Vacant Land

One of the biggest obstacles every land investor has to wrestle with is how to find the “market value” of vacant land.

It may seem like an odd dilemma to the typical real estate investor but trust me – if you’ve spent any amount of time trying to find comps or relevant valuation data for a parcel of raw land, you know that it can be incredibly challenging to nail down a concrete value for this type of real estate. It presents a major challenge to those who are new to the land business because most of the time, the data you need simply isn’t there.

Understanding How Appraisals Work

Before we get into the complexities of valuing land, let’s establish a fundamental understanding of how appraisals work.

In the vast majority of real estate transactions (especially when financing is involved), buyers and lenders will rely on an appraisal from an outside source to verify the value of the asset they are purchasing (aka – the collateral that their loan is secured by). The appraisal is a comprehensive report that usually consider The Sales Comparison Aproach.

One of the biggest obstacles every land investor has to wrestle with is how to find the “market value” of vacant land.

It may seem like an odd dilemma to the typical real estate investor but trust me – if you’ve spent any amount of time trying to find comps or relevant valuation data for a parcel of raw land, you know that it can be incredibly challenging to nail down a concrete value for this type of real estate. It presents a major challenge to those who are new to the land business because most of the time, the data you need simply isn’t there.

Sales Comparison Approach

With this valuation method, the appraiser will look at the recent sales of similar properties in the area. With this approach, the appraiser is making the general assumption that a typical buyer will not pay more for the subject property than they would have paid for a similar property in the same area. Appraisers will only consider the data from properties that have actually been sold, because these are concrete numbers and (in theory) they represent real purchase prices that have actually been paid. Appraisers usually find this data from various public records, real estate agents, other appraisers, etc.

The Problem With Land

These valuation approaches usually work great for conventional real estate projects (houses, apartments, commercial buildings, etc.) but I’ve found that in most cases, these  approaches simply aren’t feasible methods when it comes to assigning a market value to most vacant land properties because at least 90% of the time, the data needed to draw these conclusions simply isn’t available.

It’s a frustrating dilemma for land investors, because it is extremely important for us to understand a property’s market value. It’s a piece of the puzzle that drives everything else in the process (our offer price, the cost of property taxes, holding costs, closing costs, etc.). If we can’t be certain about a property’s market value, we’ll have to live with some major risk and ambiguity (and this is never ideal, especially when you’re investing a fortune into a property that you can’t afford to be wrong about).

How To Deal With Ambiguity

Unfortunately, there is no “magic bullet” when it comes to valuing land. As any real estate appraiser can tell you, it’s virtually impossible to reach the point of 100% certainty (down to the penny) about the market value of a property.

That being said – there is almost always a way to get reasonably comfortable with a “ballpark value” on a property…   even one as tricky as vacant land. It’s not a black and white valuation approach by any stretch, but there are a number of reliable measurements you can use to get confident with the value of a prospective property.

When I’m seriously evaluating a potential land investment, I start by looking at several different factors and asking myself, “How important will these factors be to my end buyer?”

What is the zoning on this property?

• What can this land be used for? Can someone use it to build a house? Office Building? Factory? Farming? Hunting? Mining? Make sure you understand what your (or the future owner) will be allowed to do with the property in accordance with the local zoning and planning requirements.

How much inventory is available in the local market?

• Is this a one-of-a-kind property or are there hundreds of others exactly like it on the market right now?

What are other, similar properties currently priced for in the near vicinity?

• If you were the owner of this property, and you listed it for sale today, what kind of competition would you have to deal with? If you can acquire it for the price you want, will you be able to re-list it, and price it exceedingly better than all the other properties in the area?

How desirable is this property?

• Think of this as the “common sense” approach…    what was your first impression when you saw this property? Did anything about it look interesting, desirable, appealing or attractive? Be honest – is there anything sexy about it? Will it catch anyone’s interest? Are you looking at a gorgeous, wooded, mountainside lot – or is it a dry, barren, hostile wasteland? If you go through the effort of creating a great property listing, how beautiful will you be able to make this property look? Can you give buyers an offer they can’t refuse?

What kinds of holdings costs are associated with this property?

• Suppose you buy this property and you can’t sell it immediately. What if you have to hang onto it for 6 months? 12 months? 2 years? If you’re forced to hold onto this property for longer than you want to, how much will it cost you (e.g. – property taxes, associates fees, assessments, etc.)? Can you afford it? Is it worth the risk?

Does the property have road access? How easily can someone get to it?

• You’ll always want to verify that the property has road access or some kind of legal easement so that people can actually get to it. If it doesn’t have any access (and believe me, there are a surprising number of vacant lots that don’t), your property might as well be on the moon. Make sure the property has legal access – or walk away.

What is the size, shape & dimensions of the property?

• Think about what this property might be used for some day. Is the parcel big enough? Does it have an odd shape? Is it located next to anything that would significantly decrease its desirability? Be sure to note any red flags that you run into…  these can be serious issues that will influence the property’s value.

How close is this property to the local conveniences and amenities?

• Consider what kinds of amenities or local attractions will be available to the owner of this property. Will they have a grocery store across the street, or will they have to drive 3 hours to get there? Will you be able to market the property’s location as a good thing?

What do the adjoining properties look like?

• The properties next door can have some MAJOR implications for the value and “sale-ability” of a parcel of land (e.g. – Would you prefer to live next to Glacier National Park or a Meth Lab?). Most people care a great deal about who their neighbors are, so get a good idea for how the surrounding properties could impact the desirability of your property. If the adjoining properties have any obvious issues that are beyond your control, you’ll want to think carefully about what this means for the property’s value.

Is the property situated in a flood zone?

• When properties are located within a flood zone, the cost of flood insurance has to potential to be very expensive, and this added cost of property ownership can have a major impact on the feasibility of building a home on the property (and since many people buy land with the intent of building something on it, this is a very relevant detail). To get an idea for whether a property is situated within a flood zone, check out the FEMA website or FreeFlood.com and do a property search to see if your property is situated within or nearby a flood zone.

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