How Land is Valued
Contrary to landowners belief, land has zero intrinsic value. That said, land value can be calculated.
The method of valuing land is to figure out what the highest income can be from the land (it’s best use), and then subtracting the cost to produce the improvements that will derive that income.
In development, the concept is to back into the land value using a “return on investment” (ROI) method. When the highest income is defined, the land value is automatically determined by the ROI percentage when all fixed costs are applied (ie. Construction costs, Permitting & Entitlement costs, Financing costs and Leasing & Stabilization costs).
The "back of the napkin" approach
We follow the principal best stated by the author John McNellis in Making It in Real Estate: Starting out as a Developer…”If a deal doesn’t work on the back of the napkin, it doesn’t work.” This is a simple way of saying that deals are simple in nature, net returns on total cost of land and development either meet the market return on investment threshold or they don’t.
Our Step By Step Approach
First we will need the property address or parcel number.
Then we determine the property’s highest and best use based on the underling zoning, the specific plan and general plan, the overlay if there are any, the CC&Rs if there are any, and the density.
When we know highest and best, we calculate what type of structure will be built on the property and break down the hard and soft costs to construct the improvement.
We will then look at the potential lease value of the improvements and from there we can back into the value of the land.
