Are you wondering, “how much is my land worth?” You may be considering selling or just curious about the current market value. It’s a simple question but unavoidably hard to answer.
The #1 misconception we encounter when talking to landowners is that land has an objective value and that vacant land always appreciates over time. On the contrary, determining land value is more art than an exact science. Vacant land prices fluctuate, including going down, and it’s challenging to determine the actual value of land without putting it on the market. Don’t let a real estate agent or appraiser convince you differently.
If you want to sell land or any other form of real estate, for that matter, continue reading below to learn more!
Real Estate Appraisal
A real estate appraisal is a formal, paid report prepared by a professional appraiser that values a property using three valuation techniques: the income approach, the cost approach, and the sales comparison approach.
Hiring a qualified appraiser can be particularly helpful with vacant land appraisals, as the appraiser will have access to comp data that is not publicly available, and they evaluate properties regularly. It’s their day job! However, it’s critical to remember that the appraisal report contains estimates of a land’s worth and may not accurately reflect the current market. Land values are tricky!
The Income Approach
The income approach for a real estate appraisal is a standard method used in predicting the value of income-producing properties by forecasting and analyzing future net cash flows. This approach gives an estimated land worth based on these anticipated future streams of predictable income and any expenses associated with them, such as maintenance costs or upgrades that would increase rent.
Income for vacant land often comes in the form of rent and royalties (e.g. grazing leases, farming leases, hunting leases, natural resources exploration, etc.).
Unfortunately, many vacant land tracts do not have predictable, recurring income, and if they do, it tends to be rather financially inconsequential and barely cover property taxes. Compared to an apartment complex or industrial warehouse, a discounted cash flow analysis of these de minimis cash flows from vacant land will significantly undervalue the land.
The Cost Approach
The cost approach to appraisals estimates the land’s value by measuring how much it would cost to replace and rebuild it from scratch. This method considers current land and building costs, the replacement cost of materials, labor expenses, design specifications, and a potential buyer’s perspective of what the real estate should be worth in its current condition. It also looks at building factors like square footage and other features influencing pricing.
The cost approach is constructive when valuing unique properties with improvements in areas with very few or no recent sales. However, it’s not particularly helpful for rural vacant land because 1) there are no improvements to replace, and 2) you still have to determine land value, which will require the sales comp approach.
The Sales Comparison Approach
The sales comp approach evaluates your land in comparison and contrast to comparable properties that have recently sold to determine the market value. To be comparable, a peer property must be similar to the one being appraised in size, condition, location, and features. It’s essential to consider comparable sales data as close to the current moment in time as possible for the most accurate appraisal. Old data is not necessarily helpful.
This sales comp approach is the best method for valuing rural vacant land, but it’s important to remember that an appraisal is an estimate and not an unequivocal fact. It’s a logical and reasonable estimate, but it’s still an opinion.
The Challenge of Valuing Land
Of the three formal appraisal methods, the sales comp approach typically provides the best estimate for vacant land. However, this approach requires qualitative comparisons and valuations that are not an exact science.
Many factors will influence the perceived value of the land, and there’s no precise way to re-engineer what is ultimately a subjective, multi-variable equation. It’s certainly a judgment call by the appraiser, and if you do indeed list your property for sale, the market will be the final judge.
What Determines Land Value?
A potential buyer determines land value. Not the owner!
The buyer will evaluate your land in terms of its potential uses and features and compare it to other properties on the market, as well as those that have recently sold. Prospective buyers want to find land that meets their needs, and they want to get a fair deal.
To get a fair deal, the buyer must pay less than the property is worth. They must feel like they are getting a deal, and if you, the landowner, are unyieldingly stubborn and want a top-dollar price, the buyer will walk away and find a better deal. There are always alternatives!
Land Use for the Property
The potential uses or land type of a piece of real estate materially impact the land’s value. An acre of land in New York City is worth millions because there’s sufficient demand (and constrained supply) for a skyscraper, whereas “goat pasture” in West Texas ain’t worth much. Vacant land or unimproved prices vary dramatically, depending on the specifics.
Zoning Restrictions & Deed Restrictions
One of the most critical comments of real estate value is understanding zoning restrictions and deed restrictions. The local county dictates zoning laws, which will impact the property type or use case for undeveloped land. Some areas will allow commercial development, whereas others have outlawed it.
Acreage, Shape, and Dimensions
Real estate comes in all shapes and sizes. The shape and dimension of a tract can impact its usability and value. A long and skinny vacant lot is worth less than a square lot. More road frontage is typically better than less. Larger acreage tracts are worth more than smaller acreage tracts.
Topography
Severe typography or elevation changes may adversely affect vacant land value. A steep incline may make it nearly impossible to access a property, and a flood zone may make it unbuildable. Further, the topography may impact road access to the property.
Soil Types
Soil composition and soil types can impact land value in two ways: 1) it may impact the suitability of building sites, and 2) it may prevent the installation of a septic system. Some soils are unstable or prone to extreme contraction and expansion, which can wreak havoc on a foundation; soils that don’t pass a “perc test” won’t percolate and won’t support a septic system.
Flood Zone
Flood zones are lower-lying drainage areas that will flood or back up with water after heavy rains. The Federal Emergency Management Agency (FEMA) maintains regional floodplain maps based on contour and elevation surveys. Typically, you can’t build a flood zone, and if even available, flood insurance is costly; plus, a flood zone across your property may effectively cut off access to a portion of your land.
Water Features
Typically, water features like creeks, rivers, and lakes are property assets and increase land valuation; however, depending on the location of water features on the land, they can make it difficult to access or develop part of the property.
Wetlands
Wetlands are an important fluvial ecosystem that regularly or seasonally floods with water or has sustained elevated soil moisture levels. While they provide valuable habitats for flora and fauna, they are also federally protected by law and may impede or preclude future development on your land.
Natural Resources
Natural resources such as timber, oil, coal, natural gas, and other valuable minerals impact the potential uses and value of a property. They can provide income to the landowner but may also negatively impact the usability and aesthetics of the land.
Relative Supply and Demand for Properties
The dirty little secret about valuing land is that it’s an investment scheme based on orderly buying and selling with relatively restricted availability and a societal agreement that real estate is valuable.
Otherwise, without the investment component, the utility of land quickly diminishes as prices increase. You can’t do more with an acre in upstate New York than in East Texas, but the land in New York is worth more due to a heightened demand that stems from higher population levels.
But when a market gets flooded with inventory, which for example, can be seen when a resort subdivision fails to attain the developer’s hype, prices plummet, and landowners are left with properties that are worth a small fraction of the price they paid.
When looking for similar properties to use as sales comps, it’s important to remember that no two properties are created equal.
The Desirability of the Property
With many vacant land tracts, the potential use is the primary driver of value.
Location
It’s cliche but true. Real estate is all about “location, location, location.” Land in an urban area is worth more on a relative basis than land in a rural area. A building on Rodeo Drive in Beverly Hills or a brownstone on Park Avenue in New York City is worth more due to the surrounding area than a property on Main Street in Podunk, USA.
Road Access
How do you access the property? You can legally access the land, right? Or is it landlocked? Road access and the quality of that road impacts property value. An easement is a less desirable form of access.
Utilities
Are there utilities on the property or nearby? A buyer wants power, water, and sewer. A septic system is fairly affordable for rural areas that don’t have sewer systems, but water wells can be costly, and it can be painfully expensive to pull power if it’s too far away.
Traffic
Is your land next to a busy highway? Or on a quiet cul de sac? Traffic patterns and congestion can negatively impact land worth.
Neighborhood
How’s the neighborhood? Are the properties well-kept, or do they look like an automotive chop shop or zoo? Neighboring properties can positively and negatively affect land worth.
Conveniences & Amenities
Where is the nearest grocery store? Are there restaurants and entertainment venues nearby? Is there a doctor and hospital in the area? These modern life conveniences and amenities have a large impact on property values.
Curb Appeal & Aesthetics
Does your vacant lot look like a jungle? Or is it cleared, mowed, and free from litter and dead trees limbs? Curb appeal matters, and in general, many potential buyers have a hard time imagining the “after” look of clearing, remodeling, landscaping, etc. vacant lots.
Improvements
Property improvements include buildings, barns, homes, structures, fences, and other capital expenditures to make a property more usable and valuable. Unimproved land has no upgrades and will be valued by its dirt value only. In contrast, an office building will be valued based on its rent per square foot, cap rate, or other valuation metrics and will command a premium to the land valuation, given its improvement.
Annual Taxes
Take a look at your most recent tax bill. Is it not too bad, or does it make your blood boil? Tax rates will impact land worth, as will any other recurring holding costs.
Home Owner’s Association or Property Owner’s Association
A homeowner’s association (HOA) or property owner’s association (POA) can be a blessing or a curse. On the one hand, they can protect property values and impose minimum standards, but on the other, they can be burdensomely expensive, bureaucratic, and severely restrict land use.
County Assessor’s Market Value
The county assessor’s office will value a property periodically for property taxes. The county assessor’s evaluation is typically based on recent sales and a regional appraisal of similar properties, but it’s done on an area or regional scale rather than property-by-property. And while the assessed value may be a good signal, it can also be off wildly. Some counties are conservative with property values, and others squeeze every inch of property value to increase their tax base. With vacant land, the assessed value tends to be regionally based rather than fully considering the particulars of the property.
Research Internet Listings
Much like a professional appraiser, internet research gives you an idea of what other sellers are asking, which is not the same thing per se as what a property is worth. Sellers and their real estate agents tend to push prices up by asking more than the last comparable sale in the area. More extensive research, particularly in disclosure states, will give you an idea of recent sales of comparable properties.
Hire a Professional Real Estate Appraiser
As discussed, a professional appraiser can be an invaluable resource when appraising land. These professionals live, and breathe prices and are steeped in the nuances of land sales and prices. Keep two caveats in mind when using an appraiser 1) it’s just an estimate, and 2) you should talk to the appraiser to understand how conservative (or not) they are with their evaluation.
Talk to a Real Estate Agent Specializing in Rural Vacant Land
Like most things in life, not all real estate agents are created equally. An experienced real estate agent can be invaluable in their home market and help you understand pricing. Then again, since you’re selling land by owner, you’ll want to be respectful of their time and not simply pump them for information. If you can, talk to more than one agent and focus on real estate agents with experience selling vacant lots and unimproved land.
If you are currently using a realtor to market sell your land, you’ll need to consult your current listing agreement to see when it expires to sell your land by owner.
Disclosure Versus Non-Disclosure States
In the world of land prices and valuations, some states are considered “disclosure states,” whereas others are “non-disclosure states.” In some states, land sales are disclosed publicly by law in the form of stated transaction prices or stated taxes based on transaction prices, whereas in other states, prices are private and confidential. In disclosure states, the county recorder and for-profit databases that compile the county’s data are invaluable in finding comparable sales data.
Sales Price per Acre
With most prices and land sales data, the total price will also be expressed in a dollar amount per acre or square foot. When it’s measured by the foot, you know it’s expensive! While this data can be helpful, again, it’s important to find accurate comparables, and it’s important to remember that the price per acre goes down as the total number of acres goes up. Holding all things equal, in the same market, one acre of land is worth more per acre than 100 acres.
Willing Buyer, Willing Seller
Despite all of the above methods, there are so many factors to consider when determining a property’s value. Again, it’s NOT an exact science. Land is illiquid, and prices can be opaque. And most properties are unique, making it harder to find accurate comparables.
Ultimately, the best judge of a property’s value is the market. By listing your land online, you’ll expose your land to the wide world of land buyers and get clear signals on pricing and demand.
Finally, it takes a willing buyer and seller to get a deal done! It takes two to tango.
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