growth, family sizes, age ranges, and education levels.

The 3 Most Common Approaches to Evaluating Land

Before an assessor calculates the land’s value, the highest and best use of the site must be determined. There are four criteria here: legally permissible, physically possible, maximally production, financially feasible. Two analyzes will be made. First, the assessor will determine the highest and best use for the land as is, if it’s vacant. If undeveloped, the assessor will determine the highest and best use of the site if improved. Next, the assessor will use one of three methods to determine the property’s market value: comparison approach, cost approach and income approach.

Comparison Approach

As you may have guessed, this approach uses actual market prices of similar properties to determine the value of the property. This method can be tricky when valuating land simply because there may not be recent comparable data available.

However, if appropriate data is available, this is the best method to use.

Cost Approach

The cost approach uses the substitution principle we discussed earlier, and is very similar to the comparison approach. This method is based on the idea that the buyer would pay an equal amount for a substitute property.
The cost method works best when dealing with land that has recently been updated, unique land, and land with special improvements. In these cases, there may not be comparable properties on the market, so the cost approach must be taken.

Income Approach

If the land generates cash flow, the income approach is generally used to determine its value. Anticipated future and present net operating income will play a role in valuation, and future reversions will be discounted to generate a current worth figures. The income approach also takes into account expense levels to determine the projected net operating income of the property, and current market data to determine market values.

Value Adjustments

Once an assessor has calculated the property’s base value, adjustments may be made depending on a few different factors.

Unique Features

Properties with unique advantages and disadvantages will have their value adjusted accordingly. Unique features may include:

* Zoning
* Location
* Topography
* Utilities
* Traffic
* Site
* Water (ponds, rivers, etc.)
* Access
* Parks
* Frontage
* Noise
* Transportation
* View
* Regulations

Although unique features can (and do) affect the value of land, the increase or decrease is typically not dramatic.

Computer Estimated Values

Many jurisdictions now have databases with some site data and prior market data estimates available. This data can be used to determine the value of the land, or to update market estimates. Computer estimated values are not always available. In this case, the methods above will be used to determine the value of the land.

Assessing the value of land can be a complex process simply because there are so many factors at play. Generally, assessors will first try to use recent comparable sales data from similar properties to try and determine value. If this is not possible, other factors will need to be considered. Unique features will also add or subtract from the value, so adjustments will need to be made once the base value has been calculated.

If the property is capable of producing income, the process becomes even more complicated. In this case, the value of the land will be largely dependent on how much revenue the property will generate. Location, unique features and comparable sales will also be used to help calculate valuation.

Because of the complexity of the appraisal process, it’s often best to hire a professional who is experienced with the land assessment process. He or she will know what factors to look for and how to properly valuate a piece of land. If there is sufficient data available, it may be possible to carry out the land valuation yourself, but you may find yourself going through a process of trial and error before finding a price that attracts buyers.

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