Wondering how to value land? It’s a common question I get—so I wrote this post and shot a video that you can watch below!
When evaluating land’s value, you first need to ask whether it’s improved or unimproved. Next, you need to find comps that match the improvement status, size, and location/layout. If you can’t find similar comps, valuing land requires judgment and estimates. This creates more risk for the investor.
In this article, I’ll explore some more considerations and steps about valuing land.
Valuing Land – A Personal Example
I recently looked at a couple parcels of land to see if they’d be solid investments. To do this analysis, I first needed to confirm the land’s value. In other words, how can you know if you’re getting a good deal if you don’t actually know the value?
With single-family homes, you can usually confirm value fairly easily—just find some recent sales comps. Unfortunately, the two plots of land I reviewed (five acres and six acres) had no available comps. Both plots sat high up on the mountain and qualified as recreational land. The closest “comps” I could find were A) closer to the city, and B) only half acres.
These half-acre comps varied between $30k to $50k. So, could I just multiply these half-acre lot values by 10 or 12 to determine the five- and six-acre lot values? Absolutely not! The half-acre lots were completely different in size, location, and improvement status. These smaller lots were located in developed communities with HOAs to take care of roads, utility connections, etc.
My potential lots—though higher and with better views—didn’t have any of this HOA support. Consequently, the better location could make this land more valuable. But, the lack of current infrastructure definitely meant I’d have more expenses, too.
Without clear comps for these lots, I looked around to see if I could find any appraisals for similar properties. By chance, the lot across the street—similar in size and location—had recently been appraised. But, this land also had a home built on it. The certified appraiser valued the entire property at $1 million, with $900k allocated to the house and $100k to the land.
Did this mean I could value my land at $100k, too? Maybe, but probably not. At the end of the day, the appraiser’s valuation didn’t represent an actual market comp. Instead, that $100k valuation represented the appraiser’s best estimate—basically an educated guess. If I’m considering investing tens of thousands of dollars, I need more confidence than a guess, even one by a certified appraiser.
Lacking solid comps—and not wanting to gamble based on the appraiser’s estimate—I took the conservative route. I knew that the smaller, half-acre lots had solid comps showing values between $30k to $50k. And I was confident that these larger, better located lots were worth at least what those smaller lots were. Solution? I also valued these larger lots in the $30k to $50k range. While this may have undervalued them, this conservative valuation made sure I wouldn’t overpay for this land, as I based it on actual comps.
Valuing Land Option 1: Comps
I used my personal example to first demonstrate how challenging valuing land can be. But, I also used it to outline how to value land. When looking at land, comps serve as the absolute best option for valuing a potential investment. Simply put, comps reflect market reality. They tell you what someone recently paid for a similar parcel.
However, as with single-family home comps, not all land comps are created equal. Before picking just any comps, you first need to confirm improvement status. Is the land you want to value improved or unimproved?
This land typically lacks any services and utilities like electricity, water/sewer, and telephone. Frequently, unimproved land also lacks road access, meaning developers would need to clear and pave streets.
Generally speaking, this land already includes services and utilities. If not fully installed, these items would at least be readily available (e.g. fire hydrants and electrical boxes nearby).
These differences mean that improved land tends to be worth far more than unimproved land. Accordingly, it wouldn’t make sense to find unimproved comps to value your improved parcel—or vice versa.
Once you determine the improvement status, you next need to find the actual comps for your target parcel. As with homes, you ideally want to find nearly identical land for your comps. In addition to lot size, you should consider the following characteristics of any comps relative to your own property:
- Views: With residential properties, people tend to put a premium on the view, especially if you live in mountainous areas. If your land is located in the valley bottom without any view, it wouldn’t make much sense to find comps with stunning, panoramic views.
- Access: You don’t just need to consider the land, itself. You also need to think about how easily you can get to that land. If one parcel has a paved road leading to it, and another one a seasonal, dirt track, the one with the easier, paved access will likely have a higher value.
- Location: As with homes, land location will significantly impact its value. For instance, a parcel of land located close to a city and major roads will likely command a higher value than a parcel in the middle of nowhere.
These characteristics don’t represent a comprehensive list of things you should consider when looking for land comps. But, if you can find three to four historical comps that check these boxes relative to your parcel, you can pretty accurately determine your land’s value.
Valuing Land Option 2: Judgment
But, what if you can’t find comps (like my above example)? If no historical comps exist to value your land, you need to rely on judgement. That is, you’ll need to take in all of the land’s characteristics and, considering the local market, make your best estimate.
When relying on an estimate, you inherently increase your risk. But, if no comps exist, this may be your only option. Here are some of the items to consider when estimating land value:
- Improvement status: Improved or unimproved?
- Soil: Will the soil actually handle construction? You’ll likely need to complete a soil test.
- Size, views, access, and location: The same characteristics you look for in reliable comps should factor into your estimate of land value.
While none of the above will give you a perfect valuation, they will inform your judgment. At the end of the day, with land, finding value is more art than science. On the other hand, with single-family homes, valuations tend to be more science than art.
My Investing Rule of Thumb for Land Value
After years of experience investing in land, I’ve developed a rule of thumb: make sure you’re getting an outstanding deal.
Put differently, base your investment analysis on the most conservative valuations as possible. In my situation above, this meant not accepting a land value for anything above the half-acre lot comps I could find. While this means I may undervalue a potential investment, this conservative approach also means I won’t be into a deal for more than it’s worth.
Final Thoughts and Additional Resources
When considering a land investment, comps serve as the most reliable indicator of value. Without solid comps, you’ll need to rely on your judgment, which adds risk to any deal. As I’ve stated, when unsure of value, err on the side of caution and take the conservative value.
If you’d like to keep learning about investing in land, check out these other great resources from the Do Hard Money team: