Land Appraisal & Valuation Methods
Last updated 12th July 2019 • Lois Arcari • JaeVee
We can all agree that understanding how to value and appraise land is crucial in property development, whether it influences what you buy or the property for sale.
Even though a land development loan should only have a light impact on the potential profit, getting the best interest rate could make the difference between thousdands, even tens of thousands for collasal schemes.
There are 8 key factors to consider.
1. Land value
Land value is pretty simple.
It's the price of a piece of land when potential improvements are taken into account.
You’ll learn the value of improvements as well as the underlying value of a property.
Land value is assessed by a thorough examination and survey.
It takes into account all of the surrounding areas - the amount of green space, or the average income of the area, for example.
Once the examination and survey is complete, the land value is then determined.
The results will suggest the best uses for the land - this is generally calculated by the HBU (Highest and Best Use) method, alongside the sales comparison method.
2. The sales comparison method
The sales comparison method compares recently-sold local properties similar to the property in question.
It then makes price adjustments for differences in the comparable and subject property.
The relevant elements to look for are split into transaction and asset characteristics:
- Transaction - date of transaction, means of payment, transaction speed etc. of other properties. This gives an insight into how quickly your property is likely to sell once it’s on the market.
- Asset Characteristics - size, location, conditions, utility, building regulations, business climate, etc. These take into account the assets and liabilities of developing property in your chosen area.
This information is usually found by searching a property transaction database.
The land most similar to yours will be given the highest weighting in order to get the most accurate predictions.
The sales comparison approach is the quickest foundation for learning how much a property realistically can be sold or purchased for.
The conditions of the land are also vitally important to the final land value.
This requires a thorough valuation.
This valuation will ask all the environmental questions, noting the natural and man made features on the land.
This is of particular importance if you’re looking to develop on or around green belt, agricultural or garden land.
The valuation will give you an idea of the long term sustainability of the land and any potential pitfalls.
Nearly all construction projects begin with a topographic land survey.
This describes the starting point of the land before any improvements are made.
Engineers and architects use the results of these surveys to design buildings for the property.
This is because existing features may influence what they are allowed to do with the property.
Topographic surveys can also be used when creating plans for drainage ditches, grading or other features.
They use the natural landscape as the basis for such improvements.
Government agencies may also request topographic surveys for a variety of reasons - for example, as regulatory requirements for construction codes, or as part of environmental restoration projects.
Some of the many questions included will likely be:
- What is the condition of the soil?
- Is the area prone to flooding?
- Is there wildlife on the site?
- Are there any protected species that could limit the scale of the development?
It’s essential 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 costly mistake - to the tune of thousands of pounds.
A good developer always has a keen eye for potential improvements.
Ask yourself what you could add to improve the value of the property.
- Would it make a good family home or housing estate?
- Would 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.
5. Know your limits
We’d usually advise meeting up with an estate agent in the area you’re planning to develop.
This means you can go out to any site surveys together.
This will determine size, site boundaries and allow you to gather the most information possible.
You can do this by checking deeds, searching records, obtaining maps and making use of boundary markers.
Building a good partnership with your estate agent will allow you to ask about similar sized properties and their sales prices.
It is also necessary to discuss land usage restrictions.
Are there any zoning requirements or anything that could stop development?
Is commercial or residential usage allowed?
Do you need to obtain planning permission?
The last thing you want is to invest in a piece of land only to find out that you’re restricted in what you can do with it.
It is critical that you check with all of the relevant authorities to ensure you are educated about legalities, public records and so on.
6 . Appraisal value
This is the process of generating a rough estimate on the market value of land in your area which is usually close to the actual market value.
There are 3 methods which can be used here: the aforementioned sales comparison approach, and these:
- The Income Approach - this is the ongoing income (rent) that the property can produce. This will be calculated by taking into consideration the rent value of surrounding properties.
- The Cost Approach - this is where you evaluate the amount of money that it would take to rebuild the property 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?
Researching the location effectively will give you an idea of where the market is heading and keep you informed of any impact this will have on your finished property.
The appraised value of the land is the closest estimate to actual value of the home, whereas the market value price is the price that it actually sells for.
To get a better idea of the market value price you’ll need to look at the surrounding areas.
In the case of residential developments, it helps to always try and view the land and surrounding areas from the eyes of your ideal tenants.
Think about what will be their ‘make or break’ questions and criteria.
If you’ll be marketing to families for example, you’ll need to ask yourself if there’s a good variety of schools 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?
It may be checking local news for any large developments or factors that could affect your valuation.
They may even have useful data such as the local crime rate for the last year.
If your property will be built in a large city, it may also be worth looking at national papers which may appraise the standards of living, local employment rate and average income etc.
It will also help you to identify up and coming areas!
Determining the value and appraising the land has a lot of considerations to take into account in order for you to have satisfied your due diligence.
But it's absolutely essential - and we hope we’ve made it easily digestible for you.
Just remember to research, research, research - from land conditions to surrounding properties - and it’s hard to go wrong.
We wish you all the best in valuing and appraising your own land!