The value of land for residential development is related to income and expense. This means that what the land is worth is determined by the following factors: (a) how the parcel can be used; (b) the number of lots; (c) the potential sale (resale) value of the finished product; and (d) the expense necessary to transform the property into something that you can sell for a profit.
The items included in the last factor (d) might consist of vertical and horizontal improvements, consultant fees (e.g., legal or engineering), and other expenses, such as municipal fees. It all depends on what your intended development scenario is. So, for instance, if you want to change the land parcel (developing it) only by obtaining zoning approvals, your category (d) would probably include municipal and consultant fees but not costs for installing improvements. On the other hand, if you are subdividing the parcel and then putting in the horizontal improvements (e.g., excavation, grading, landscaping, streets, curbs, sidewalks) in order to sell vacant building lots, your expenses would have to reflect the cost of those improvements in addition to the other expenses you incurred. If you intended to subdivide, put in site improvements, construct houses on the lots and then sell a finished package (i.e., new house on its lot), you would have to add your costs for building the houses to the other items of expense.
Since real estate developers do all of their income and expense projections of a land parcel on a per-lot basis, they don’t use the number of acres in the property to determine its value and analyze the economic feasibility of a deal. This makes sense because for example, a 50 acre vacant land parcel zoned for lots of 43,560 square feet (one acre) will likely not produce 50 lots of one acre each. Land area is typically lost or wasted due to proposed roads, irregular shape and other physical characteristics restricting or prohibiting development, such as land areas having steep slopes, floodplain or certain soil classifications. Suppose this hypothetical 50 acre parcel could produce only 37 building lots and was for sale at $1.5 mil. Developers would show the projected land cost in their pro formas or spreadsheets at $40,541 per lot ($1.5 mil divided by 37 lots) and not as $30,000 per acre. So the first step in the land buyer’s value analysis is estimating the number of potential lots that the parcel can produce. This is usually referred to as the “yield.”
The starting point is reviewing the current zoning ordinance and map. This…