It may seem like an leftover dilemma to a conventional substantial estate investor but trust me – if you ’ ve ever tried to find comps or relevant evaluation data for a parcel of bleak estate, you know how challenging it can be to nail down a concrete value for this type of real estate of the realm .
specially for those in the nation flipping business, it presents a MAJOR challenge, because the conclusions we draw about this number will affect everything else in the serve, and most of the datum we need plainly international relations and security network ’ triiodothyronine there .
How Real Estate Appraisals Work
Before we get into the complexities of valuing land, let ’ s establish a fundamental understand of how real estate appraisals work.
In the huge majority of real number estate transactions ( particularly when finance is involved ), buyers and lenders will hire a professional appraiser to verify the value of the real estate of the realm being purchased and/or financed. The appraiser will put together a comprehensive report that considers three key valuation approaches :
These are widely considered to be the most authentic methods of determining a property ’ south grocery store value. In most cases, an appraiser will use at least two ( if not all three ) of these methods to come up with their final stopping point. hera ’ s a quick overview of how each of them works :
The idea behind this access is to determine the come of ongoing income ( i.e. – rent or lease tax income ) the subject property can be expected to produce. In order to determine this act, an appraiser will look at the “ market rent ” in the sphere. In other words, what are like properties presently being rented or leased for in the lapp market ? The appraiser will look at several similar properties ( while besides considering their size, localization, condition, amenities, etc. ) in decree to get an estimate for the measure of tax income the capable property could practicably produce .
With this approach, the appraiser will try to determine what it would cost to rebuild the claim same structure from the anchor astir. The appraiser will figure out an estimate cost of construction, based on today ’ south prices ( minus depreciation, plus land ) and use this to come up with a measurement of the property ’ s prize .
There are a lot of big assumptions that live inside this approach ( namely, the monetary value of construct materials, and the assumption that cipher will always pay more for a property than the cost of the improvements ). The monetary value approach is an significant consideration – but it ’ mho about never sufficient to use this approach path all by itself to determine a property ’ randomness bonny market value .
Sales Comparison Approach
With this valuation method, the appraiser will look at the recent sales figures of similar properties in the area ( i.e. – the prices that exchangeable properties have sold for in recent history ). With this approach, the appraiser is making the general assumption that a normal buyer will not pay more for the subject property than others have recently paid for similar properties in the lapp area .
Appraisers will only consider the datum from properties that have actually been sold because these are concrete numbers and ( in theory ) they represent very purchase prices that have been paid. Appraisers normally find this data from versatile populace records, real estate agents, other appraisers, etc .
The Problem With Land Valuation
These valuation approaches normally work fairly well for houses, apartments, commercial buildings, and the wish, but vacant farming is a completely different fib .
In the huge majority of cases, the data needed to draw these conclusions for a vacant lot simply international relations and security network ’ t available .
The Income Approach typically doesn’t apply, because unless the property is being leased to a farmer or hunter, or is generating income by some other means, it is highly unusual for a vacant draw to generate any kind of regular income .
The Cost Approach doesn’t apply, because by nature of the fact that it ’ s vacant land, there are no improvements to take into circumstance .
The Sales Comparison Approach may apply, but only if there are enough sold comps to take into consideration ( and many times, there aren ’ metric ton ). In most cases, there are FAR fewer sales comps available for land than for houses and early improved properties… and even when the comps do exists, they are much harder to quantify than improved property. Looking at different vacant lots is hardly an “ apples to apples ” comparison, and it ’ s a very imperfect skill at best .
It ’ s a torment dilemma for land investors because it ’ s highly crucial for us to understand a property ’ s grocery store value. This number drives everything else in the process ( the offer price, the cost of property taxes, holding costs, closing costs, the profit allowance when sell, etc. ) .
If we can ’ deoxythymidine monophosphate be sealed about a property ’ randomness grocery store value, we ’ ll have to live with some horizontal surface of ambiguity – and ambiguity is never ideal, specially when you ’ rhenium investing a lot of money into a property you can ’ thymine afford to be wrong about .
RELATED: The accuracy About Land Investing : 15 Warning Signs to Look for When Buying Vacant Land
What Determines Land Value?
unfortunately, there is no “ magic trick bullet train ” when it comes to valuing land. As any real estate appraiser can tell you, it ’ s virtually impossible to reach the item of 100% certainty about any place ’ mho market measure, and that ’ s specially true for unimproved nation .
The good news program is, there is about always a way to get sanely comfortable with a “ ballpark value ” on a property, flush with natural down .
While it ’ s not a black and white evaluation approach by any unfold, there are a total of authentic measurements you can use to get convinced with the respect of a prospective property before you sink any of your own money into it .
When I ’ megabyte badly evaluating a electric potential nation investment, I start by looking at several different factors and asking myself, “ How significant will these factors be to my end buyer ? ”
How is the property zoned?
What can this country be used for ?
Can person use it to build a family ? Office Building ? factory ?
Is it well suited for farming ? Hunting ? mine ?
Make certain you understand what you ( or your future buyer ) will be allowed to do with the place in accord with the local partition and plan department .
In many cases, a property may be useful for more than one purpose, and that ’ s worth considering excessively .
RELATED: What ’ s the Highest and Best Use For Your Land ?
How much inventory is available on the market?
Is this a one-of-a-kind property or are there hundreds of others precisely like it on the market right now ?
If you own land with an incredible location ( or view, or access, or resources, etc. ) unlike any other in the area, that’s probably worth something .
however, if your property is one of a hundred others precisely like it, and all of which are presently listed for sale – that will make it much harder to sell your property at a premium price .
What prices are the similar properties listed for in the near vicinity?
Pretend for a moment that you are the owner of this property you ’ rhenium measure .
If you listed this property for sale today, what kind of “ selling rival ” would you have to deal with in the immediate vicinity ?
If you ’ re able to acquire the subject property for the price you want, will you be able to re-list it, and list it at a price that is significantly higher than what you paid for it, AND extremely lower than all the early properties in the area ? This is how you make money as a land flipper, and it ’ s another key consideration in determining what you should be volition to pay for a tract of vacant nation .
RELATED: How much Should You Offer For That Property ?
How desirable is the property?
think of this as the “ common feel ” approach .
The beginning time you saw this parcel of land, what was your first base impression ? Did anything about it look interest, desirable, appealing, or attractive ? be honest with yourself – was there anything sexy about it ? Is it likely to catch anyone else ’ mho interest ? Are you looking at a gorgeous, wooded, mountainside draw – or is it a dry, barren, hostile barren ?
If you go through the campaign of creating a capital property list, how beautiful will you be able to make this property attend ? Can you give buyers an offer they can ’ t refuse ?
What are the holding costs associated with the property?
Suppose you buy a package of land and you aren ’ thymine able to re-sell it immediately .
What if you have to hang onto it for 6 months ? 12 months ? 2 years ?
If you ’ rhenium forced to hold onto this property for longer than you want to, how much will it cost you ( e.g. – property taxes, association fees, assessments, and so forth ) ? Can you afford it ? Is it worth the risk ?
fortunately, the holding costs on vacant farming are normally reasonably cheap… but if you find that a property has unusually high gear property taxes or HOA fees, you ’ ll want to factor that small snatch of risk into the equation .
Does the property have road access?
When you ’ rhenium dealing with vacant nation, this one is a biggie, and it has huge implications for what a property is worth .
It ’ s constantly important to verify that a vacant lot has road entree ( or some kind of legal easement ) so the owner ( be it you, or your future buyer ) can actually get to it .
If it doesn ’ t have any legal access points ( and believe me, there are a surprising number of vacant lots that don ’ deoxythymidine monophosphate ), your property might angstrom well be on the moon. Make sure the property has legal access, and if you do decide to roll the dice on a landlocked place, make sure you ’ re paying about nothing for it .
What is the size, shape & dimensions of the property?
Think about what this property might be used for someday. Is the tract adult enough ? Does it have an curious determine ? Is it located next to anything that would importantly decrease its desirability ? Take a mental note of any crimson flags that you run into… these can be serious issues that will influence the place ’ s value .
RELATED: One Weird Trick to Find the Size, Shape, Dimensions, and Location of Your property
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 memory 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 ?
This one is closely related to the property ’ sulfur sex appeal and it ’ s highest and best use. If the place ’ s most obvious use is to build a single-family house, park a mobile home or hold any kind of residence, then this measured becomes evening more crucial to consider .
What do the adjoining properties look like?
The properties next door can have some major implications for the rate and “ sale-ability ” of a parcel of country ( e.g. – Think about it, would you rather live/work adjacent to Glacier National Park or a Meth Lab ? ) .
Most people care a great cope about who their neighbors are, so try to get a good idea for how the smother properties could impact the desirability of your property. If the touch 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 monetary value of flood insurance can be very expensive, and this added cost of place ownership can have a BIG negative impingement on the feasibility of build improvements on the property .
To get an estimate for whether a place is situated within a flood tide partition, check out the FEMA web site or FloodTools.com and do a property search to see if your property is situated within or nearby a flood zone .
RELATED: How to Identify ( and Avoid ) Wetlands
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Land Valuation Hacks
even though the data for vacant land appraisals is sparse in most areas, there are still some option approaches that can help you zero in on a naturalistic value of the place you ’ ra measure. here are a couple of tricks I use on a regular basis…
Scour the MLS
Note: Back in 2015, Trulia was acquired by Zillow ( and Zillow has made some BIG improvements to their database of land sales comps ). If you head on over to Zillow, you can use this claim lapp serve to find stream nation listings AND late farming sales comps in your area. You can besides use Redfin to determine estimate commercialize values in the lapp way ( but with better options for data analysis ), as I explain in this blog position .
This approach is far from perfect ( for obvious reasons ), but it does do one thing quite well… it will inform you of what kind of competition you ’ re dealing with ( and what those sellers are hoping to get out of their property ). In early words – if you were to list your subject property for sale in this grocery store today, what early listings would you have to compete against ?
Take a minute and do the mathematics. once you understand what price your property will have to be listed for in order to look like the best deal on the market, this will give you a better position for the property ’ s potential respect in contrast to what ’ s presently available on the market ( because if you ’ ra offering the best deal and advertise it well, it will theoretically be the first one to sell ) .
Price Boss Valuation Calculator
If you want to take this a few steps far, another clever direction to go through this exercise is with a property appraiser called Price Boss ( as I explain in a lot greater contingent in this blog post ). Price Boss allows you to copy and paste the raw data in any market from websites like Zillow, Lands of America, and Realtor.com and ultimately, come up with a much more data-driven decision .
This video explains how it works…
Note: As mentioned above, you can get a $ 50 discount on Price Boss AND help support REtipster if you use coupon code RETIPSTER during the checkout summons. enjoy !
Check Out Price Boss here
Price Boss international relations and security network ’ t a magic fastball, but it ’ s A LOT better than merely going with your intestine after seeing a few vaguely similar listings in the sphere .
just like any calculator or spreadsheet, the dependability of Price Boss depends greatly on the quality of the information you start with, but if you ’ re smart about how you work with the information, it can be helpful in giving you a lot more confidence about what domain values are in any given area .
Contact Local Real Estate Agents
again, this is far from a goofproof method, but it does help to “ tell the narrative ” of what your subject property may be probable to sell for .
It ’ sulfur surely helpful to look at market data on your calculator, but there ’ s a whole other level of value that comes from picking up the call and calling a few local real estate of the realm agents .
When I find a local agent that actually has some feel selling vacant lots in the area, I ask them something like this…
“ Suppose I owned this place free and clear and I wanted to list it for sale with you today. What price would I have to list it for in order to sell it within 6 months ? ”
This kind of statement tells the agent a couple of things:
- You’re looking for a naturalistic estimate of what it will take to sell this property quickly. You’re serious about getting this thing sold, and you want some honest answers.
- If this agent turns out to be legitimately helpful, you may actually want to hire them for the job! This will encourage them to give you the time of day and offer up some legitimate answers.
RELATED: How Land Investors Can Leverage the Power of Real Estate Agents
As you ’ re having these conversations, pay close attention to the prices they suggest. If they throw out some numbers that distinctly aren ’ thyroxine going to work for you, now is the time to figure that out ( rather of after you ’ ve already bought the thing ) .
Another thing to keep in mind is that you might actually want to hire one of these people to list this place in the future. It doesn ’ thymine hurt to start reaching out and making connections with agents on the front conclusion like this. Their services might actually come in handy .
My primary warning would be this: Don ’ metric ton put besides much religion in any ONE agent ’ s public opinion. There are a distribute of clueless real estate of the realm agents out there, particularly when it comes to vacant state. If you decide to go through this practice, make certain you ’ re getting remark from at least 2 or 3 agents ( the more the alert ) .
Recognizing Hidden Value
In some cases, the value of a property is a little hard to recognize .
On newspaper, there may not be much value in the property ’ sulfur location, or what it can be used for, but there is placid a great deal of value in what is growing on it .
Keep an eye out for any value that can be yielded by harvesting timber. If you notice that a property is situated in a dumbly wooded area, this may be worth investigating far. A professional forestry adviser can help you get an mind of what timber on a while of land is worth .
besides keep in mind, depending on a number of factors, removing trees has the potential to enhance or detract from a property ’ south value and utility. In some cases, clearing the state ( or choosing the right areas to clear ) can make a property more readily useable for development. In other cases, dense tree coverage can foster wildlife and make a property more utilitarian for amateur purposes .
RELATED: TIMBER ! A Guide to the Harvesting of Trees
Another electric potential point of value is the place ’ s mineral rights ( which aren ’ t constantly automatically transferred to a new owner with the surface rights ) .
Surface rights are precisely like they sound – they are your rights to own and use the surface of the nation. Depending on what type of property you own, the open rights allow you to develop the domain in accord with the local zone and planning ordinance .
Mineral rights apply to anything that exists beneath the surface. This includes ember, natural accelerator, petroleum or any other commodity that can be mined. If your state is situated in an area with these energy resources, and if you own the mineral rights to your domain, you can either sell them or lease them to an concerned party. Both options have their pros and cons, and you can make money by either collecting royalty interest or working concern. It will be up to you to decide which one you prefer .
RELATED: What Every Land Investor Should Know About Mineral Rights
When a place has value to offer in the form of timbre or untapped minerals, this added value frequently international relations and security network ’ deoxythymidine monophosphate accounted for merely by looking at the basics like size, shape, placement, zone, and alike listed properties in the area. There can be real number respect at venture when a parcel has deep natural resources, and these can present some big opportunities that many other state investors will overlook .
An Appraiser’s Perspective
now that you ’ ve hear a nation investor ’ s take on this issue, I wanted to dig a bit deeper and get an appraiser ’ s position on how they evaluate vacant land .
I reached out to Ryan Lundquist ( founder of the Sacramento Appraisal Blog and a license appraiser in the State of California ) to get his stimulation on how he would approach the tax of valuing land .
When it comes to real estate of the realm valuations, this ridicule ’ second parole carries a set of slant, because he is working in this world every day . As a professional appraiser, he understands how to approach this serve using the conventional standards that are well-established in the actual estate of the realm industry .
here is a compendious of a Q & A consultation we put together on this topic…
What are the most important factors you look at to determine the value of a vacant land property?
It ’ mho honestly not easily to determine a approximate range value for a musical composition of farming because there are so many factors to consider ( as we ’ ll get to below ). Plus, since I hold a express license to appraise property, I have to actually support the values I give – whether I ’ thousand giving a verbal “ approximate range ” prize or a wax, written appraisal. I am basically apt for any value I give, so that is why it can be challenging when people call me and say, “ I don’t need a full appraisal, but just a quick value. ” I get what people are asking, but since I actually have to support the value I give, it is more involve on my end .
Let’s talk about location, zoning, and topography. Why are these things important? What about these three factors would cause a property’s value to go up or down?
Everyone knows real estate is about location. A web site adjacent to a toxic dump, for exercise, credibly international relations and security network ’ thyroxine going to fetch high dollars, but a vacant lot in an upscale neighborhood is going to be worth much more .
That beings said, not all vacant lots are created equal and this is where zoning comes in to play. Zoning helps tell us what the site can be used for legally. This means if a vacant batch was zoned for residential caparison and it could be split into four buildable lots, that might carry a lot more weight than a draw that international relations and security network ’ thymine buildable at all ( for whatever reason ). On the early hand, if zoning would only permit a property for industrial use, it ’ randomness worth considering whether that function can be amply realized in the current market. In early words, is it a dependable grocery store to improve an industrial lot ?
last, the topography is crucial. Two separate lots might have the lapp claim size on paper, but if one of them is on a steep incline and has very small buildable space, the set that is actually useable could be worth much more .
RELATED: What Is a Topographic Survey ?
In your opinion, is vacant land a difficult type of real estate to value? If so, why?
It sometimes feels unmanageable because there are decidedly fewer comps. Sparse data always makes for more challenge valuations. Since the majority of my work involves lots that have already been improved, that is decidedly region of why it takes me longer .
( note : When the data is available, this is the kind of ocular context that Ryan likes to provide for his clients )
When an appraiser nails down the value of a vacant parcel of land, how much deviation (or “lack of reliability”) do you think there is on this number and why?
It honestly depends on the appraiser and how thoroughly the composition is. There is no real “ standard ” end-all answer to this interview. The reader of an appraisal report will have to sniff out whether it seems legitimate or not. Does the report tell a compel narrative of value so that the value makes fair sense ?
How much weight and importance would you give to the following factors?
The property’s assessed value:
I suppose it truly depends on how good the assessment is. Some areas may be better than others. however, one authoritative consideration is that assessments in my area at least are based on when the property was purchased rather of the current market value. This means an judgment for a piece of down purchased 15 years ago might show a profoundly lower respect than what the stream commercialize is volition to pay. Personally, I pay about no care to the assessment for this argue .
The listed prices of similar lots in the area:
I think the list price for similar properties can say something about prize, though sometimes listings are out-of-sync with the market. I do pay attention to them ( adenine well as pending and disengage transactions ), but it ’ south always crucial to judge each one on its own – and specify whether it says something about the market or not. I do want to know how much sake alike properties have had from buyers when exposed to the receptive market and [ it besides helps to know ] how many days they spent on the market besides. It can be telling if listings aren ’ deoxythymidine monophosphate sell at a sealed floor or if they ’ re fetching a lot of interest at a certain price .
The amount of inventory (of similar properties) on the market:
This is authoritative because when there is more inventory in a commercialize, it tends to water down the price ( due to the increased competition ). This is basic economics. When there is more issue than requirement, prices will inevitably come down .
For the typical land investor who is trying to nail down a “ballpark value” of a vacant lot (WITHOUT ordering an appraisal), are there any common valuation mistakes or dangerous misconceptions they should watch out for?
I would say to make sure you are comparing apples to apples. One set might look very competitive on wallpaper, but when drive by or at least viewing it on Google “ Street View ”, differences can become apparent. I would besides recommend talking with the city to ensure the land use and zone are understood. I say this because sometimes information provided in Tax Records may not be accurate. The definitive parole should come from the plan department alternatively of published records that may not have been updated in years .
Land Valuation is an Art, Not a Science
Believe me, I would LOVE to give you a crystal clear approach to valuing country that will constantly work, every time – but it ’ s precisely not that simpleton ( and if anyone tries to tell you otherwise, I ’ d be highly leery of whatever they ’ re trying to sell you ). The fact is – even an appraiser ’ second impression should be taken with a grain of salt. When we ’ re talking about real estate ( or any other product or service, for that matter ), the final rule is this:
It’s worth whatever someone is willing to pay for it.
The datum ( when available ) can give us a halfway decent idea on this, but that international relations and security network ’ triiodothyronine something you should bet your liveliness on. At the end of the day, the value is by and large contingent on finding the veracious buyer, for the right property, at the correct prison term. Extracting the most value from any musical composition of real estate is an art, not a science.
When it comes to determining the value of land – the best you can do is perform a fair amount of research. Take the clock time you need to carefully consider the items listed above. Dig up whatever data you can find with tools like DataTree or PropStream, front at early locally listed properties on Zillow and use the best, most indifferent sagacity you can manage .
At the end of the day, if you ’ re making offers that are low enough, you should be able to protect yourself from most of the risks of down invest .
due to the difficulty of getting perfective valuations, you should be giving yourself a healthy buff to help to offset any errors in judgment that you might be making along the way. This is the way I ’ ve been doing it for years, and even though I haven ’ thymine constantly done it absolutely, I ’ ve never gotten in over my head – and that ’ s something most actual estate of the realm investors can ’ t say for themselves .