HOW TO FIND THE “MARKET VALUE” OF A LAND
By Seth Williams

One of the biggest obstacles every land investor has to wrestle with is how to find the “market value” of a land.

It may seem like an odd dilemma to the typical Real Estate investor but trust me – if you've spent any amount of time trying to find comps or relevant valuation data for a parcel of raw land, you know that it can be incredibly challenging to nail down a concrete value for this type of Real Estate. It presents a major challenge to those who are new to the land business because most of the time, the data you need simply isn't there.

Let's talk about location, zoning and topography. Why are these things important? What is it about these three factors that would cause a property's value to go UP or DOWN?

LOCATION

Everyone knows Real Estate is about location. A plot next to a swamp or hostile environment, for example, probably isn't going to fetch high naira, but a vacant plot in an upscale neighborhood, close to a serene beach is going to be worth much more in future.

ZONING

Not all vacant plots are created equal and this is where zoning comes in to play.
What can this land be used for? Can someone use it to build a house? Office Building? Factory? Farming? Hunting? Mining? Make sure you understand what your (or the future owner) will be allowed to do with the property in accordance with the local zoning and planning requirements.

Zoning helps tell us what the site can be used for legally. This means if a vacant plot was zoned for residential housing and it could be split into four buildable plots that might carry much more weight than a plot that isn't buildable at all (for whatever reason). On the other hand, if zoning would only permit a property for industrial use, it’s worth considering whether that use can be fully realized in the current market. In other words, is it a good market to improve an industrial plot?

TOPOGRAPHY

Lastly, topography is crucial. Two separate plots might have the same exact size on paper, but if one of them is on a steep incline and has very little buildable space, the plot that is actually useable could be worth much more.
Understanding How Appraisals Work

Before we get into the complexities of valuing land, let's establish a fundamental understanding of how appraisals work.

In the vast majority of real estate transactions (especially when financing is involved), buyers and lenders will rely on an appraisal from an outside source to verify the value of the asset they are purchasing (aka – the collateral that their loan is secured by). The appraisal is a comprehensive report that usually considers three key valuation approaches. These approaches are known as:

• The Income Approach
• The Cost Approach
• The Sales Comparison Approach

These are widely considered to be the most reliable methods of determining a property's market value. In most cases, an appraiser will use at least two (if not all three) of these methods to come up with their final conclusion. Here's a quick overview of how each of them work:

INCOME APPROACH

The idea behind this approach is to determine the amount of ongoing income (i.e. – rent revenue) a property can be expected to produce now or in future. In order to determine this number, an appraiser will look at the “market rent” in the area. In other words, what are similar properties currently renting for in the same market? The appraiser will look at a number of similar properties (while considering their size, location, condition, amenities, etc.) in order to get an idea for the amount of rent revenue the subject property could feasibly produce. This approach is looking at the property purely from a revenue generation standpoint.

COST APPROACH

With this approach, the appraiser is trying to nail down the cost to rebuild the exact same structure from the ground up. The appraiser will take the estimated cost of construction, based on today's prices (minus depreciation, plus land) and use this to come up with one perspective of the property's market value.

There are a lot of big assumptions that live inside of this particular approach (e.g. – the cost of building materials, the assumption that nobody will ever pay more than the cost to build etc). The cost approach is an important consideration – but it's almost never enough to use this approach all by itself to determine a property's market value.

SALES COMPARISON APPROACH

With this valuation method, the appraiser will look at the recent sales of similar properties in the area. With this approach, the appraiser is making the general assumption that a typical buyer will not pay more for the subject property than they would have paid for a similar property in the same area. Appraisers will only consider the data from properties that have actually been sold, because these are concrete numbers and (in theory) they represent real purchase prices that have actually been paid. Appraisers usually find this data from various public records, real estate agents, other appraisers, etc.

What are other, similar properties currently priced for in the near vicinity?
If you were the owner of this property, and you listed it for sale today, what kind of competition would you have to deal with? If you can acquire it for the price you want, will you be able to re-list it, and price it exceedingly better than all the other properties in the area?

How To Deal With Ambiguity

Unfortunately, there is no “magic bullet” when it comes to valuing land. As any real estate appraiser can tell you, it's virtually impossible to reach the point of 100% certainty (down to the penny) about the market value of a property.

How desirable is this property?

Think of this as the “common sense” approach… what was your first impression when you saw this property? Did anything about it look interesting, desirable, appealing or attractive? Be honest – is there anything sexy about it? Will it catch anyone's interest? Are you looking at a gorgeous, wooded, mountainside lot – or is it a dry, barren, hostile wasteland? If you go through the effort of creating a great property listing, how beautiful will you be able to make this property look? Can you give buyers an offer they can't refuse?
Does the property have road access? How easily can someone get to it?

You'll always want to verify that the property has road access or some kind of legal easement so that people can actually get to it. If it doesn't have any access (and believe me, there are a surprising number of vacant lots that don't), your property might as well be on the moon. Make sure the property has legal access – or walk away.

What is the size, shape & dimensions of the property?

Think about what this property might be used for some day. Is the parcel big enough? Does it have an odd shape? Is it located next to anything that would significantly decrease its desirability? Be sure to note any red flags that you run into… these can be serious issues that will influence the property's value in future.

How close is this property to the local conveniences and amenities?

Consider what kinds of amenities or local attractions will be available to the owner of this property.
Will they have a grocery store across the street, is it close to beach or playground for relaxation, hospital or will you have to drive 3 hours to get there? Will you be able to market the property's location as a good thing?

Is the property situated in a flood zone?

When properties are located within a flood zone, the cost of flood insurance has to potential to be very expensive, and this added cost of property ownership can have a major impact on the feasibility of building a home on the property (and since many people buy land with the intent of building something on it, this is a very relevant detail). To get an idea for whether a property is situated within a flood zone

Call 2 or 3 Local Real Estate Agents and Ask Their Opinion:

This isn't a foolproof method, but it does help to “tell the story” of what your subject property may be likely to sell for. When I call local real estate agents, I've found it can be helpful to say something like this:

“Suppose I owned this property free and clear and I wanted to list it for sale with you today. What price would I have to list it for if we wanted this thing SOLD within the next 6 months?”

My primary warning would be this: Don't put too much faith in any ONE agent's opinion. There are a lot of clueless real estate agents out there (especially when it comes to vacant land), so if you're going to go through this exercise, make sure you're getting input from at least 2 or 3 people (the more the merrier).

You can find the market value of a real estate home in Nigeria with this free online tool: www.estateng.com/property-worth/hsev/