There are textbooks dedicated to the appraisal process, with many different techniques and parameters involved. Setting a value on land is not rocket science, and the important factors are as follows.
(1) Is the land splittable?
If a parcel fits within the City and County guidelines and zoning parameters that would allow a parcel to be split into a number of smaller lots, then splitting may be an option. Typically, sellers don't want to bother about lot splits: if they were intending to split, they wouldn't be selling right now! But sellers want to maximize their profit and so if there is even a vague possibility that a split can be applied to the parcel, they want to price the parcel as if it were a series of smaller lots.
The problem with that approach is that lot splits will take a minimum of two years, cost $50,000 or so, and there is no guarantee at the end of the day that the City and County reviewers will allow the split to take place.
If you have a nice flat 20 acre parcel in an area where zoning is 20 homes per acre and sewer is available, clearly the parcel CAN be sold at a premium for its development value. But if you have a 2 acre parcel in an area with 1 acre zoning, there is little if any additional value to the buyer in a potential lot split.
(2) Pricing lots for building a single family home
A seller owns a four acre lot in an area zoned 'residential'. The area shows the minimum lot size to be two acres. As there is some slope on the lot, the seller doesn't have any confidence that splitting is possible (see Slope Analysis in the Septic and Sewer section above). How much is his lot worth?
When pricing a lot of this kind, the two most important factors are septic or sewer and the value of the surrounding properties. A four acre lot could in principle support a 10,000 square foot mansion. But if the properties in the immediate vicinity of the lot are all in the 3000 square foot range and are selling in the $1,000,000 price range, the mansion would be an overbuild.
The septic/sewer issue determines the maximum number of bedrooms that can constructed in the home. If the property is to be on sewer, the number of bedrooms is not usually relevant. If it is on septic, the available area for the leach field is critical and if the leach field will only support a two bedroom property, the value of the lot will be far less than if it would support a five or six bedroom home.
In this example we'll assume that the property is to be on septic, the soil percs sufficiently well to allow a leach field to support a four bedroom home to be constructed, and that the neighboring properties average four bedrooms.
The value of the lot is therefore calculated as 1/3 the value of the home that can be constructed on the site. The value of the home will be the approximate value of the surrounding properties plus a little extra for the 'newness' factor, say 10%. If the home's value is around $1.1m, the value of the lot will be in the $350,000-$375,000 range.
(3) The builder/developer discount
If you are selling land, you'll soon find out that all buyers are not created equal. If you have a lot zoned for a single family home, your best bet is to find someone to buy the lot who is going to build a home for themselves. In this case the '1/3rd Rule' that we considered in the previous section holds true. But what if a developer wants to buy the lot? He or she will probably be intending to build a 'spec home', in other words the developer wants to speculate that the value of the home that can be built on the lot will be substantially higher than the cost of the lot and building costs combined.
The developer will be able to save some money by using his or her industry connections and management skills to lower the costs of raw materials and labor. However, the developer will also look for savings on the cost of the lot. A lot that is worth $375,000 to someone that wants to build their 'dream home' may only be worth $300,000 to a developer or builder.
There are many small builders who spend a great deal of time and effort trying to buy lots at a huge discount. This is especially the case in Southern California where land values have skyrocketed in recent years. These builders often look for lots that have 'Out of State' owners who may not be aware of California land values.
Unfortunately, developers aren't bound by the same rules of ethics as Realtors. If a 2 acre lot is worth $100,000 in Michigan and the seller lives in that state, a $125,000 offer on a choice piece of land in Southern California may sound fine to the seller. The developer probably won't volunteer that the lot is worth five times that much! If you own a lot in a different part of the country and a developer calls you, contact a Realtor who works in the area where the lot is situated to get an estimate. The Realtor will be interested in listing the lot, and will be very happy to give you all the free advice you need.
'In The Path of Progress'
Sometimes a lot has significant issues that affect its saleability. It may have no power within reasonable distance, access may be by way of a long dirt track. The lot may not be in a water district, and the probability of digging a well sufficient for the property may be small.
If most of these issues apply to a parcel, there may be value in the location of the land. Perhaps it is within a few miles of a growing city, and it is reasonable to believe that the city will expand to encompass the area around the parcel in the coming years.
If this is the case, you'll often find land advertised as 'in the path of progress'. How much the land is worth depends on the likelihood of utilities being brought into the surrounding area within a given time frame.
You may end up hoping that a potential buyer is will to wait 5, 10 or even 20 years for the land to reach its full value. Current value? Possibly a 1/4 to 1/3 the value of the land if utilities were available to the parcel today.
This website has been written and developed by Rob Ransom, PhD. Rob has extensive experience working with buyers and sellers of vacant land in San Diego County, CA. Although Rob currently has a California real estate license he is retired from selling real estate.
If you have comments or suggestions regarding this web site, email Rob at the address below.
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