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Real Estate with Integrity and Common sense
Pricing Land for Buyers and Sellers
Seems these days more than most other days in years past that Buyers want a good deal. Sellers on the other hand remember the days gone by with some of the highest land prices in recent history and just can't bring themselves to sell for what buyers want to pay. The real estate market is experiencing a down cycle not seen since the mid 1970's and land is not immune to the effects of this market regardless of what the national news reports. The ongoing question has been--What is my land worth? To answer the question we must ask the question--What is your land good for? If you say development, I will tell you that if you were to give me your land along with a suitable cash gift I may turn you down. Many markets report a 30 year supply of building lots at below cost, it's a bloodbath out there for development lots. On the other hand if you say it's good farm ground I'll need to ask an entirely new set of questions. The bottom line is it is not easy to know what the land is worth until an analyst can discover a potential income stream from the property. Perhaps you already own a building lot and want to know what it could be worth. What could you sell it for? Don't get in a hurry to contact a local broker to obtain a comparable sales analysis because either no lot sales can be found or the ones found are bank sales at a fraction of the cost to develop. Many markets report lot sales at roughly 1/2 the cost to improve with streets, sewer, water and so forth with the land thrown in for good measure. Small acreage parcels have found favor with the market but again at something less than what they brought only a few short years ago. Whether you are looking to sell or buy some helpful tips to pricing are these: 1. The beginning step to an effective analysis is to learn if any building lots have sold, and for what amount. A standard building lot sale can be most helpful but not necessary to discover the value of the building value. The building value is that value that represents the premium a lot has for the right to build on it. Here is an example: We have Two five acre parcels. One sells for $15,000 but has no building permit, the Second lot sells for $42,500 with a building right. If both parcels are similar then it is reasonable to assume that because the second lot was buildable it had a building value of $27,500. 2. The next step involves an analysis of all land sales, it any. Small or large(up to 80 acres) makes little difference as long as the geographical location is close in proximity. What was the price per acre? 3. Of those sales, did one stand out with something special? Could that special feature make it unusable as a valid comparable sale? What is the price per acre? 4. If you cannot find a recent, valid and similar sale don't worry, that was bound to happen. What are farm rents in your area? What is the anticipated Net operating income of the farm lease? Take this amount and divide by a reasonable rate of return, let's say 6%. If an acre has a net lease of $125 per acre per growing season then that determines a value of the land per acre at just shy of $2100 per acre. If the site in question is not close to farmable ground not to worry. What are homes in the area selling for similar to where the land in question is located? Using the bankers rule of 4:1 the most the land could be worth is 25% of the housing prices or the value of a complete new home less the cost to build. If you are able to determine the building value as found in step 1 add it to the sum value found by multiplying the remaining area of the subject property by the price per acre as determined from the farm rents analysis or the sales data. This method of determining value is relatively simple when you want to consider a 4 acre parcel, 9 acres and 12 acres. All too often a seller or broker wants to cheat in the process and use a 3 acre parcel that sold for $45,000 and say that land is worth $15,000 per acre. That make the 4 acre parcel worth $60,000 they say and so on with the other acreages. That's wrong! Using the building value from step 1 of $27,500 We'll analyze this equation. A sale of $45,000 less the building value is $14,500 for the remaining 2 acres of land or $7,250 per acre. You now have enough information to know to a degree what each parcel is worth by multiplying the remainder acreage by $7,250 and the adding the building value of $27,500. When utilizing this method the 9 acre parcel would have a value of $85,500 not $135,000 when using a straight price per acre. The land valuation process is a specialty and should be left to a knowledgeable expert that is familiar with evaluation methods and data analysis. J. Douglas Ferguson has been a successful land broker for over 17 years in California and Idaho and at present is Designated Broker with Ferguson, Beal & Associates in Middleton, Idaho. Mr. Ferguson is an Accredited Land Consultant and a Certified Land Consultant. Currently, Mr. Ferguson serves as President of the American Land Institute, Member of the World Organization Land Federation and teaches continuing education in matters of land brokerage. http://www.douglasferguson.net
