How Does Land Valuation Work?
When you're looking at lots for sale, you might be wondering what goes into valuing a piece of land. A part of the valuation process involves valuing the rights to either use or possess the land. Mostly, this included things like mineral rights, timber rights, hunting rights, grazing rights, fishing rights, access rights, and air rights. The marketability of the land may also come into play. Naturally, a land assessor can also determine the land's valuation depending on economic principles.
These principles include:
Supply and demand – A land's value can increase if the supply remains constant and the demand increases. The value can decrease, on the other hand, if the demand decreases.
Anticipation – The value of land can increase or reduce depending on the expectation of future factors.
Conformity – The value of land can attain its maximum level if it is used in a manner that meets the socioeconomic standards of the neighborhood.
Common Approaches in Land Valuation
Before a land valuation specialist determines the value of a land for sale, they must determine the best and highest use of the land. The assessor follows the following criteria: legally permissible, maximally production, financially feasible, and physically possible. First, the land valuation specialist needs to determine the best and highest use of the particular land as it is when vacant. If the land is undeveloped, the assessor must determine the best and highest use of the land when improved. Lastly, the assessor will need to use one of the following methods in determining the market value of the land:
The comparison approach uses the real market prices of related property when determining the value of a particular land. However, this method tends to be tricky, particularly when valuing a land because of the unavailability of comparable data. Nevertheless, the comparison approach is the best method to use, especially when the required data is accessible.
This approach resembles the comparison method. The cost approach depends on the idea that a buyer is willing to pay the equivalent sum for substitute land. This approach works best if you are dealing with a piece of land that's been recently used, is unique, and has distinct improvements. In such a case, there might not be any comparable data available, so the cost approach is used.
The income approach is used in determining the value for a cash flow–generating piece of land. Both the present and expected future operating income plays a great role in determining the value of the land. In addition, any future reversions are usually removed in order to create the current amount of figures. This approach also puts into consideration the levels of expense when determining the expected net operational income of the land and the existing market data in order to come up with market values.
All of these factors get into the specifics of land valuation, but they show you a bit of how prices are determined for land lots. If you go in armed with this knowledge, you may be better equipped to find land that is accurately valued and argue for price reductions if you can prove that the original land valuation didn't take all factors into account.