An Investor's Guide to Understanding Land Values

"Buy land, they're not making it anymore."

Mark Twain's famous quote still holds true today. For investors, knowing how to value land is key to making smart decisions. Whether developing, holding for appreciation, or generating income, understanding a property's worth is essential. Accurate land valuation impacts your return on investment and helps you avoid missed opportunities or unexpected challenges.

If you're preparing to invest, it's essential to start with a solid grasp of the basics, including knowing how to buy land. This article will guide you through the key factors that influence land value and the methods used to determine it.

Factors That Influence Land Value

1. Location and Accessibility

Location is one of the most critical factors in determining the value of land. As Seth Hayden, a broker with Hayden Outdoors Real Estate in Windsor, Colo., puts it, "The location of the property is the benchmark and starting point for all land valuations." For commercial properties, it's about traffic count and foot traffic, while for residential development, it's about proximity to city services, privacy, beauty, and being close to amenities and schools.

Accessibility is another key element that significantly impacts land value. Properties with easy access to major roads, highways, or public transportation are generally more valuable. Good road access, for instance, can enhance the development potential of a property, making it more attractive to investors. On the other hand, land that is difficult to reach or lacks adequate infrastructure may see a reduction in value, as these factors can complicate development and limit future use. Vinny Delgado, a broker with Fay Ranches in Bozeman, Mont., agrees, stating, "For example, a ranch near Bozeman is going to be worth more than a ranch in eastern Montana simply because Bozeman is a booming community with an ever-expanding airport, offering easy access for absentee owners to get in and out."

2. Environmental Considerations

Environmental factors play a crucial role in land valuation. Natural features like soil quality, topography, and proximity to water bodies can significantly influence a property's value, making it more suitable for agriculture, development, or recreation. However, environmental risks such as flooding, contamination, or steep terrain can negatively impact land value by increasing development costs or limiting usability. Investors should carefully assess these factors to ensure the land's potential aligns with their investment goals.

3. Zoning and Regulations

Local zoning laws and regulations have a direct impact on land value by determining how the property can be used. Understanding land zoning is essential before purchasing land, as it influences the types of developments allowed, which in turn affects the property's marketability and value.

As Seth Hayden notes, "If a town takes three years to go from raw ground to a shovel-ready development, for instance, it is worth much less to a developer than a higher functioning town where it can be done in 18 months." Investors should thoroughly research zoning regulations to avoid costly delays and ensure their plans align with local requirements.

4. Utilities and Infrastructure

The availability of utilities such as water, electricity, and sewage significantly affects land value, as properties with established connections are more desirable and easier to develop. The cost and complexity of connecting a property to these essential services can reduce its overall value, particularly in remote areas where infrastructure is limited. Investors should factor in these costs when evaluating potential land investments.

5. Market Trends and Economic Factors

Local and national economic trends play a crucial role in shaping land value. A strong economy with low interest rates and high employment levels can drive demand for land, pushing values higher. Conversely, economic downturns can suppress land prices as demand wanes. Delgado agrees that land valuation is heavily influenced by economic factors. "Land is an appreciable asset," he says. "We use extensive data tracking tools that give us the ability to determine what a ranch is worth, and why." Supply and demand dynamics are key, with areas experiencing growth and limited land availability seeing the most significant increases in value.

Methods of Land Valuation

Sales Comparison Approach

The Sales Comparison Approach is a common method used to determine land value by analyzing recent sales of similar properties in the area. This method compares key features such as location, size, and accessibility to establish a fair market value for the land in question. It works best in regions with plenty of comparable sales data, allowing for a more accurate assessment of the property's worth based on real-world transactions.

Income Approach

The Income Approach values land based on its potential to generate income, making it particularly useful for income-producing properties like rental spaces or commercial developments. This method estimates the property's value by calculating the expected income it can generate and comparing it to similar income-producing properties in the area. It's a valuable approach for investors focused on the long-term profitability of their land investments.

Cost Approach

The Cost Approach estimates land value by calculating the cost of developing a similar property and then subtracting depreciation. This method is particularly useful for valuing new or undeveloped land, where there may be limited sales data or income history to rely on. It provides a practical way to assess the land's value by focusing on the costs associated with its potential development.

State-Specific Considerations

Land value can vary significantly based on regional characteristics and resources. For example, mineral rights in states rich in natural resources, like oil or natural gas, can greatly enhance land value. In addition, renewable energy potential plays a crucial role in states where solar or wind energy projects are viable. For instance, coastal states often have higher land values due to their solar potential, while the Midwest is known for its wind energy opportunities.

Conducting Due Diligence

The role of professional land appraisal in accurate land valuation cannot be overstated. Investors should also consider the financing options available, including land loans, which can play a significant role in the overall cost and feasibility of a land purchase.

Additionally, it's important to pay attention to macro-economic trends driving the overall economy. "Factors that increase demand and drive commercial real estate prices higher include a growing U.S. economy, higher corporate profits, and low unemployment," notes a report by the National Association of Insurance Commissioners (NAIC). Of course, the fundamental rules of supply and demand apply when it comes to land valuation. According to the NAIC report, prices tend to increase or remain stable when inventory change (supply) and net absorption levels of available square footage (demand) are being absorbed by existing demand.

Moreover, the report adds, investors should closely monitor data points that could indicate a commercial real estate pricing bubble, including supply and demand, vacancy rates, leverage, sales volume, and the cap rate spread over 10-year Treasury yields.

Conclusion

Understanding how land value is determined empowers investors to make informed decisions in commercial real estate. With a clear grasp of the factors influencing land value and valuation methods, you can identify the best opportunities. Ready to take the next step? Start exploring available land for sale to find the perfect property for your investment goals.

GREG SANDLER
CONTRIBUTOR

Greg Sandler is a business and technology writer with expertise in real estate, finance, science, technology, manufacturing, international business and sustainability. He regularly writes blogs, white papers and e-books for a wide range of companies across multiple industry sectors. He also has an MBA and considerable management experience.

This article was updated on 12/12/2024