When people new to investing/developing first get started looking for land to purchase, they tend to depend on their solely on real estate agent to provide comparable properties to calculate land value. This by itself, however, is not the best way to figure out what to pay for land. If you rely on comparable property calculation alone to arrive at your purchasing price, you may make a potentially profitable venture fall flat. You should consider other methods and tools of valuating your land, some of which I will explore in this blog post, starting with…
The Land Residual Method
One method used by many savvy investors, developers and appraisers is the Land Residual Method. This method is used for both Commercial and Residential valuation. It can determine the current and future value of a particular piece of land. Using this method you will be able to propose a piece of land to a developer and have profit built in. Once you have used it enough you should be able to get an estimated value for almost any property in just a few moments, and to be able to answer in quick strokes the all-important question, “Does this deal make sense?”
To Figure out the Land Residual Value, first you need to figure out the highest and best use for the property and how much the property would be worth when the project is complete. Subtract the development costs to make the property and you will come to the Land Residual Value, or “Land Value”. Of course, this begs the question, how does one find out how much the land is worth?
If you have any questions about this method of Land Valuation, feel free to contact Stephen Lilly to explain this method and the next land valuation methods discussed in this blog series.