I am looking at a raw land. Its has been re platted recently. County site does not show any tax value for the newy platted land.
1)How to make a decision as what to offer. Should I pay an appraiser 300-400$ to appraise the land?
Any suggestions.
you can contact the municpality offices - like code enforcement/development or some variation. they should be able to give you estimates of how much it will cost to put in sewer, utilities.
Appraising raw land in a city (without many comps I assume) can be tough. You’d have to first establish the “highest and best use” of the property. Highest and best use can be a complicated thing, especially for raw land. Then you have to find buildings that are living up to a similar highest and best use on a similar sized lot. After that, you figure out how much of the comps value is attributed to the land, and how much is attributed to the building. That is also a tough thing to do without comps of raw land.
All of the above is what the land is worth on an open and active market. Here’s how you figure out how much the property is worth to YOU, which is much easier. I’m not sure what your final intended purpose with this land is but it doesn’t really matter.
Final Value (after doing whatever to the land you plan on)
Less- the cost to do whatever it is your going to do
Less- a healthy profit for your hard work
Equals- value of the land to you
To pay an appraiser will cost probably double your original estimate. I wouldn’t pay for anything before I had this under contract, so you’ve got to do the best you can.
Sounds like an exciting project. Appraisals for raw land are typically more expensive than the above suggested 300-400. This is because alot of “theorizing” work needs to be done as to what the highest and best use for the site will be.
It will help your appraisal if you can tell the appraiser what your plan (even if the plan has not gotten approval yet) at to what would work on the site.
As for financing (which is likely the reason you need the appraisal) raw land is generally financed at a low loan to value, because its by nature a riskyer type of deal. Alot of things need to go your way to make a raw land development a success. Not for the amature.
There are many experienced developers out there that would likely be open to buying a good deal subject to your PA if you get it tied up. If no buyers surface from a group of experience developers, you should second guess the project.
Highest and best use I not as tricky as some would think. Highest and best use is simply what use gives the highest return to the land after development.
EX. (Land Residual Technique)
Income (NOI) = $80,000
Development costs (Hard and Soft) = $500,000
Expected return = 12%
Income to improvements = $60,000
Residual income to land = $20,000
Land Value = $166,000
You have to apply this technique for every use, office, retail, industrial, mixed-use, multifamily. Also keep in mind the legal uses for the land and some uses may not apply. Also keep in mind the surroundings some uses may be permissable but not likley and thus not applicable.
Highest and best use for raw land in a city could go on forever. Is it better to build a 6 story building or 8 story building, high end apartments or low end apartments, a warehouse or factory, a parking garage or parking lot? “A lot of theorizing” is the best way to describe it.
The land residual technique assumes you know the value of the building. Typically the value of a new building is equal to it’s reproduction cost. That’s where the thousands of development possibilities come in. Of course there are legal, financial and physical constrains and that’s the reason why there aren’t millions of possibilties. It’s difficult to know what development will cost for every possibility.
Reproduction cost is a different part of the appraisal, the cost approach. Reproduction cost comes in when you have an existing structure to reproduce. Highest and best has its own section in the appraisal. The land residual technique is the proper approach for law land within the highest and best use section.
I agree to a point Sean. However, to use the land residual technique, you need to have a value of a building, in this case it would be the potential building you’ll be developing. Just as you used $500,000 for development costs in your example. Since brand new buildings are worth about what it’s reproduction cost would be, that’s where the cost approach comes in.
My arguement would be; How do you know $500,000 is the cost of development? The answer is, “because that’s what the cost is to build the highest and best use.” Then I’d say, “well how do you know the highest and best use of raw land in a city?” That would be a very time consuming thing to figure out using a lot of hypotheticals- more than just vague uses such as multi-fam, office, retail, industrial, mixed, etc.
The HBU will be similar to what uses are in the vicinity of the subject. There may be one or two or three uses at the most and therefore its not that ambiguous. There are many different costing guides out there that take alot of the guess work out of it. You could also use the developers cost estimates. Appraisers don’t create work for them selves if they have a willing able developer with plans it’s a good chance that the HBU is the developers use.
Also land sales are not that hard to come by in cities and the sales comparison approach is given the most weight in the analysis typically.
Figuring out the value of land if you already know what you want to build is easy. If you’d just like to know the value of raw land in a mature city (without many comps) it is extremely difficult. Zonings can be changed, city districts have thresholds that change, etc. If you were to show me 1 million buildings, I’ll show you 1 million buildings that cost a different amount to develop. Thus using the land residual technique, the land would have a different value in each case.
Assigning a vaue to central park in NYC would be a moumental challenge. The true HBU is not something an appraiser could reasonably figure out. If you put 10 developers and city planners in a room and asked them to work out a plan on what to develop in central park, they would never agree on the best things to build.
You are correct that developers know what they want to build before they purchase any land, which makes the appraisers job pretty straight forward. But to say whatever they’d like to build is the true HBU because some of the surrounding buildings are similar is the easy way out. It takes a lot of work to figure out what the most cost effective thing to build is. 6 story building with 8 foot ceilings, 6 story building with 8.5 foot ceilings, 6 story building with 10 foot ceilings, 7 story building with 8 foot ceilings, etc. Most of the time the developer already knows what they want to build to best suit their ego, so it’s really not an issue. It only becomes an issue if you point to rare- raw land in a city and say “How much is that worth?”