How Is a Plot of Land Valued? Everything You Need to Know

woman's hands holding a flower from a plot of land

When you find the perfect plot of land for sale, you must determine whether the asking price is appropriate. The best way to do that is to value it. However, land valuation is more of an art than an exact science, so it can be a bit difficult to get the hang of it.  

To help you overcome any doubts, we’ll look at the most important factors that impact land value, the two most used valuation methods, and special considerations to have in mind.

The Most Important Factors that Influence Land Value

There are numerous factors that directly or indirectly affect land value. The location of the plot of land is the most important one. Land in a city is more expensive than land in the countryside, and land in the city center is more valuable than land on the outskirts. Similarly, topography directly impacts construction costs and, as a result, overall development costs. The costs of developing facilities on uneven soil will be substantially higher than on a flat plane. This is why land prices are low in hilly and mountainous places and construction costs are substantially greater. 

Determining the land’s use is also an important factor in determining its value. Land that you can use for commercial purposes is more valuable than land that has residential or industrial purposes. Likewise, residential and industrial properties are also more valued than agricultural properties.

Finally, any leveling costs you should consider when valuing a piece of land. Laying water and drainage lines will be more difficult if the land level is higher than the neighboring road. You must excavate extra soil in order to keep the plot at a respectable level. Also, if the ground is significantly lower than the road level, you should be aware of major landfilling costs may incurre. 

The Top Methods Used to Value a Plot of Land

Land sellers usually base their asking prices on what the market will pay rather than what the land is worth. The market price for a plot varies greatly. Good plots in top-notch locations are rare. So, when they hit the market, people are ready to pay more for them. So, to ensure you pay the right price for the property, here are the two most used methods of land valuation and everything you need to know about them.

Residual Valuation Method

Residual valuation method is the basic land parcel calculation method. It’s used to determine the potential of the plots of land for sale and the units built on them. For instance, a plot’s value may have been low at one point, but it could now be worth a lot more later on due to the anticipated infrastructure development. 

To get the land value using the residual valuation method, calculate the end value of the proposed finished house minus the development costs minus the desired profit. Keep in mind, however, that this method is sensitive to variables, so you should carefully consider when calculating a plot value the following: 

  • End Value — Understanding the end value of what you aim to build should always be the starting point for plot valuations. The most challenging aspect here is to figure out what building the plot can support and what the planning board will approve. It’s best to conduct market research or have a real estate agent evaluate your proposals. Remember that end values should never be based on ideas that overdevelop the plot, as these are unlikely to be approved. 
  • Development Cost — These will cover all of the costs associated with the construction of your home. Things to consider here would include design services, building costs and fees for developing the plot. Furthurmore, planning fees, taxes, land surveys, site abnormalities, contingency, and level of specification and customization. 
  • Equity — This is the profit you anticipate from your plot development activities. However, the definition of equity is subjective. While some — such as builders and developers — consider this to be essential, others don’t. For instance, if you’re a self-builder, profitability may be less important to you. So, if you’re not interested in making a profit, you won’t deduct an allowance, which would increase the value of the tract of land. 

Sales Comparison Method

The recently sold local properties identical to the one in question, are compared using the sales comparison approach. It then adjusts the price to account for the variations between the comparable and the subject property. You should check the following elements: transaction and asset characteristics:

  • Transaction — refers to the date of the transaction, the method of payment, the speed of the transaction, and other attributes. This provides you with an idea of how quickly your house will sell once it’s on the market. 
  • Asset — refers to the size, location, conditions, utility, construction restrictions, and business climate. These consider the advantages and disadvantages of developing property in your chosen place. 

The most common way to find this information is to search a property transaction database. To generate the most accurate estimates, the land that is most comparable to yours will have the highest weighting. The sales comparison method is the quickest way to figure out for how much you can sell or buy property in the real world.

Special Considerations for Land Valuation  

Land in an area where there are environmental problems may lose some of its value. If a property is located in an area prone to flooding, mudslides, or earthquakes, it will have a lower value. 

Similarly, the possibility of recurring devastation might make maintaining a safe presence on the property difficult. Any enhancements made to the property could be wiped out in the event of a natural disaster. Moreover, the risk to the people who may be present at such a location can outweigh any benefits derived from its use.

Even if the land is in a good location and has access to desirable resources, there may be mitigating circumstances that prevent it from being fully developed or utilized. Restrictive covenants, for example, may prevent you from tapping into discovered resources such as oil and natural minerals. 

Final Thoughts

Because there are so many more factors, valuing a vacant plot is far more complex than valuing a house. However, when you do it right, you’ll get an accurate picture of the true value of the land during the selling and buying process. It’ll also help with tax calculations, analyzing returns on investments, and determining the income-generating potential of a plot of land.

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