Are you looking to buy a piece of land? Sell a parcel you already own? Refinance the land you possess? In any case, it will be imperative to know its market value.
But how is the value of land determined? What are the characteristics that influence the cost? And what methods are used by professionals? Here's an overview.
What influences the market value of land?
Like a house, several characteristics come into play when determining the value of land. Here are some:
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Area;
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Dimensions;
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Shape and orientation;
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Location;
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Soil topography;
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Soil type;
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Presence of contaminants;
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Access to public roads;
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Servicing (connection to public utilities);
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Nearby amenities;
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Sector nuisances;
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Etc.
All these factors are considered when calculating a lot's market value. They can either increase the price of the land on the market or decrease its value.
Who can appraise the price of land?
As with property, two experts can help you determine the value of land: a real estate broker or a certified appraiser. However, each has a more specific area of expertise.
You can consult a real estate broker to estimate the price of land when you want to buy or sell it. This professional is indeed an essential ally during a real estate transaction to help you determine the fair value of a property.
Need an official appraisal? This might be the case, for example, when refinancing with the bank. The certified appraiser will then be the ultimate expert to determine and prove the value of your land. Their rigorous work includes drafting a comprehensive appraisal report, in which the expert communicates their observations and conclusions to you.
How is land appraised?
Several steps must be taken by the certified appraiser to accurately determine the market value of the land. Here's an overview of each of them.
1. Analysis of the land to be appraised
First, the appraiser must gather all relevant information about the land to get a precise idea of its situation. They will inquire about the land's area, dimensions, shape, orientation, zoning, potential sources of obsolescence, and much more.
2. Visit to the land and surrounding area
Next, the appraiser visits the site to inspect the land and observe its environment. During this stage, the expert verifies the positive and negative aspects of the area, access to public roads, connection to public utilities, nearby services, etc.
3. Determination of the optimal use of the land
Once all this information is obtained, the appraiser determines the optimal use of the land in question, as the potential use of the lot can affect its value. The expert considers this when making their calculations.
The permitted construction density can also impact the appraisal result. For example, a vacant lot capable of accommodating a multi-unit building will have a higher value than an identical lot only able to accommodate a single-family home.
4. Selection of the appraisal method
The fourth step is to determine the most appropriate appraisal methods to calculate the market value of the land. Several methods can be used depending on the case:
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Comparison method;
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Allocation method;
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Residual income method;
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Subdivision method;
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Income capitalization approach.
Each of these methods requires precise and complex calculations based on market statistics.
In most cases, the comparison method, also known as the comparable sales method, is preferred and used by the certified appraiser. However, it is not entirely identical to the one used for houses and other properties.
The sales comparison method for land can be subdivided into 3 main steps:
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Selection of comparable lands;
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Calculation of the average unit rate per square foot;
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Determination of the market value.
Selection of comparable lands
To choose comparable lands to the one being appraised, the expert must have a good understanding of its characteristics, as well as the sector and market it is in. This is where prior research becomes crucial.
The appraiser will search for other lands similar to the one they are appraising. In addition to similar characteristics, these lands must be in the same area; otherwise, the result obtained will not be reliable.
For example, it would make no sense to compare a 10,000 square foot lot in Laval to another 35,000 square foot lot sold in Blainville.
Calculation of average unit rate per square foot
Despite their similarities, the selected lands will rarely have identical sizes and prices. To compare them on a common and objective basis, the appraiser will calculate the unit rate per square foot of each of them by dividing the sale price by the area.
For example:
Land 1: $254,000/9,800 square feet = $25.92/square foot
Land 2: $278,500/8,720 square feet = $31.93/square foot
Land 3: $295,200/10,100 square feet = $29.23/square foot
Once the calculations are done, and if no anomalies are found, the appraiser will calculate the average unit rate per square foot. This will serve as the basis for calculating the value of the land for which they have been commissioned.
In the case of the previous example, the average of the unit rates corresponds to $29.03/square foot.
In some cases, the appraiser may also decide to choose a unit rate based on their judgment rather than the average of the rates.
Determination of market value
When the base rate per square foot is determined, it is time to estimate the market value of the land. To do this, simply multiply the obtained cost by the total area of the lot. In the case of a 10,000 square foot lot, you would get:
$29.03/square foot x 10,000 square feet = $290,300
The market value of the land would then be estimated at $290,300.
It goes without saying that the appraisal method and accompanying calculations are much more complex than the example presented here. However, this allows you to understand the essence of the process.
5. Comparison and submission of the appraisal report
Finally, if the appraiser has used more than one method to determine the market value of your land, they will compare the different results obtained to render their judgment.
They will then provide you with a comprehensive appraisal report specifying the market value of your land and the reasons that led to this conclusion.
You can then buy, sell, or finance your land with peace of mind, relying on the opinion obtained from an impartial expert.
Looking to estimate the value of your land?
XpertSource.com can help you find a certified appraiser. When you tell us about your project, we put you in touch with qualified resources for FREE. Simply fill out our form ( it only takes a few minutes ) and we will connect you with professionals.
