How to determine land value

To determine the market value of vacant land (any property with no buildings), you must look at a number of factors. It's a little different than trying to determine the value of a residential or commercial property. The market value of any property, put simply, is whatever someone is willing to pay for that property and other similar properties. That value, of course, is based on a few different attributes.

Step 1

Look at comparable properties that have sold in the past two or three months. Try to find properties in a similar location that are the same size and type as the property for which you are trying to determine a value. If a similar property is selling for $160,000, your property is probably worth something close to that.

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Step 2

Consider where the property is located. Location is an important factor when determining market value. Two completely identical vacant lots in two different cities can have values that differ by thousands of dollars, if not more. There can even be extreme differences in plots of land a few blocks away from each other. If the land is situated in an area of rapid expansion, or if it is near a busy financial or retail district in a large city, it is worth a lot more than if it were located along a country road in a small town.

Step 3

Factor in any unique attributes that the property may have. If the vacant lot is zoned for commercial, it might be worth more than if it were zoned for residential use. In an area that does a lot of logging, the property will be worth more if it has an abundance of hardwood trees. A vacant lot that is situated on a body of water, or that provides a great view or other marketable value (such as a fruit orchard), will be worth more than a bare plot of land.

There are many different real estate investing strategies you may consider if you’re looking to make money, including purchasing undeveloped land. Although it takes a little extra effort, purchasing land is a great way to invest your money if you make the right decisions. Here is a look at how to calculate market value of land, so you can decide whether or not this strategy makes sense for you.

What Is Land Market Value?

Land market value refers to the amount of money a piece of land would command from an informed buyer under ordinary conditions. It is based on the features, location, and desirability of the land and serves as a general estimate of what the land is worth on the open market. Keep in mind that when referring to the market value of the land itself, this excludes any structures, but does factor in certain improvements, such as an upgraded drainage system.

Also, understand that the market value is not necessarily going to equal the sales price. There are other factors that impact how much an actual buyer will pay for the land and the final sales price may be higher or lower than the market value. But market value refers to a rough estimate of what the land should be worth under normal conditions, which you can use to price your parcel and respond to offers.

Best Methods for Calculating the Market Value of Land

There are several methods used by investors and real estate professionals to determine the market value of land. The most common methods are the comparable sales approach, income analysis, and cost analysis.

1. Comparable Sales Approach

This is the simplest method and uses the sales data of comparable lots to determine a rough market value. This is done by comparing the sales price of other similar pieces of land in the area to determine a rough estimate, adjusting for any variances such as size, location, or other desirable features.

Say, for instance, there is one plot of land down the block that sold for $100,000 and another that sold for $70,000. The former is larger than your plot and the latter is smaller but other than that, they are comparable to your plot. Using the comparable sales approach, you could determine that your plot is worth somewhere between $80,000 and $90,000, depending on the exact dimensions. This gets a bit more complicated depending on how many other plots and factors you include in your analysis, but that’s generally how the comparable sales approach works.

2. Income Analysis

This method is also known as the residual land value analysis and is a bit more complicated but can often be more accurate if calculated correctly. This method begins with analyzing how much income a developed property could yield. Then, subtracting the costs of all other elements, except the cost of the land itself.

First, you must determine the gross development value, which is the amount a property will be worth if developed to its highest and best use. Then you must create a rough estimate of what it will cost to develop that property, including construction costs, architect fees, real estate commissions, financing charges, and any profits you plan to pocket. You subtract these costs from the gross development value and what you’re left with is the value of the land itself.

This method can get complicated and will likely require a professional to ensure accuracy. But it’s a strategy often used by savvy investors and can provide a sound valuation based on essential factors.

3. Cost Analysis

The cost analysis approach takes the opposite stance and values the land based on the costs associated with development. In the cost analysis approach, the value of a potential property is equal to the cost of land, plus construction costs minus depreciation. This method is trickier to use if the land is undeveloped and is often less accurate than the comparable sales and income approach. But it’s often required in special circumstances that include insurance claims, new construction, special use properties, and so on.

Buying Land vs Buying Property – Which is Better for First Time Investors?

How to determine land value

Buying land has its benefits, but it can also come with its challenges. Unlike purchasing a property, when you buy raw land you can’t make money right away. You have to either develop a residential or commercial building to attract buyers and tenants or hold onto the property in the hopes that it appreciates over time.

Developing properties is more complex than simply purchasing rental property or even flipping an existing home. It requires knowledge of construction costs, zoning and tax laws, market conditions, and so on. Plus, it also requires more complex financing and risk assessment.

But if you are up for the challenge, there is more profit to be made when building something from scratch than purchasing an existing structure, so the added risks will pay off. Most first-time investors are likely better off choosing a simpler strategy, like single-family rentals. But, if you have the time and the vision for a piece of land and have a solid network of professionals at your disposal, it can be a rewarding and lucrative experience.

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Property taxes are a major expense of being a homeowner, and the way that local governments calculate how to charge an appropriate property tax can be both frustrating and confusing. One key to understanding property taxes is calculating your property's assessed value, which forms the basis for the tax calculation. Below, we'll look at some of the idiosyncrasies you'll run into with assessed value.

The simplest property assessment methods

Some local governments use the very simple technique of estimating the fair market value of a property and using that number as its assessed value. Doing so has the benefit of tying assessed value directly to the market value, making it easier for both homeowners and prospective home buyers to have at least one estimate of the true worth of a home.

To calculate assessed value, tax assessors will compare your home to similar properties in the area, looking for characteristics that make properties comparable to each other. Because property values can be highly dependent on location, all assessment methods have potential flaws, and that's why many homeowners choose to contest their assessed values.

Complications with assessed values

Property tax laws vary greatly from place to place, and not all local governments use such a simple system. In some cases, a local government will assess taxes on only a percentage of the value of the property. To calculate the assessed value when a local government uses such a percentage, you'll have to take the property's fair market value and multiply it by the chosen percentage.

Some states also offer exemptions for a portion of your property's value. In that case, you'll need to start with the fair market value but exclude the appropriate amount corresponding to the exemption.

Another way to calculate assessed value

If you know how much you owe in taxes and what the property tax rate is, you can back out the assessed value even if the tax assessor doesn't give it to you. For example, if the local tax rate is $10 per $1,000 of property value and you get a property tax bill for $3,000, you can divide $3,000 by ($10 / $1,000) to calculate an assessed value of $300,000.

Property taxes can be complicated, but when making your budget as a homeowner or considering a new home purchase, it's important to know how much you'll need to pay. These general guidelines should help you calculate your property's assessed value so that you can compare it with other local properties and make a smart decision.

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Generally accepted accounting principles (GAAP) require that the balance sheet present items at the cost originally paid for the asset. GAAP requires historical cost reporting because the cost is verifiable and reliable. An asset’s value may never be restated to reflect appreciation in value; restating assets due to permanent impairment is possible, however, in certain situations.

Determine if the decline in land value qualifies as impairment under GAAP. An impairment loss can be recognized only if the historical cost carried on the balance sheet cannot be recovered and exceeds the fair value of the asset. For land, this means that the eventual market price of the land at sale is expected to be lower than historical cost.

Determine your sales intent with the land. If you intend to sell the land in the next year or so, you may have an accurate estimation that the market price will be lower than historical cost. If you are holding the land indefinitely, however, it can be difficult to determine if an actual impairment exists, because you cannot develop an accurate estimate of the land’s market price in the future.

If you determine that an actual impairment exists, record the impairment loss in the general ledger. Debit an impairment loss expense account for the amount of the loss and credit the land asset account for the corresponding amount.

The “Journal of Accountancy” has outlined six criteria for determining when an impairment loss may exist: a significant decrease in the market price of an asset; a significant change in how a company uses an asset or its physical condition; a significant change in legal factors, such as an Environmental Protection Agency ruling that land is contaminated; an accumulation of cost to acquire an asset significantly greater than expected; or a forecast demonstrating continued loss on an asset.

Warnings

Recorded impairment losses can not be recovered on the balance sheet until the asset is sold.