• Four Parts of Value
• Why Location is Key
• Screening and Evaluating Land
• All Real Estate Values Aren’t Created Equal: Part 1
• All Real Estate Values Aren’t Created Equal: Part 2
• What Is the Land Worth?
• Real Estate Investing and Development Terminology

Obviously, value tends to rise where supply is short and demand is strong. A property’s utility, however, is often determined by perception and not reality. For instance, buyers might purchase a property because they think it will meet their needs, even if it really can’t. Even if supply, demand and utility favored higher prices, a property’s value will be depressed just because the title to it couldn’t be transferred.

Suppose a builder is pre-selling home sites. He’s in the process of subdividing a parcel in a desirable location into 30 lots and six of them back up to open space. Buyers would quickly snap up those six home sites even if the builder charged hefty lot premiums for them. However, the picture would change dramatically if the municipality imposed a two-year moratorium on issuing building permits. This would mean that no new houses could be built for two years (unless the building permit had been obtained before the moratorium went into effect). The six lots backing up to the open space still have a desirable location, but the market for them would now exclude all of the buyers who wanted or needed to have their homes built in the near future. The lots could only be used by buyers who could afford to wait for two years. The value of the home sites would drop because their utility (usefulness) had substantially decreased.

The same result would be achieved but for a different reason if the municipality decided to stop approving subdivisions for two years. Buyers wouldn’t be able to get title to the individual lots because the builder wouldn’t be able to get the parcel subdivided until the subdivision ban was lifted. The value of the prospective lots would plummet because they couldn’t change hands – they lacked transferability.

back to top

It’s often not feasible physically or economically to pick a structure up and move it. The operation may require negotiating such modern obstacles as overpasses and wires in addition to tree limbs, hills, streams and gullies. It takes a long time to move a structure a short distance, and it’s not cheap to do.

But even if you can move the house, you can't change the property's location because you can't pick the parcel up and move it. It's the land that gives the property its location, not the house. The house isn't permanent – only the land is. So for better or worse, you're "stuck" with a property's location.

What makes a location good? The answer depends on the intended scenario for the parcel. Commercial uses, such as retail and office facilities, thrive in areas that have high visibility and traffic and easy accessibility through public transportation. Neighbors like power lines and water towers don’t negatively impact the value of these properties. On the other hand, sale prices of single-family homes are more sensitive to locational challenges such as train stations, busy roads and shopping centers. Location has to be scrutinized differently and to some extent, more rigorously where residential uses are involved. The criteria for good and bad locations changes when home buyers are choosing where to live.

While a good location can’t necessarily overcome every negative about a property, it can go a long way. In addition, a parcel’s location determines many things, including the current zoning, the types and values of properties in the immediate area, and the proximity of public utilities. And if you're thinking about developing a property, these issues can mean the difference between success and failure.

Either way, builders begin the investigation by casting the net into their areas or markets of choice and sifting through potential acquisition candidates. They have to pick through dozens of sites before they find one they think they can develop profitably. Sometimes they can tell quickly if a property is worth pursuing further. More often, however, they don't know this until they spend varying amounts of time, effort and money collecting information about a parcel.

They spend their resources on investigating critical questions and often have to obtain answers to them in relatively short periods of time. Land buyers need to focus on everything that might impact and restrict how the parcel could be developed profitably. Literally and figuratively, the range of issues involved covers a lot of ground. It includes, for instance, all of the property’s physical characteristics (such as soils, floodplain and topography), uses permitted by-right and by special exception or conditional use under the current zoning, those that may be possible given changes in use, prohibitions and limitations imposed by private land use controls (e.g., deed restrictions and restrictive covenants), development costs, and the location, availability and capacity of existing public utilities.

Most of what land buyers need to know about a property isn’t visible or readily apparent, so due diligence is a critical component of their evaluation process. Their research begins with their introduction to the parcel (if they decide to purchase it) and it methodically, persistently continues through the day of closing.

Real estate appraisers define “market value” as the most probable price at which a property will sell in an arm’s-length transaction in a competitive market where both parties are motivated, and are acting knowledgeably and without duress. Market value assumes that:

• the transaction is arm’s-length and that parties are acting in what they believe to be their own best interests
• the property is exposed on the open market for a reasonable period of time
• payment is made in cash or cash equivalent (such as by a loan from a mortgage company)
• the price is not affected by special terms, conditions, financing or concessions

“As is where is” value is what the property is worth in its current state and without any changes, and it takes into account the parcel’s current zoning, conditions and physical or other limitations. Buyers purchasing a property as is take it as they find it. The purchase isn’t contingent on, for instance, satisfactory results of inspections or use and other types of development approvals. The risk in an as-is scenario can be substantial. Buyers have to commit to purchasing the parcel before having development approvals in hand and without knowing all of the conditions that would limit or prevent them from using the property as they wanted. Consequently, as-is value is deeply discounted to reflect the amount of risk assumed by the buyer.

The highest and best use is the most profitable use that’s legal, physically possible and economically feasible. An 18-hole golf course wouldn’t be the highest and best use because it’s physically impossible to fit a golf course on just 20 acres. Likewise, if a parcel were zoned for agricultural or low density residential, appraisers wouldn’t estimate value based on a use for apartments because that use wasn’t legal under the current zoning.

A quick sale value is similar to as is where is in that the buyer agrees to forego contingencies and assumes all of the risk. The difference is that the term “quick sale” usually describes a sale that’s forced by events like foreclosure, court order, bankruptcy or divorce.

The “what if” value is predicated on the occurrence of some future change to the property. This could be some type of zoning approval (e.g., variance), a different zoning classification, accessibility of public utilities, or subdivision approval. What if value is predicated on the highest and best use of the property but it assumes there will be a change in the status quo. This value recognizes that something would have to be done to transform the property from its current state so that it could achieve its highest and best use. Buyers of development property typically use the what if value in estimating what the property’s worth, but they also take into account the expenses they will have to incur in order to effect that transformation.

1. 1. Do I want to maximize the sale price?
2. Is my goal to sell the property and get to closing within 60-90 days?
3. What terms and conditions (contingencies) am I willing to give the buyer?
4. Am I a motivated seller or am I just interested in throwing a fishing line out there to see who would bite?
5. Is the highest and best use of my property something other than what it is now (one house on three acres)?
6. What is the category of buyers likeliest to purchase my property – is the target buyer a homeowner like me or is it a developer or builder?

An offer is like a set of scales with price on one side and terms and conditions on the other. Offers are not just about price because price is relative to the rest of the offer. The terms and conditions that you’re willing to give a buyer impact what you can get for the parcel. Although this is particularly true with development property, the contingencies (or lack of them) also have an effect on the price that’s ultimately negotiated. The sellers need a longer settlement date because they’re moving into a home that’s being built. In accommodating the sellers on the closing date, the buyers may gain some leverage in negotiating a more favorable price. Conversely, sellers who afford home buyers with mortgage, inspection and other contingencies should realize the top sale prices for their properties.

The development property’s value is greatest when the seller agrees to contingencies that give the buyer the opportunity to explore “what if” scenarios. However, sellers should not blindly grab the offer that has the highest price without doing some investigation both about the buyer and the development scheme that’s being proposed. The buyer may want to pursue a pie-in-the-sky idea or one that’s only remotely possible of being approved by the municipality. It could be damaging to the sellers to take the property off the market only to have the deal fall through months or years down the road because the buyer couldn’t satisfy the “what if” contingencies in the purchase contract.

If you want to maximize the sale price but don’t want to wait months or years to get to closing or a lot of risk, you may be looking at selling only to home buyers. Undoubtedly, if you have to sell fast, then your ideal buyer is someone interested in living on the property.

On the other hand, if you didn’t care how long it took to get to closing or what contingencies you gave the buyer because it was more important to you to get the highest price, then you should probably explore the developer or builder market. Before you go running off in search of a builder to purchase your property, however, you should hire a real estate attorney who’s experienced in representing owners or buyers of real estate for development.

For example, Parcel A consists of 50 acres and is zoned for single-family detached housing on one-acre lots. New homes in the area are selling for $500,000. Parcel B is also 50 acre but the minimum lot size for the home sites is 20,000 sq. ft. New homes near Parcel B sell for $375,000. Parcel A might produce 37 lots while Parcel B could be subdivided into 81 lots because the zoning allows for a much smaller lot (20,000 sq. ft.).

Buyers wouldn’t offer the same price for these two parcels because of the difference in both the number of potential building lots and the sale value of the new construction. The cost of improvements is also likely to be different because the smaller lots on Parcel B will be more narrow, resulting in less roadway, curbing and sidewalks that would have to be constructed and utility lines that would have to be laid. The reduced cost of improvements, together with the higher number of building lots, could result in the seller of Parcel B getting $1 mil+ more than the owner of Parcel A.

Builders looking at both parcels would project their income (what size house they could sell for what price) and their expenses (improvements, house construction, legal, engineering, marketing and other fees). They would analyze the possible deal on each property to find the profit margin (gross profit divided by the sale price of the new houses) that’s acceptable to them.

Once they’d fine tuned their pro forma projections, they’d decide on the price to offer the sellers. The offer would probably be structured on a per approved lot basis. In other words, the buyer would pay the seller $_____ for each lot in the subdivision plan that’s approved by the municipality. In addition, settlement wouldn’t occur until and unless the buyer had satisfied all of the contingencies in the purchase contract. If the sellers of Parcels A and B were willing to give terms, they would realize the highest sale prices for their properties.