Part 2: Thinking like a Builder

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How do you estimate the value of land for residential development? For starters, you should never price it by the acre or even think of it in terms of X$/AC. Why? Because the raw land value is not related to per AC values, but rather to what the property could yield, how it can be used, the projected sale value of the total package end product (the new home on its lot) and the estimated cost for installing site and off-site improvements required for the proposed development, such as streets, curbing, sidewalks, utilities and storm water management facilities. Value of residential development land is always relative to use and not to the number of acres. In a way, size doesn’t matter. Here’s an illustration: Suppose there are two vacant 50 AC parcels you’re thinking about buying in the same municipality. Zoning for Parcel A requires a minimum lot size of 40,000 SF and width of 200 feet; Parcel B zoning requires 30,000 SF lots and 150 ft. widths. On average, the new homes would sell for $300,000 on Parcel A and $350,000 on Parcel B. Each parcel is fairly level with no remarkable physical constraints. Per-lot improvement costs are ball parked at $56,000 for A and $43,500 for B.



In this scenario, Parcel A would probably be worth around $760,000 (or $19,000 per lot raw) to a builder who was buying fully-contingent. Parcel B, however, would command a price of over $2.3 mil ($44,000/lot). The reason that there’s a big difference in the bottom-line value of these parcels is because there are differences in the lot yield, end product value and improvement cost.



If Parcel A were for sale at $19,000/AC, it would be for sale for a l-o-n-g time, given this example. On the other hand, if Parcel B were for sale at $44,000/AC, it would sell in a heartbeat. Change yield or new construction value or lot improvement costs, and it's a brand new ball game.

Comments(8)

  • myfrogger16th February, 2004

    Please teach rather than tell...

    • NancyChadwick16th February, 2004 Reply

      Could you please explain what you mean?

      • myfrogger16th February, 2004 Reply

        It seems that you know what you are talking about but to someone like me who is not familiar with this aspect of REI yet, I have no idea why or how you come up with the values you do, for example. I was looking for a more in depth article that taught me something but instead was left being curious but not sure if what I just read had any applicable meaning to it. No offense....just my 2 cents...

    • NancyChadwick16th February, 2004 Reply

      I don't know what else you have read.

      I've written several other articles, including

      "Part 1: Thinking like a Builder", and posted in the forums on land development as well as other issues. The articles in the "Thinking like a Builder" series are intended to explore different aspects and factors related to development suitability and feasibility in an encapsulated form. To do otherwise would require something far beyond the length or intended scope of TCI articles.



      If you have an interest in learning more about land, its investment potential and relevance to achieving your objectives, you might want to do some searching of the information on this site.

      • omega119th February, 2004 Reply

        Nancy,



        What I think "myfrogger" wants to say is that you didn't explain in detail brake up of the parcels that lead to higher value for Lot B. if I am wrong then my friend "myfrogger" you have to help Nancy help you understand the part of her article you didn't.

    • NancyChadwick19th February, 2004 Reply

      Parcel B is worth more than twice what Parcel A is for a couple of reasons. Higher site yield, the new construction would sell for more on B, and there would be lower site improvement costs. Concerning the latter point, the lots on Parcel B would be more narrow (150 ft. v. 200 ft.). Just using the minimum lot width and a rule of thumb (subject to modification depending on the area or market) of $250/LF of proposed road frontage, and assuming public W&S connection fees of $6K and no off-site improvements, that translates into per-lot improvement costs of $43,500 for Parcel B. Lot improvement costs for Parcel A are higher ($56K) because the lots are wider.



      Using just the minimum lot width requirement to ballpark improvement costs is the least precise way of estimating costs. It doesn't take into account layouts that have flag parcels or areas of the site with no lots (such as open space areas fronting on the road). But until you have a sketch plan, you're not going to know more exactly what the total LF of proposed roadway is. (Only when the municipality approves a layout will you know for sure.) So the minimum lot width rule of thumb at least gives you something to work with.



      The value of raw lot = projected value of the new construction X 25% minus lot improvement costs. The lot value is whatever is left over -- it's the tail on the dog. The lot improvement costs and value of the end product are the "dog" that wags the "tail".

      • WheelerDealer19th February, 2004 Reply

        Nancy,



        Havent you written a book about land devolping? I clicked on "Nancy's products" but did not see it. it seems that there is to much information in the land devoping game to cover everything here. Gotta admit I am curious too.



        WD

    • NancyChadwick19th February, 2004 Reply

      Yes, I have and it should show up there or my homepage. If you still can't find it, let me know and I'll PM you.

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