It’s our business to evaluate real estate whose value is in the land. Our customers are interested in a properties’ potential…not necessarily in the current home, at least as how it sits today.
Simply put, there’s the land, then the improvements (i.e. a house). In many cases, the improvements are no longer of interest to a buyer leaving the structure itself with little or no value. The buyers of such homes either plan major renovation or want to start-over completely with new construction. Either way, these buyers rarely pay much, if any, premium over land value.
So, what’s the best way to estimate value for this type of property?
Work backwards.
Some buyers, both pros and individuals, like to use a “dollar-per-square-foot” calculation to come up with what a property is worth. But, in our opinion, this formula universally just doesn’t work.
Without going into a bunch of detail on why $/per square foot doesn’t work, I’ll share why in our opinion “working backwards” does.
Here’s what needs to be considered when evaluating this property type:
1. What will the local zoning rules and regs permit in terms of a new or renovated structure on the property?
2. Given that information, what will the particular property support in terms of newly constructed or fully renovated housing without creating overvalued real estate?
3. Once it’s determined what kind of project can be undertaken and there is a comfort level with the valuation of the completed project – then take the completed project value and divide by between 2ish and/or 3 (depending on whether the buyer is a professional looking to make a profit, use 3, or for an individual less concerned about immediate resale i.e. short-term profit, use between 2 and 3).
An example: A property may be worth approximately $500,000 if the completed project is expected to be in the $1.5MM range (includes the cost of the land). This is very close to the calculation a professional would use when considering buying a property for new construction (when there is a structure to replace).
This rudimentary calculation is a good starting point. Clearly, market expertise and some subjectivity is important………but, the $/per square foot model does not work, especially as bigger properties dictate a lower $/per sq. ft. valuation than smaller parcels, and it is very rare for properties to qualify as a commodity – very few are the exact same.
So, start with the value of the end project, subtract cost of improvements and what’s left is what can make good economic sense for the Value in Land.
Just a bit of info……..hope it helps :)
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