Why is it that so many owners and realtors have such a hard time pricing land? Nearly half of all land listings end up either expired or withdrawn over time. What are the critical factors when trying to price land? To begin with, the zoning is the most important factor to consider, and when I say zoning, I am not speaking of just the lot and frontage requirements in the zone in which the property is located. Above and beyond the basic zoning factors will be lot coverage requirements, soils identification and topographical considerations. The town ordinances on the use of wetlands, the setbacks associated with wetlands, and whether or not they can count toward density or useable square footage is always a question, as each community is different. In many communities, outcrops of ledge, or any slopes over a certain percentage are not allowed to count toward density, or developable land requirements. Without that information already at hand, it is often difficult, even after utilizing publicly available source information in GIS or other available resources, to determine all of the factors that go into the density calculations. This is all homework that must be done prior to trying to value a land parcel. A highest and best use analysis will begin to identify what all of those factors are, in addition to what the market factors are as well. Many times, realtors don’t have the expertise to look at the cost of the development either.
Let’s take a residential example to look at in a very general context. One way to look at the value is to back into it. Let’s start with a 50 acre parcel. If we know from our market research that the value of a lot is $150,000, then what are the components to understand what it takes to get there ?
First is the cost of a survey and soils analysis to determine what exactly we have there. For the survey the cost is likely about $30,000, and to complete the topography analysis (“topo”), it is likely another $10,000. The wetlands need to be identified, which will cost approximately $10,000. Then, a high intensity soil survey (HISS) must be completed, which depending on how much wetlands are on site, may cost $7,000-10,000 as well.
- Survey -$30,000
- Topo – $10,000
- Wetlands – $10,000
Now, we have the physical data from which to start to layout how many lots are physically possible, and how much road will be required to obtain a good layout that works. In general, most parcels will lose at least 35% of the land to wet and topo. Setbacks will eat up another 5-8%.
- 50 – 35% (17.5) = 32.5 – 8% (2.6) =29.9 acres
That would leave us 30 acres of developable land. If we have two acre zoning, in this case generally we need to take out approximately 10% for roads and utilities.
Now we have about 27 acres available for lots and assuming the two acres zoning, we would have 14 lots. Assume the road frontage requirement is 250 feet, and we can have lots laid out so they are both sides of the road, that is about an 1800 foot road. With water and sewer and sidewalks and all utilities, roads are currently averaging about $700 per linear foot to construct. (1800×700=1,260,000) That is $1.26 million to build the road.
So, back to our costs to get there. So far we have soils, survey and topo at approximately $60,000. Engineering for the road and layout will be another $35,000 minimum. Another $10,000 in Legal is possible. So we are close to $100,000 in costs to get there, and then road costs are $1,260,000. Total now being $1,360,000 in costs to get to the point where we would have lots to sell. Cost per lot – $97,140.
- Cost per lot = $97,500
The next questions are how long will it take to build it, and how long will it take to sell through the 14 lots ? If it was all built and sold within one year, then we would not have to discount the future income from the sales of the lots. If our market analysis shows that we will only build (let’s say, 4 per year), then the sellout time frame would be three and one half years. The lot sales at the end would have to be discounted back to today’s value utilizing a discount rate and a discounted cash flow analysis.
One factor that comes into play in New Hampshire is the current use penalty (RSA 79;A) . This is referred to as the LUCT or Land Use Change Tax. If the property is in this program, then the change tax is 10% of the Retail value of the lots. Sell a lot for $150,000 and the tax is $15,000 (simplistic view, assessments and ratios come into play).
So if the lot sells for $150,000, minus the LUCT at $15,000; minus the cost of creating the lots including the road at $100,000, then we have a profit of $35,000 if we are lucky. There are carry costs, cost of funds, cost of borrowing money, and risk. Risk cannot be measured in real dollars, but given that the time frame for a subdivision from Purchase & Sale to completion is usually at least a year, and usually much longer, (given the potential changes in the market) potential appeals by abutters, costs of construction changing during the term, and all of the other risk factors, developers will look at it and ask themselves if it is worth it. At this point we have not even purchased the land yet!!! How much can we pay for the land now?
This is where today’s developers run such high risk. This is where the experts for Coastal LAND and Commercial provide the best service and knowledge possible. Our teams in MA and NH have sold and leased many parcels over the last year or so. Our knowledge of the market and the deep analysis completed assist the landowner with understanding all of the ramifications of a sale.
– Dave Garvey, Managing Director