How To Value And Appraise Land!
Last updated 03/07/2018
One of the first steps in entering into a property development investment is to first of all know how to value and appraise land that you are looking at buying or selling.
Land value is measured as how much the plot of land is worth, not taking into account the buildings but the improvements that could be made on the land.
There are many factors to consider when valuing and appraising any given piece of land. Read on to begin mastering this seemingly tricky topic!
Land value is the underlying value of a property, and any improvements that can be made to it.
The land in question is examined, surveyed and the surrounding areas are taken into consideration. The value of the land can then be determined and you will learn what the land is best used for. It’s value is generally calculate by the HBU which stands for Highest and Best Use and the sales comparison method.
This is where the appraiser looks at recent sales of similar properties in the area which have been sold and completed. This directly correlates with what you will spend when purchasing the land.
When looking at the land value it is important to look at the conditions of the land, such a soil or if it is prone to flooding. Is there wildlife on the site, and is it protected as this could limit the usage of the land?
Don’t forget that when calculating land value it is important to examine the layout and size of the land in acres.
Does the layout affect any potential future use or improvements to the land? There could be areas of the land covered in trees which cannot be removed, or the land could be sitting on a chalk mine. If you purchase a piece of land without carrying out your due diligence, it could be a really costly mistake up into the thousands.
When examining the land could you add to it to improve the value? Would this make a good family home or housing estate? By adding something as simple as a gate, fence or driveway increase the value of the land?
Improvements should enhance the land value and never decrease from it. Again, this is all concerned with your planning stages and due diligence; a highly considered area to focus on.
Know your limits
It’s advisable that you meet with an estate agent in the area you are planning to develop. Go out to any surveys at the site together. You can ask about similar size properties and their sales prices. You need to survey the property to determine size and boundaries you need to gather as much information as you can.
You can do this by checking deeds, searching records, obtaining maps and making use of boundary markers.
It is also necessary to discuss land usage restrictions. The last thing you want is to invest in a piece of land and be restricted by what you can do with it.
Are there any zoning requirements or anything that could stop development? Is commercial or residential usage allowed? Do you need to obtain planning permission?
It is critical that you check with all of the relevant authorities to ensure you are educated about legalities, public records and so on.
The Sales Comparison Approach
The Sales Comparison Approach compares recently-sold local similar properties to the given property in question. There are price adjustments which are made for differences in the comparable and subject property. The sales comparison approach is the foundation for learning quickly how much a property will sell for, or can be purchased for.
This is the process of generating a rough estimate on the market value of a piece of land which is usually the close to the actual market value. There are three methods which can be used here: the sales comparison method as aforementioned and these little gems:
The Income Approach
This is the ongoing income (rent) that the property can produce, surrounding rent properties will be taken into consideration.
The Cost Approach
It is the amount of money that it would take to rebuild the property or structure from scratch including the materials and construction costs at today’s prices.
One of the biggest factors to be taken into consideration when appraising the land is the accessibility of the property. This will affect the marketability of the property and thus the price. Will the access limit the use of the property? Is there public or private access?
When appraising the land it is also important to look at the surrounding areas. Are there schools, shops and local amenities nearby? Is it a remote area? What is the employment rate like on the area? Is it run down or has it seen some growth in development recently?
Does the property have difficult neighbours nearby? What is being done nearby could it out of potential buyers/ renters of the property?
Researching the location effectively will give you an idea of where the market is heading in that area and have an impact on the market value of the property once you’re done with it. The appraised value of the land is the closest estimate to actual value of the home, where as the market value price is the price that it actually sells for.
Determining the value and appraising the land has a lot of considerations to take into account but never the less is an integral part of buying and selling property.