How Much Is My House Worth? A Beginner's Guide

How Much Is My House Worth? A Beginner's Guide

How Big Is an Acre of Land?

Have you ever stopped to think what is an acre? Where did the acre come from, why do we use it, and exactly how big is an acre of land? The history of the acre might surprise you.

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Best Approaches to Valuing Land

A landowner can still get an idea of what land is worth by gathering some information and doing some analysis. Here are the main ways to learn what land is worth:

Use

Ultimately, what a piece of land can and is likely to be used to determines its worth. This can depend on many factors, including:

  • Zoning. Zoning restrictions can have a significant impact. Land zoned for multifamily development may be more valuable than land restricted to one-acre single-family homes.
  • Size, shape, and dimensions. If a piece of land is too small or too irregularly shaped for a home site, that will affect its current market value.
  • Topography. A lot that is set on a steep hillside might be worth far less than a similar-sized one on flat land.
  • Flood risk. Land in a floodplain may have building restrictions or added costs associated with it that could affect its value.
  • Exploitable resources. Vacant land may come with valuable mineral rights, water rights, timber, or other natural resources.

Scarcity

Scarcity

The last unbuilt lot in a fever-hot building market may command a high value. On the other hand, there may be dozens of similar properties available. Then the value of none of them is likely to be high.

So you need to have some idea of real estate market conditions. It’s also essential to assess how unique or unusual your land is.

Sites such as the local Multiple Listing Service or Zillow can help you see whether similar pieces of land are available. Key factors to use when comparing listings to your property include:

  • The number of dwellings that could be built on the site.
  • Access to transportation facilities such as rail or highways.
  • Frontage on a commercial road, lake, or other assets.
  • The direction of population growth and building trends.

Land use and zoning regulations are essential for determining scarcity. Check with the city and zoning commission to make sure of the zoning for the parcel in question.

Desirability

This is the X factor. Desirability can include a host of things that are hard to quantify. They may include:

  • Location. How close are employers, schools, and shopping?
  • Access. Does it have access or easements to roadways?
  • Utilities. Are they nearby?
  • Traffic. An otherwise great home site might be less valuable on a busy road.
  • Neighbors. Is it near a high-end housing development? Or a landfill?
  • Aesthetics. Does it have a view? Is it wooded?
  • Improvements. Is it fenced? Does it have ponds or other amenities?

Desirability may be based as much on a first impression of what the property looks like as anything. And all of these factors have to be used with a sizable fudge factor.

The fact is, valuing vacant land is not an exact science. Even the most expert appraiser won’t be right all the time.

Knowing what goes into valuing land can help make a valuation exercise more accurate. But the ultimate deciding factor – what someone will pay for it – can’t be determined without actually selling it.

How to Find the Land Value of My Home

Percentage allocation is one way to find the land value of your home, says TurboTax, a software and online tax-preparation program offered by Intuit. TurboTax gives this example:

“You buy a house and land for $200,000. The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. The latest real estate tax assessment on the property was based on an assessed value of $160,000, of which $136,000 was for the house and $24,000 was for the land.”

Find the land value of the home as follows:

  • Allocate 85% ($136,000 / $160,000) of the purchase price to the house and 15 percent ($24,000 / $160,000) of the purchase price to the land.
  • Your basis in the house is $170,000 (85 percent of $200,000) and your basis, or value, of the land is $30,000 (15 percent of $200,000).

So, in this example, the value of the land is $30,000, or 15 percent of the value of the overall property, and the value of the house is $170,000, 85 percent of the total value of the property overall.

What factors affect home value?

A number of factors can affect the value of your home, including:

  • The neighborhood
  • Its age
  • Its condition
  • Its size
  • Any home improvements or upgrades

There are other factors that impact property values overall, too. These include the local housing market, economy, interest rates and tax rates, Reed says.

An Appraisers Perspective

appraiser’s perspective Now that you’ve heard a land investor’s take on this issue, I wanted to dig a bit deeper and get an appraiser’s perspective on how they evaluate vacant land.

I reached out to Ryan Lundquist (founder of the Sacramento Appraisal Blog and a certified appraiser in the State of California) to get his input on how he would approach the task of valuing land.

When it comes to real estate valuations, this guy’s word carries a lot of weight, because he is working in this world every day. As a professional appraiser, he understands how to approach this process using the conventional standards that are well-established in the real estate industry.

Here is a summary of a Q&A interview we put together on this topic…

What are the most important factors you look at to determine the value of a vacant land property?

It’s honestly not easy to determine a ballpark value for a piece of land because there are so many factors to consider (as we’ll get to below). Plus, since I hold a state license to appraise property, I  have to actually support the values I give – whether I’m giving a verbal “ballpark” value or a full, written appraisal. I am essentially liable for any value I give, so that is why it can be challenging when people call me and say, “I don’t need a full appraisal, but just a quick value.” I get what people are asking, but since I actually have to support the value I give, it is more involved on my end.

Let’s talk about location, zoning, and topography. Why are these things important? What about these three factors would cause a property’s value to go up or down?

Everyone knows real estate is about location. A site next to a toxic dump, for example, probably isn’t going to fetch high dollars, but a vacant lot in an upscale neighborhood is going to be worth much more.

That beings said, not all vacant lots are created equal and this is where zoning comes in to play. Zoning helps tell us what the site can be used for legally. This means if a vacant lot was zoned for residential housing and it could be split into four buildable lots, that might carry much more weight than a lot 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 lot?

Lastly, the topography is crucial. Two separate lots 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 lot that is actually useable could be worth much more.

RELATED: What Is a Topographic Survey?

In your opinion, is vacant land a difficult type of real estate to value? If so, why?

It sometimes feels difficult because there are definitely fewer comps. Sparse data always makes for more challenging valuations. Since the bulk of my work involves lots that have already been improved, that is definitely part of why it takes me longer.

(Note: When the data is available, this is the kind of visual context that Ryan likes to provide for his clients)

When an appraiser nails down the value of a vacant

When an appraiser nails down the value of a vacant parcel of land, how much deviation (or “lack of reliability”) do you think there is on this number and why?

It honestly depends on the appraiser and how good the report is. There is no real “standard” end-all answer to this question. The reader of an appraisal report will have to sniff out whether it seems legitimate or not. Does the report tell a compelling story of value so that the value makes reasonable sense?

How much weight and importance would you give to the following factors?

The property’s assessed value:

I suppose it really depends on how good the assessment is. Some areas may be better than others. However, one important consideration is that assessments in my area at least are based on when the property was purchased instead of the current market value. This means an assessment for a piece of land purchased 15 years ago might show a profoundly lower value than what the current market is willing to pay. Personally, I pay almost no attention to the assessment for this reason.

The listed prices of similar lots in the area:

I think the list price for similar properties can say something about value, though sometimes listings are out-of-sync with the market. I do pay attention to them (as well as pending and withdrawn transactions), but it’s always important to judge each one on its own – and determine whether it says something about the market or not. I do want to know how much interest similar properties have had from buyers when exposed to the open market and [it also helps to know] how many days they spent on the market too. It can be telling if listings aren’t selling at a certain level or if they’re fetching a lot of interest at a certain price.

The amount of inventory (of similar properties) on the market:

This is important because when there is more inventory in a market, it tends to water down the price (due to the increased competition). This is basic economics. When there is more supply than demand, prices will inevitably come down.

For the typical land investor who is trying to nail down a “ballpark value” of a vacant lot (WITHOUT ordering an appraisal), are there any common valuation mistakes or dangerous misconceptions they should watch out for?

I would say to make sure you are comparing apples to apples. One lot might look very competitive on paper, but when driving by or at least viewing it on Google “Street View”, differences can become apparent. I would also recommend talking with the city to ensure the land use and zoning are understood. I say this because sometimes information provided in Tax Records may not be accurate. The definitive word should come from the planning department instead of published records that may not have been updated in years.

What do vacant land appraisers look for?

Homes have dozens of factors that affect their value, from the quality of the finishes to the number of bedrooms and bathrooms. Similarly, vacant lots have features that make them more or less attractive to potential buyers. Here are some things appraisers consider when determining the value of a piece of land. 

Accessibility 

A plot of land isn’t worth much if you can’t get to it, so accessibility is one of the major factors appraisers consider. Rural vacant land in particular can be hard to access.

In general, the more road frontage a property has, the higher it will appraise. Frontage is especially important to commercial buyers who want their business to be visible from the street. 

But some cities even require newly built homes to have a minimum amount of road frontage. So landlocked properties may only be suitable for hunting and recreation depending on local laws, which decreases their overall value. 

Utilities and Improvements 

Bringing utilities to a piece of land can cost thousands of dollars and take months. If a property already has water, sewer, or electric, it will appraise for a higher amount than a raw, undeveloped plot. 

If the parcel is cleared, fenced, landscaped, or has other improvements, it may also sell for more money. 

Location and Surrounding Properties

The location of a plot of land factors heavily into the valuation. Land in urban and suburban areas is worth significantly more than rural vacant land. Properties in desirable parts of town with easy access to jobs, schools, and entertainment also appraise higher. 

Appraisers may also look at surrounding properties to see how the neighborhood is changing and developing. If a rural area shows signs of population growth, for example, they’d take that into account in their calculations. 

Amenities 

Amenities such as lake access, beautiful views, hiking trails, and shooting lanes can make a property more enjoyable and increase its value. These amenities can significantly improve the price when the vacant land goes up for sale.

Shape, Topography, and Size

Shape and topography are both important considerations because they affect how the property can be developed. Oddly shaped lots may have less usable acreage and road frontage than standard square parcels, which makes them less desirable. A property that has rolling hills or a river running through it may also be harder to build on and appraise lower. 

Size has an impact on the land’s value as well. Small lots typically sell at a higher price per acre than large parcels of land. The appraiser may also take into account how much demand there is for a parcel of that size and factor it into the calculations. 

Environmental Factors 

Environmental factors like soil quality, flooding, and contamination can make or break a building project. Appraisers perform research and work with experts to identify potential issues that could get in the way of construction. 

Scour the MLS

Note: Back in 2015, Trulia was acquired by Zillow (and Zillow has made some BIG improvements to their database of land sales comps). If you head on over to Zillow, you can use this exact same process to find current land listings AND recent land sales comps in your area. You can also use Redfin to determine approximate market values in the same way (but with better options for data analysis), as I explain in this blog post.

This approach is far from perfect (for obvious reasons), but it does do one thing quite well…   it will inform you of what kind of competition you’re dealing with (and what those sellers are hoping to get out of their property). In other words – if you were to list your subject property for sale in this market today, what other listings would you have to compete against?

Take a minute and do the math. Once you understand what price your property will have to be listed for in order to look like the best deal on the market, this will give you a better perspective for the property’s potential value in contrast to what’s currently available on the market (because if you’re offering the best deal and advertising it well, it will theoretically be the first one to sell).

Methods Appraisers Use to Find Land Value

Most people will tell you to start with an appraisal to help you determine value. There are two primary methods that appraisers use to calculate the worth of a piece of property or land. Let’s take a look at these three different methods to give you a sense of how a professional goes about it. You can then use this knowledge to follow the same steps and do it yourself.

Cost Approach

This method is not used as often to estimate the value of unimproved land. It is mainly for properties with a house or other large improvements. Having buildings on a the lot will obviously massively affect the value. What kind of shape the buildings are in will also affect the value. For example if the property needs a major renovation

Since we are here to discuss how to estimate the value of land we won’t get into too much detail on this method.

Are you interested in learning more about the cost of land in the U.S.? You can learn more in the USDA Land Values 2019 Summary

Market Approach Using Sales Data

The next approach involves finding comparable (comp) real estate sales data for your vacant land. You will want to look for recent sales that are as similar to yours as you possibly can. This is the most common method an appraiser will use for a house and it can translate to land.

What Makes A Good Comp?

If you have a 5 acre vacant lot then the ideal comparable is other recent sales of 5 acre vacant lots with the same zoning as geographically close as possible to yours. You can’t compare a 5 acre property to larger lots that have 10 acres or more.

You will also want the sales to be as recent as possible so that they reflect what is going on in the current real estate market today. Sales from a year or longer ago aren’t that helpful.

To get a good valuation, you will want to find at least three to five sales that are comparable to yours in recent times (sold in the last couple months ideally).

Then, you can make adjustments to these sales you found that were similar to your property. You will need to determine the different variables that have an impact on the value of the land. These include things like access, zoning, parcel size and shape, and topography. You can then adjust each of the comparable sales for the ways that they differ from the lot you are selling.

Cost Per Square Foot or Per Acre Of Other Land Sales

Finally, it’s time to determine the cost per square foot of these similar sales. To determine this, you will want to divide the sale price by each of the properties’ total square footage.

For all of the comparable sales, you will want to find the median or average cost per square foot or per acre depending on the size. Then you can take the total square footage or acreage of your lot and multiply it by the median or the average land prices you determined. The figure you end up with is the valuation of your land based upon the market approach to appraising land.

Are you curious about how property values have changed over time? If so, take a look at this article.

Income Approach To Land Value

The income approach for locating values works best with income-producing properties such as rental properties. Most empty lots however make little income. Only parcels of land leased for agriculture and recreational uses, such as hunting, produce predictable income.

If your land is or could be used to generate income, you can use this method to pin down the real estate value. This is most often the case with farm, timber, and agricultural land.

Net Operating Income and Capitalization Rate

If you’re looking into how to sell land that you’ve been using commercially, you can start by calculating the current net operating income (NOI) of the land. Buyers want to get an idea of what kind of return they can get on their investment.

Now it’s time to find the capitalization rate. This represents the rate of return on investment for the investor. You will first need to calculate the cap rate for similar properties in order to find the cap rate for your real estate. Commercial brokers can help give you an idea of these numbers. You can also look at other commercial websites.

Once you have found accurate estimates for similar properties’ net operating incomes, you can then divide each properties’ NOI by its most recent sales price you can find. This will leave you with the capitalization rate.

To calculate the cap rate for your own tract, you can take the average cap rate from the comparable properties and use it in your own calculation.

Finally, it’s time to divide your land’s NOI by the comparable cap rate you calculated. The figure you end up with is your land’s value based on this method of appraising land. This strategy requires a lot of data that isn’t as readily available.

Are you wondering what it takes to find a developer to purchase? If so, you can learn more here.

Speak to a Realtor on Market Conditions

Talk to a real estate professional. A real estate agent who regularly buys and sells property in your area will have a good idea of what properties similar to yours have sold for. He or she might even know of a similar piece of land that is currently for sale.

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