Land Value vs. Appraised Value

The “value” of land can represent a subjective concept, when viewed through the lens of a biased person, or it can represent an objective opinion that’s made by a qualified professional. You may place a higher value on a tract of land than a property appraiser’s opinion of its value simply because, for example, it’s been passed down in your family for a hundred years. But what is understandably priceless to you becomes distilled into a black-and-white representation of its unbiased appraised value when the appraiser’s pen hits paper.

When assessing land, four primary characteristics point to its value:

• Desirability. When a buyer’s need for a property, or just a desire for the property, is backed by his ability to pay for the land, his interest in the tract generates demand and increases its desirability. Conversely, a property's value may decrease if it cannot generate demand.
• Scarcity. When similar tracts of land are few and far between when compared to the subject property, the value of the subject property may be driven higher because the demand is strong while the supply is scarce.
• Utility. When a particular tract of land meets a potential owner’s need for the property, the land is more valuable than a similar property that doesn’t quite meet muster.
• Transferability. When ownership of land can be easily transferred, the real estate transaction is more desirable than a property with encumbrances that hinder its closing.

Compared to the value of consumer goods, which typically are used up quickly, the value of real property generally yields benefits over time. When valuing land, this long-term benefits realization is the reason that a property’s value must consider influences such as market trends, the economy’s health, environmental changes that potentially could affect the property, governmental regulations and even social contributors.

Each tract of land is uniquely featured with physical characteristics that set it apart from similar properties. Even two properties that are nearly identical can have significantly different values just by their locations in different states. And further broken down, two comparable tracts within the same state can also have vastly different land values.

According to a May 2019 USA Today report, an acre of land in Georgia is valued at an average of $14,242. But in just one state south of Georgia, Florida land is valued at an average of $28,961 per acre – twice as much, simply because of geography – even though the location in the country and the climate are similar. And if you head up north, you’ll find an inordinately higher cost of property in New Jersey, compared to Georgia and Florida, where an acre of land is valued at an average of $196,410.

Topographical differences contribute to varying land values. Although hilly terrain is desirable in the North Georgia Mountains for its spectacular views, farmers in south Georgia need level, flat ground to grow their crops successfully. For the south Georgia farmer, flat ground without a hill in sight commands premium prices, compared to a nearby tract of land whose slope ensures that irrigation water will flow away from intended crops.

Residential property values are also influenced by the physical characteristics of land. Uneven topography, compacted soil and poor drainage are not as desirable to the backyard gardener (or even to the curb-appeal-driven homeowner) as an expanse of lawn that supports healthy plant growth.

Other physical attributes of land contribute to its value, including proximity to shopping, schools and parks. Availability of public utilities, the convenience of nearby public transportation and road frontage are additional considerations of value.

Legal factors, including local government constraints, can improve or lessen land values. When property is at the mercy of these and other factors, its value may fluctuate:

• Tax rates that are assessed by different municipalities, which determine a property owner’s tax liability. Purchasing property just a few miles outside the city limits, where property taxes are higher than on land outside city boundaries, may mean huge tax savings.
• Zoning laws that establish how certain tracts of land can be used. If a potential buyer wants to raise chickens and grow crops on a property that’s strictly zoned residential, disallowing agricultural crops or livestock of any kind, the land is worthless to this particular type of buyer.
• Eminent domain, which conveys the right for using or taking land to a government entity.
• Police power that mandates how the land can be used for the public’s welfare, safety, health, traffic regulations, building codes and even morals.
• Escheat, which is the right of a legal entity to remove property from its owner and turn it over to the proper governing authority in the event the property owner defaults on paying taxes or in the event of the owner’s death when there are no legal heirs.    

The land principle of conformity theorizes that land reaches its optimal value when its use conforms to the social and economic standards of its surrounding neighborhood. Some of these social factors that may influence land values include the sizes of family, ages and even education levels. The social influence of population changes in a certain area, whether increasing or decreasing, can also affect property values.

When land assessors and appraisers value land, they consider economic factors. New businesses that move into an area and existing businesses that expand can boost land values. And on the flip side, property values may decrease if businesses close or move out of an area.

When a sale or purchase of a certain tract of land is personally or emotionally driven by sentiment, the land’s value may be subject to wide fluctuations. But the land’s appraised value determines its worth as framed in the terms of a professional appraiser’s opinion. Professional appraisers follow certain established guidelines of valuation to render their unbiased opinions.

Sources of accepted appraisal guidelines include Freddie Mac and Fannie Mae. Following the requirement of rendering an unbiased opinion, Fannie Mae guidelines require appraisers to report the negative aspects of a property as well as the positive ones. For example, a property’s features may be incompatible with the surrounding neighborhood, or the land may be located in a flood hazard area. An appraiser must also note if an adjoining property’s characteristics adversely affect the subject property.

Part of an appraiser’s land appraisal form includes the “highest and best use” of a property. In fact, this inclusion is so important that Fannie Mae will only back mortgages that represent a property’s highest and best use as it is improved. This means that if a property currently is in a state of disrepair or if the land contains existing structures that need renovations, the appraiser must note this on the appraisal.

For land appraisals, the appraiser gives two valuations: a valuation if the land is vacant and a valuation of the land if it’s currently improved or, if it’s currently vacant, a valuation of the land after proposed improvements are made. Improvements must meet four criteria to qualify for highest and best use: physically possible, legally permissible, financially feasible and maximally productive.

Even though all property is not securitized by a Fannie Mae loan, Fannie Mae’s appraisal guidelines shed light on the four points that appraisers cover when considering the highest and best use of land. Properties must be:

• Legally permitted. Properties must meet zoning laws, pass health standards and conform to public restrictions.
• Financially/economically feasible. The land surrounding a subject property also influences the subject property’s value, either positively or negatively.
• Physically possible. A property must be of adequate size, meet certain soil conditions and have accessibility.
• Most profitable. If a property is to produce income, it must generate more profit than any other use of the property would generate.

After determining the highest and best use of a property, an appraiser analyzes the data he’s collected and compiles it into a land value appraisal report. Contained in this report are three approaches to value – the cost approach, the sales comparison approach and the income approach. All properties may not include all three approaches to value, depending on the type of property and the availability of data for the property. And sometimes, an appraiser may use a hybrid valuation using a combination of the three approaches.

When valuing land, the sales comparison approach generally yields the most accurate indicator of value. This approach is reliable because it compares the subject property against similar, nearby properties that recently sold. If a tract of land is located in an area where there have been no recent sales of comparable properties, an appraiser may use other approaches to value, including the proportional relationship and allocation methods.

An appraiser uses the cost approach as a valuation method to determine the cost that a reasonable buyer would not exceed for a property because she could purchase a comparable property for this same amount. The appraiser may need to consider two different values of land using this approach – one cost if the land is vacant and another cost if the land also includes buildings or other improvements.

If the land includes buildings, the appraiser must determine the value of the land as if it were vacant and then determine the value of just the structures on the land. After adding these two values together and factoring in depreciation, the appraiser arrives at the total value of the property.

An appraiser would only use the income approach, also called the income capitalization approach, to value land if the property currently is (or will be) part of a business that produces income. In addition to its current market value, a property’s future income, as well as its present income, is factored into the income approach. An appraiser also considers expenses, based on current market data, to project a net operating income for the property.

Whether you’re a buyer or purchaser of land, an appraisal more finely tunes its fair value and informs your negotiating stance. You may need an appraisal from a land appraisal service if your lender requires it as a condition of your mortgage approval or if you’re forming a business deal such as a merger, acquisition or dissolution. Local governments appraise land to determine its tax liability so they can collect property tax from landowners.

Your lender typically chooses an appraiser and orders an appraisal as a step in your mortgage approval process. Each state has different licensing requirements for its appraisers. If an appraisal is needed for federally regulated lenders, Fannie Mae only allows appraisals from unlicensed or uncertified appraisers if they are working in a supervised capacity as an employee or sub-contractor of a licensed or certified appraiser who signs the appraisal. The state must also allow this practice.

Aside from state requirements, the Appraiser Qualifications Board (AQB) of The Appraisal Foundation is authorized by Congress to determine the minimum requirements for appraisers who are Certified General Real Property Appraisers or Certified Residential Real Property Appraisers.