A piece of property that appears beautiful when seen through the eyes of one person might look like a desolate tract of land when viewed through the eyes of someone else. Whether it’s a property’s aesthetics, location or potential use, its value truly may be in the eyes of the beholder. But when putting pen to paper and assigning an estimated monetary value to the land, an actual land assessment might result in a different conclusion than what a potential buyer is thinking. Although it’s not an exact science, estimating land property values follows certain accepted guidelines of valuation.
A land appraisal estimate is an assessment that represents the opinion of value made by a professional assessor or appraiser.
Land vs. Land Site
Land, in its broadest sense, typically represents the ground and its natural resources such as soil, minerals and plants. To a property appraiser, a land site represents a parcel of land that has defined boundaries and a certain measurement – an acre of land, for example.
A land site may also be improved by public utilities including electricity, gas and sewer. And if a land site does have any of these utilities or other improved features, such as a building, its value also includes these improvements.
Four Components of Land Value
Although a potential purchaser may see the value of a tract of land with blinders on as she focuses only on one desirable element, the comprehensive value of land actually reflects four components, including:
- Desirability, which is how a potential buyer’s desire for a certain property and the ability to pay for the property create demand for the property.
- Utility, which is how a future property owner will use the land.
- Scarcity, which is how the land compares to a limited number of competing properties.
- Transferability, which refers to how easily the property ownership rights can be transferred.
Land Property Value Estimators
Even similar properties can vary in value from site to site because of their unique features, which can be advantageous or disadvantageous. Aside from a property’s physical attributes, estimated land property values are also influenced by legal constraints, social factors and economic influences. And two nearly identical tracts of land can have wide variations in value simply because of geography – by being located in two different states.
As an example, the average value for an acre of land in
Physical Attributes of Land
The physical characteristics of land, such as its proximity to schools, parks and even shopping, influence its property value. Other physical attributes include the property’s fertility, its physical location and the availability of public utilities and public transportation. Road frontage and topography also influence a property’s value.
For example, the topography of one property may be hilly while a nearby property of the same size is level. If a potential purchaser intends to have a garden or grow agricultural crops on the land, the level site is more desirable. Even the view from a tract of land can add value; a lovely vista is certainly a more desirable feature that adds value to a property instead of a view of the local landfill.
Legal and Governmental Limitations
Governmental and legal factors can place constraints on land that add to or detract from a property’s value. Property values can move up or down, depending on certain factors, which include:
- Tax rates that provide public revenue and fund the costs of public services.
- Zoning restrictions that determine the legal use of properties. If, for example, a potential buyer wants to grow crops or raise livestock but the land is not zoned agricultural, the property will have no value for the potential buyer.
- Eminent domain that determines a government’s right to use or take land.
- Police power that regulates land in areas such as general welfare, health and sanitary conditions.
- Escheat, which refers to the removing of land from property owners and turning it over to a government authority when the owners abandon the property and do not pay taxes on it, or upon an owner’s death in the absence of legal heirs.
Social Factors for Property Value
Even some social factors may influence land property values. Changes in population for an area, whether increasing or declining, can affect the demand for properties. Changes in ages, family sizes and education levels can also lean into property-buying decisions. And even prevailing attitudes toward law enforcement may steer buyers toward or away from buying property in a certain area.
Economic Factors for Property Value
Land assessors also look to economic factors when they value property. An area’s median income may increase if the area attracts new industry, but it can also decrease when industry moves out of the area. Growth, expansion and new construction may improve an area’s economics and, in turn, these factors will also affect property prices.
Highest and Best Use
When an assessor estimates land property values, he always considers the highest and best use of the land to determine its best value. When determining a land’s highest and best use, the appraiser typically uses two types of analyses: an analysis of the land if vacant, and an analysis of the land if it’s improved or has proposed improvements.
Although all property is not backed by a Fannie Mae loan, Fannie Mae guidelines offer an insight into the four points an appraiser covers when valuing properties that include:
- Legally permissible. A property must meet zoning, health and public restrictions.
- Physically possible. A property is of sufficient size, meets certain soil conditions and has accessibility.
- Financially/economically feasible. Surrounding properties may have bearing on a subject property’s value, particularly if the surrounding land is inferior or contains sub-par improvements.
- Most profitable. If a property will be used for commercial use, an appraiser calculates its highest potential net income.
Land Value Appraisals
After an appraiser collects property data, he analyzes it and organizes it into a report. But according to Fannie Mae guidelines, an appraisal must not only report the positive aspects of a property but also the negatives. Adjoining properties that may adversely affect the subject property, incompatibility with its surroundings and location in a flood hazard area are some of the negatives that must be reported.
An appraiser also typically uses three approaches to calculating a property’s value: the cost approach, the sales comparison approach and the income approach. Variations on these approaches are also acceptable.
Property Value Cost Approach
The cost approach is an appraisal valuation method that establishes the cost of a property that a purchaser would not exceed if she produced a comparable property. If the land also has one or more buildings on it, the cost approach separately values the cost of the land and the cost of the buildings, considering depreciation, and then adds the two values together for a comprehensive value of the entire property.
Property Value Sales Comparison Approach
The sales comparison approach is an appraisal valuation method that compares actual sale prices of comparable properties to the subject property. Comparable sales should be recent enough to reflect the true market conditions during the same time frame of the subject property’s appraisal.
If the appraiser has difficulty finding recent land sales or pending land sales that are comparable to the subject property, he may use another approach – the allocation approach. This approach uses a standard valuation ratio that’s specific to the sales area for certain categories of real estate that have similar characteristics to the subject property.
Property Value Income Approach
If a tract of land is going to support an income-producing business, an appraiser will use the income approach, also called the income capitalization approach, to value the property. He’ll consider current market value, anticipated present income and future net operating income of the property.
Land Valuation Most Reliable Method
Generally, when estimating land value, the sales comparison approach is the most reliable indicator of value because it considers the actual sales of similar properties. But when there are few or no recent sales of comparable properties, as an option to the allocation method, an appraiser may also use other valuation methods. One of these methods is the proportional relationship method, which compares a site to a similar site, even when the similar site doesn’t have a recent sales history.
Reasons for Assigning Land Values
You’ll typically want an appraisal when buying or selling property to determine its fair value. With an appraisal in hand, buyers and sellers are better equipped to negotiate a sale. Your mortgage lender may require an appraisal before approving your mortgage loan.
An appraisal is also important if you’re considering a business merger or dissolution. And local governments valuate land to assess property tax liability for its property owners.
Using a Competent Appraiser
If your lender requires a property appraisal to approve your mortgage loan, the lender generally chooses the appraiser. But you can also have an independent appraisal if you want to confirm the lender’s valuation of your property. If you need an appraisal for reasons other than qualifying for a mortgage, you’ll typically choose your own appraiser – and you’ll want a competent professional for this job.
Qualifications for Professional Appraisers
States require appraisers to be licensed and certified if federally regulated lenders use their appraisals, and some states require licensing and certification even if appraisals are furnished to other parties. Because the qualifications for appraisers vary from state to state, you’ll have to check your state’s appraisal regulator agency for its requirements.
Congress has authorized the Appraiser Qualifications Board (AQB) of The Appraisal Foundation to establish the minimum requirements, regardless of each state's requirements, for Certified General Real Property Appraisers and Certified Residential Real Property Appraisers. The AQB also establishes the minimum requirements for Licensed Real Property Appraisers and Appraiser Trainees.
Fannie Mae guidelines allow appraisals by unlicensed appraisers, uncertified appraisers and appraiser trainees if they are working as a supervised employee or sub-contractor of a state-licensed or state-certified appraiser, if the supervisor signs the appraisal and if the state allows it.
- Investopedia: What You Should Know About Real Estate Valuation
- USA Today: Here's How Much an Acre of Land is Worth in Each of the 48 Contiguous States in the US
- Fannie Mae Selling Guide: Site Section of the Appraisal Report
- Fannie Mae: Appraisal and Property-Related Frequently Asked Questions (FAQs)
- Investopedia: Learn to Value Real Estate Investment Property