Hello All,
I am trying to make an offer on some vacant lots but want to make sure I have the FMV before I submit it. I searched the web but can’t find anything that would give me this info. Unfortunately, this land is out of state so I can’t use my current real estate agents either. Can anyone help or give me some direction. I just want to make sure I give the seller a fair price as well as my investors. I appreciate your time.
Hey QMGInvests,
The way I usually determine FMV on a vacant lot is by first determining the value of the house you plan to build on it. Once you find out how much a brand new home in that area goes for you can determine “X”. Then you need to find out what the County Tax Assessor assesses the land at to determine “Y”. (In my county the assessor assesses the land anywhere from 20%-25% of the value of the home.)
X= FMV of home
Y= % of X equals land
FMV of land = X times Y.
Now that only deterimes value of land after the home is built. But for me thats all I need to know because my exit strategy is to build out and sell the home.
Example
300k = FMV of brand new home
25% = Land
75k = FMV of lot
<75k = Offer
Your offer all depends on your exit strategy. If your wholesaling the deal then you would need to make an offer of 60%-70% of that. If you can build at a good price then I have seen people pay 100% of FMV for the land because they have profit built into the back end on the home.
My numbers in my area are usually…
300k FMV Home
50% = Cost of Labor and Materials
25% = Cost of Land (Pay anything under 25% is profit)
10% = Cost of Sale (Debt Service, Realtor, Closing Costs, Down Assist)
15% = Profit
Example
A friend of mine just picked up a 66 home subdivision with 4 model homes and 62 finished lots. The FMV for a new home in this area is $279,000 giving the lots a value of $69,750. The final sales price was 1,650,000 which came out to $25,000 per lot with the 4 model homes thrown in for free. Also the lots are now being held at 9% of the value of the home. So there is another 21% profit on the land. Just goes to show you can get some pretty good discounts on the land as well depending who you are.
Hope the information helps
Good Luck
Mike
Mike,
You saved me a ton of sleepless nights! Thank you so much for that formula. Yes, I will be wholesaling it so your info really helps. I think I’m ready to make an offer now thanks to you. Have a great day! :beer :beer
QMGInvests/CalREGuy - I am no expert. But one thing that I didn’t like on CalREGuy’s approach is that he is relying on the Assessor’s office estimate for land. The formula the assessor’s use is set by law and is the same for everybody in a given area. That doesn’t seem appropriate. I would use that number as a guideline.
One option that you have is to ask your realtor to locate a realtor in the area where the property is located. Realtors do that all the time. And sometimes the other realtor would do that for free.
And in the end of the day you could use the following formulat to determine your purchase price:
[FMT of the house built] - [cost to build] - [administrative, financing, miscellaneous costs] - [your profit] - [margin for error] = maximum purchase price.
I hope this makes sense.
Good luck!
I agree with j1dias. I ignore assessment values unless their too high and I think I’m paying too much taxes for a property I own. You have to rely on comparable data (actual sales) and your own personal investment goals.
Land is a bit trickier than houses. Location is even more critical.
I sure wouldn’t want to be buying land without seeing it, and seeing what is around it.
Double check to make sure there are no environmental issues on your piece or on anything near it.
Make sure it has legal access, and that it has water and access to utilities.-- also that it will perk, if it isn’t on sewer.
Check with the local government to see what is planned in the area. I once looked at a parcel where there were plans for a sewage treatment plant right across the road. You think that was disclosed? Guess again. I found out while doing my due diligence.
I also walked away from a nice parcel because there was a dilapidated garage that had been used as an auto repair shop. There were signs of oil and antifreeze having been poured directly on the ground.
The seller refused to pay for an environmental survey, and I walked.
The old garage didn’t show up on the assesor’s listing, and everyone involved failed to mention that there might be an environmental clean-up needed. I had to go and see it for myself.