To Buy Or Not To Buy Land
Why do you go to some areas and 1 acre of land is say $50,000.00 and another property down the street not 3 blocks away is only $25,000.00 an acre.
This is New Jersey shore area I am speaking of.
How do you know if the land you are purchasing is worth the price? I have researched this land in question and can't figure out why it is so cheap.
If you're talking about land zoned for residential development, you may find it helpful to think of it in terms of X$ per building lot, not X$ per acre.
The value of residential land depends on what you can do with it, what the end product (house on lot) would sell for, and lot improvement costs. The raw land value is the "tail" on the dog. The dog is a combination of end product value and improvement costs.
If you want to estimate the raw land value, first determine what new homes are selling for in the area. Then take 25% of that and back out lot improvement costs.
There could be many reasons why that property is so cheap. It may not be buildable, either because of physical characteristics or invisible factors, such as lack of utilities, deed restrictions or contamination.
If you're actively looking at what real estate is selling for in your area, and you've researched all the possible ways this property could be worth less- zoning, perc test, septic, development issues, et al. , and you want the land --- then make an offer that is heavy with contingencies!! In my experience, there is almost always a reason that something is priced less than a similar property. Sometimes it can be as simple as seller distress though....
Thank you for your help - The land the owner said is R-5 has no mortgage no other liens and had a house on it several years ago - the man selling it said he has a grandfathered interest in the property (?) (not sure what he means) to be able to build there again. Would that carry over with the sale of the property? He is telling me I can atleast put one house on the property for sure - this prop. I really wanted this for myself to build a home for our retirement. I have written to the township for answers but so far no reply.
Thanks again for your help - Cynthia
Nancy,
I agree that for most residential raw land your 25% of new home value - cost rule of thumb will give a rough estimate of lot value. Or at least some % factor based on new home prices depending on the local market.
However, for some types of residential land or even markets you can throw that rule of thumb out the window. Raw land with high amenity values or rare attributes such as water front have values that are not corelated with new home prices at all. For example, I sale mini farms in the the $100k - $250K range and our customers build custom homes from $200k to $1M plus. We are as likely to see a $1M home built on a $100k farm as on a $250k farm and vice versa.
How do I determine value? Comps, comps, comps. I determine how many home-sites (farms) I can yield and what I can sell those sites for. Then I back the numbers down to determine what value that raw land has to me.
Quote:
On 2004-03-24 08:42, pspiers wrote:
Nancy,
How do I determine value? Comps, comps, comps. I determine how many home-sites (farms) I can yield and what I can sell those sites for. Then I back the numbers down to determine what value that raw land has to me.
Sounds like you're appliying the same concept. Determine what the end product will sell for and work back from that, using rule of thumb and/or pro forma. It's fortunate that in your area, lots that can be purchased for $100K will be located in $1mil neighborhoods. In my area, one is likely to find a building lot retail priced at $100K in an area supporting homes in the $300K price range.
Cynthia,
Concerning your question about "grandfathering"...
What he may be referring to may be a non-conforming lot or structure--in other words, a lot or structure that was "legal" before the zoning requirements were changed. If I could suggest, rather than write to the township, try to get the Zoning Officer on the phone and ask him/her about the specific property. See if the Zoning Officer has a file on the property--were any zoning approvals, special exceptions, variances granted in the past. That sort of thing. My understanding is such things "run with the land" regardless of who owns it. I would definitely not rely on what the seller tells you.
Thank you all for the help!
I will try to reach the Zoning Officer today.
I really do not want to miss this land deal.
Nancy - Thanks again!
Cynthia
Well it never hurts to just ask him why its cheap. Although if his grandfathering answer is typical of the clarity with which he answers questions you may not get much help here.
Unfortuantely the zoning guy's answer needs to be taken with a grain of salt since he's not required to honor whatever answer he gives you.
Lets assume that, for some reason not immediately obvious, the lot is unbuildable (say its too narrow for the setbacks required by the local ordinance). Lets also assume that the seller knows this but is not going to tell you. In response to your phone call or visit the zoning guy may or may not notice the defect so he may not be able to give you the correct answer. If he says its ok, but its not you can bet he's not going to refund your money.
Therefore, put the property under contract with a long contingency period and subject to the city issuing a building permit. During the contract period submit plans for a building. Now they will take you seriously and, if they issue the permit you may safely close. If the owner knows that there is a problem he's going to be very reluctant to enter into such a contract.
To what's already been posted, I would just add that you should have a real estate attorney involved in preparing your purchase contract and including all of the appropriate contingencies, including feasibility period. Your contract needs to be customized to the particulars of the situation and should be site-specific. If your state requires sellers to provide written property disclosure statements, I would also make sure you get one from this seller and consider attaching it and making it a part of your purchase contract.
commercialking,
I had suggested that the poster check with the zoning officer not to have the municipality bound by the ZO's words, but rather to find out about the zoning history of the property (variances, special exceptions, etc. requested or granted) and potential non-conforming aspects. In other words, just some pre-offer due diligence to be followed up post-offer during the feasibility period.