What’s that land worth?
The answer will take some digging. Valuing land is more complicated than simply looking at parcel size and comparable sales. There’s a long list of factors that could impact price, ranging from soil type to road access. To top it off, there isn’t a gold standard, magic formula to get it right.
Land features can vary greatly, even over short distances, and at the end of the day, the key to determining land value is careful due diligence and research. This is where consulting a professional can be a huge benefit. Of course, taking the time to learn about how land is valued and what considerations impact price will give you more clarity during the buying and selling process overall.
In this article, we’ll discuss typical land valuation reports, why determining land value is challenging, and what factors impact price so you have a solid starting point for your transaction.
- Types of Land Value Reports
- Why Land Valuation is Difficult
- 10 Factors Used to Estimate Land Value
- Where to Search for Property Information
Types of Land Value Reports
Competitive Market Analysis
A competitive market analysis is a report often provided for free by a real estate agent. It typically includes property data (like size, soil type, elevation, etc.), data from the previous listing, recent sales and current listing comparables, and micro-market trends.
The goal of a CMA is to recommend a listing price based on all available data and current market conditions. Because CMA reports are not standardized, it’s a good idea to learn what goes into a thorough report.
When a buyer applies for a loan, the lender will want to ensure they aren’t lending more money than the property is worth. To determine the value, they’ll send a licensed appraiser to evaluate the land and compile a report based on three approaches:
- Sales Comparison Approach: This method involves estimating value based on recent comparable sales in the area, which are typically found in public records, real estate websites, and from other appraisers.
- Cost Approach: Using the cost approach, an appraiser will estimate what it would cost to rebuild a property from the ground up (for example, a developed farm). They’ll account for today’s prices, depreciation, and the cost of the land.
- Income Approach: This appraisal method uses a simple formula to estimate land value. It takes the net operating income (the annual income of an investment property) and divides it by the cap rate (the ratio of a property’s income over its cost).
Why Land Valuation is Difficult
While a comparative market analysis or appraisal is a fairly straightforward process for residential or commercial real estate, land presents unique challenges.
For one, land data is often difficult to find, and in the past, access and boundaries have sometimes been settled with handshake deals instead of paper documentation. Relevant comparable sales and listings are also limited because the features of neighboring parcels can vary greatly, even if they are similar in size.
In short: It takes a deliberate evaluation of multiple features to estimate land value, and while there isn’t a standard process, there are common factors agents and appraisers take into consideration. Keep in mind that some of these may weigh more heavily than others depending on the type of land being evaluated.
10 Factors Used to Estimate Land Value
It should come as no surprise that location has a large impact on land value and is usually the first thing you should think about. In general, proximity to towns or cities tends to increase the value of a parcel, but other considerations may also be at play.
For example, a recreational property in a sought-out location for wild game could have a higher value than a similar property with fewer hunting opportunities. On the flip side, an agricultural property that overlaps flood zones might fetch a lower price than one with less flood risk, even if they are just a few miles apart.
A few other location-related factors include:
- Potential for development
- Public utilities
- Neighboring parcels
- Proximity to economic activities
- Nearby attractions
- Desirability of overall area
2. Usable Land
Not every acre of land is necessarily usable, and what constitutes usability can vary depending on the type of land in question.
For example, farmland with limited tillable acres or poor soil quality will generally fetch a lower price than sweeping tracts of high quality cropland. Steep elevation changes might limit the enjoyment of recreational land and lower the value.
Certain types of access can be more critical when valuing a piece of land. For example, a landlocked property without direct road access will typically be worth less than property with easy road access. However, easements for utility companies or first responder access usually have a minimal impact (if at all).
Proximity to water does not immediately guarantee access or use. Water rights are a major consideration for buyers, especially when it comes to farmland or recreational land.
It’s important to note that laws determining water ownership and use vary across the U.S. An experienced land agent will understand how water rights in your area affect the value of your property.
Land improvements refer to features that make a property ready for its intended use and reduce the overall upfront costs for a buyer.
Examples of existing land improvements include:
- Access roads
- Food plots
- Useful buildings, like a barn or cabin
- Permanent hunting stands or blinds
Keep in mind that derelict structures can have the opposite impact on value. It comes down to how much effort and money it will take for the buyer to make the most of their new property based on intended use.
6. Timber Value
Species, size, quality, and quantity are four of the more obvious considerations when looking at timber value for a piece of property, but like most topics on this list, there’s more than meets the eye.
Timberland value also depends on when the property was last logged, site conditions, proper management, and the cost of harvesting in your area. When it comes to valuing timber, consult a specialist with a strong understanding of the industry.
7. Soil Type & Quality
Soil impacts agricultural and timber productivity, building potential, and even septic suitability. Type and quality can also vary greatly even over short distances. This makes it another important factor in land valuation for many land use types, especially farmland.
If your land is in an area known for having valuable minerals, like natural gas or oil, mineral rights can be an important consideration when pricing your land. In the United States, mineral rights can be sold separately from the land or retained by the seller altogether.
However, for property in areas without valuable minerals, this factor will likely not be on the table to begin with.
9. Conservation Easements
Conservation easements restrict development in order to protect wildlife, historic sites, agricultural land, or other conservation values. Often, these easements are permanent and do not allow buyers to negotiate new terms. As a result, conservation easements may lower the value of a property.
10. Potential Income Sources
If a property has features that are more likely to generate a return, it can often be listed for more than otherwise similar properties. A few examples include:
- Grain bins
- Horse stables
- Alternative energy, like wind or solar
- Building sites
- Hunting leases
Where to Search for Property Information
If you’re doing your own research, you’ll likely need to compile several sources for a complete picture. Here’s a quick breakdown of where to search:
- A title search includes details, like property lines, rights, easements, and zoning.
- Mapping tools, like Acres, show you important land data, including soil type, elevation, and even crop history.
- Real estate listing websites are a good place to search for comparable listings in your area.
Of course, you should also visit any property you’re interested in purchasing. Satellite images and documentation provide a limited perspective. Walking the land may reveal problem areas you did not anticipate on paper.
Land valuation is not a straightforward process, but it is a critical step whether you’re setting a listing price or looking to purchase new property. Here are key points to remember:
- Working with an appropriate professional will help you more accurately value your land and secure the best terms possible for your situation.
- There isn’t a simple process or formula for valuing land. Even neighboring properties of similar sizes can have drastic differences.
- Land valuation depends on a myriad of factors, so the more information you have available, the better.
Need help with buying or selling land? Talk to an AcrePro agent today.