Like most of us, I can look at a property with an income stream and figure out approximately how much it's worth. But what about a raw piece of land? Both residential zoned land and commercial zoned. How does one go about putting a price tag on it?
What is the lands highest and best use??
You have raw land,semi developed,and developed.
Raw land is where trees and everything is untouched.
Semi developed is usually where they might have torn down the house and cleared some trees.
Developed is where it is cleared and graded,utilities and entrance is in place and they just haven't gone vertical with any structure yet.
The best use of a parcel of land might not be it's current zoning use.When you want to build on the land will factor into it as well.Example a developer might have gotten zoning and approval for a particular use.Now too many of those properties have saturated the market or the demand is no longer there.Now you have to figure out in the current economy what would work there and what the ultimate rents would be to determine a price for the land.
How much dirt you have to move around to get a site ready for vertical improvements is key as well.
You can have 2 sets of the same size parcel.One is listed at 300,000 and acre and the other at 175,000 an acre.Looking at face value you would think 175,000 is cheaper.You learn however that with the topography of the land to clear the site ( 3 acres ) will cost 200,000 an acre.
The other parcel at 300,000 will cost only 50,000 an acre as it is relatively flat already with little to no brush to take down.
So 300,000 times 3 is 900k plus 150k for clearing land is 1,050,000 to get site ready.
Land at 175k is 525k plus 600k in clearing costs is 1,125,000 plus the site will take longer to get ready to develop.Land prices are down in mnay areas as well because used to a developer could form an LLC and pay any price and it the project tanked they could walk away non-recourse.Now lenders want heavy down payments,recourse,and cross collateral of the developers existing trophy properties.So now developers are real picky on what price they will pay for a property.
I can go much more in depth than this about land development but I don't want to write a book here.If you have a more specific question just ask.
I only provided basic info here and does not include anywhere near all development costs.
You can value it a couple of different ways. One is, as-is, which is to appraise as raw land based on similar land sales comps. The other is to basically back into a land price as if the property was developed for highest and best use, as @Joel Owens mentioned. Value the property as if construction is completed and achieved stabilized operations (office, retail, multifamily, single family). From that value, back out all your cost associated with construction (hard and soft costs) as well as a fair profit an owner/developer would require in order to build. What's left over is basically your land cost.
As Joel said, its really more complicated, but that's the ballpark price (value) the owner/developer would pay for the land in order to build the improvements that is considered highest and best use in order to acheive a reasonable profit.
Limiting (some) factors of your land that you must understand:
Joel - thanks for your great reply! this question wasn't on any particular property. it was just a question i knew i'd run into sooner or later. it came upon me when i saw this FSBO trying to seller her lot for 1.2mm when the property across the street has a building on it (same lot size) and generates an NOI of 6k per month or 72k per year so at a cap of 8%, that income producing property is at 900k. If i were to work backwards like you're saying to do, that lot she's selling would be far less then 2mm, right?
Your examples are very clear, I appreciate that. I think a way to help evaluate land more is to learn more about development cost right? I wonder if theres somewhat of a formula to use when look at a property. For example, let's assume its raw land of 1 acre. To clear and get it developed would cost x for 1 acre. So if it's 10 acres, i'd just times it by 10. Not that clean cut is it? Even for a ball park figure?
Then I'd go as far as trying to figure out if the land is developed, to go verticle, it'd cost x per sqft to build. So if you want to build a 20k retail strip, it'd cost x per sqft. Is it possible to come up with soft numbers for this?
Tod, your reply is very good as well. The questions I wrote above is open to you as well if you would like to provide your thoughts... I would appreciate anything you can provide.
Thanks to you both.
Tony what you can do with the land depends on where it is at and what is existing around it.
For example a corner usually a pharmacy will pay the most money for a corner,followed by a gas station,followed by a bank,followed by a restaurant.
Some absolutely want the corner but will live being next to the corner with a road easement passed through to their building.By being next to the corner you can pay sometimes 20% less or more for the lot.
It's a balance of anticipated sales versus the premium the business will pay for the location.
After doing land awhile you will learn how to evaluate things.Land deals are much more involved and can be a headache compared to existing properties.
Land has more "one off" type transactions where for instance I have more of a system in place for helping clients with apartments each time with minor changes.
Easements of a property is key with the land along with available utilities. If you have to connect into sewer for instance and the owner next to you is not cooperating it can get very expensive to run alternative piping and a lift station etc. to make the project work.
So most developers will get everything agreed in place and terms before they go "hard" with any non-refundable money.Otherwise one wrong thing happens and the project tanks and you lose your earnest money.
As a developer you never let a seller hold your earnest money either.Even though by the contract they are obligated to give it back sometimes they already have spent the money or they make you take them to court and chase them to get the money back.This hinders your ability to now pursue other deals as you have money and time chasing people down.This is especially true in land assemblage for multiple parcels where you might have hundreds of thousands of dollars of earnest money on the line with multiple sellers.
My experience working with a commercial developer for a few years and going to all the meetings and helping assemble the land.
THat's a great explaination of evaluating land. Thank you so much. It definitely is more involved then properties with existing structures already on it. I'm taking CCIM courses right now (starting 102 next week) so am hoping to run through this again for me lol
thanks again for your help Joel. If i have more questions, I'll post it on here for the public to see and I'll look forward to hopefully seeing you chime in! Have a good one.
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