How to make sense of an appraisal number

Before purchasing land, buyers need to determine how much that land is worth, a figure that may be substantially different from its sales price.

By: Dan Rafter

To do this, buyers hire land appraisers, who work to make sure that their clients don’t overpay for their dream parcels. Many buyers, though, have no idea of what a land appraiser does to calculate the value of a piece of a land. Buyers purchasing existing homes, for instance, often confuse what an appraiser does with the job of a home inspector. When it comes to land appraisal, this confusion is only magnified.

Appraisers, though, say it’s critical that buyers understand exactly what goes into determining land’s value. Appraisal is an inexact science, one that relies in part on human judgment. But there is a method to determining how much a plot of land is worth, and the best land appraisers approach their jobs with a scientific bent.

“People often think it is easier to appraise a piece of land rather than a house,” said W. David Hohman, an accredited senior appraiser and owner of Winterhaven, Fla.-based Dave Hohman Associates. “That’s not the case. Once you build a house on a lot, you know what the lot is going to be used for. The piece of land with no development on it, though, leaves a lot of options for how it can be developed or how it can be used. Appraising land is a lot more involved than people think.”

The standard way to appraise property is to study comparable sales. Problem is, with land the nearest comparable sale may be not only rest in another county it may have occurred in another state. So top appraisers must often judge each piece of land on its own merits, making the process a complex one.

Appraisers consider three main factors when determining the value of land, said Hohman: What owners can legally build on it, its physical characteristics and the demand for what the owner intends to build on the parcel.

Hohman says the first of these three is the most important. Some parcels may be zoned solely for residential, while others only for commercial buildings. Some land can be used only for raising cattle or growing citrus, legal requirements that impact the value of land.

To help buyers sort through these restrictions, Hohman contacts local governmental bodies and planning departments to first identify what improvements owners can legally add to a piece of land. Hohman then determines whether owners can petition to change a piece of land’s current classification, and how likely a buyer’s petition is to be successful. If buyers can change a piece of land’s designated zoning from a less-intensive use such as agriculture to commercial or residential, they can significantly improve the value of their land.

Once he determines what buyers can legally do with a piece of land, Hohman then studies its physical features. Certain features add more value to a property. Is a piece of land dry or does it have federally protected wetlands on it? Is the shape of the parcel suitable for what the buyer wants to build?

Finally, Hohman considers the type of improvements his client is planning for the land and then explores the market demand for them. Today, demand has slowed for residential development in much of the country. The land may be worth less, then, if an owner plans to build a sprawling estate – to sell at a later date — and more if that owner decides instead to operate a commercial use on the parcel.

Jim Amorin, vice president of the Appraisal Institute, www.appraisalinstitute.org, and an appraiser with Austin, Texas-based Atrium Real Estate Services, recommends that everyone purchasing land, no matter how large or small the parcel is, work with an appraiser who not only has one of the main appraisal designations – MIA, SRA, ASA – but has experience working with vacant land.

“Appraising land can be one of the most complex assignments you can get,” Amorin said. “Land can bring untold riches or untold disaster.”

 

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