When you’re planning to list your land, the first thing to figure out its market value, having an understanding of the market value of your land allows you to establish a competitive market price that will attract more potential buyers. Pricing your property right is one of the best ways to get your property sold, and to ensure a faster sale that feels like a win for both buyer and seller.
If you want to know more about market evaluation and its importance, the different methods of market evaluation of real estate property, and the difference between market value and market price, read on.
Market Value and Market Price: Defined
Many people use the terms market value and market price interchangeably. However, there’s a difference between the two.
Market value is an appraiser’s opinion on how much a property would sell for in a competitive market based on the benefits and features of the subject property, comparison of similar properties sold in the area, supply and demand, the overall real estate market, among others.
Market price, on the other hand, is the agreed price that the buyer is willing to pay, and the seller is willing to accept.
It can be more or less than the market value, depending on their agreement and the motivations of each party.
Three Methods of Real Estate Property Appraisal
For beginners, real estate property appraisal may sound like an easy task – you only need to look at previously sold properties in the area and use them as a starting point to nail down the market value of the subject property.
Unfortunately, the market valuation of property can be tricky, which is why there are professional appraisers that specialize that critical aspect of real estate.
For you to understand how real estate appraisals work, here are the three different methods that you need to know.
Using this method, the appraiser will try to figure out how much would it cost to rebuild a replica of the present building from the ground up, or for the rebuilding of a structure with similar features to the current building but made with modern construction materials.
The appraised value using this approach is the result of the estimated cost of the construction based on the present prices of construction materials plus land value and minus the depreciation of the property.
Although the cost appraisal method is an important consideration, it’s not advisable to use it alone to figure out the market value of a property.
Income approach means determining the amount of lease revenue or rent income the subject property is expected to produce. The market rent in the locality will be the determining factor to come up with the number.
The appraiser will look at similar rented properties in the market with the consideration of their size, features, amenities, condition, etc.
Sales Comparison Approach
This method is frequently used to determine the market value of residential real estate properties, but it can also be used to figure out the value of some types of commercial properties. For you to come up with the market value using this approach, you need to look at similar properties or “comps” that are sold recently in the same area where the subject property is located.
You can start by taking note of the specific features and advantages of the subject property, namely:
- Lot size.
- Square footage.
- Number of bedrooms and bathrooms (if it’s a residential property).
- Upgrades, pools, garages.
- If it’s a commercial property, specify if it’s best for warehouse, retail, or office.
- Overall condition.
Once you have listed down the features of the property, it’s time to look at the sales prices of similar properties in the area. You should see to it that these comps have similar features with the subject property. If there are any distinct characteristics, such as lower square footage, make sure to take note of them as such information will be needed later.
It will be easier to get a list of comps if you have access to the Multiple Listing Service (you can also look for information on Zillow, Landwatch.com, Redfin, etc.). Look for comparable properties that have been sold in the last three to six months.
It’s crucial to know that older sale prices won’t be suitable or even available, especially if the market you’re looking at moves quickly. You should also keep in mind the location of the comparable properties as factors like school quality or transportation in that area are essential pieces of information when doing an appraisal.
After listing down your comparable properties, you can now calculate a benchmark price for the property you’re going to list.
For instance, if you dig up three comps that sold for $335,000, $350,000, and $380,000 respectively, you can get the average of these numbers as your benchmark price, which is $355,000. You can also consider the price per square foot or ppsf to determine the benchmark price of the subject property.
However, you must keep in mind that the valuation of real estate properties is more or less subjective. Therefore, you make sure that there’s room for price adjustments while taking into consideration the quality, special features, and condition of the property.
The Issue with Vacant Land Using Those Appraisal Methods
The valuation methods mentioned above are typically ideal to use for commercial buildings, houses, apartments, and other improved properties. However, if we’re talking about vacant land, a problem emerges.
For instance, the cost approach won’t be suitable to evaluate a vacant lot since there are no improvements yet which you can use for your conclusions. It’s the same with the income approach. Unless the vacant lot is being leased, you can’t draw any data using this method because a vacant lot is impossible to generate any income.
The sales comparison method may be applicable to appraise a vacant land, but only if there are sufficient comparable vacant lands to take into consideration. In a vast majority of cases, you can only find a few sales comps for vacant land than for apartments and houses. If you can find any comps, they’re more challenging to quantify than improved properties.
Factors That Raise the Value of a Vacant Land
There are factors to consider if you want to know if a vacant land has a high market value. First of all, you have to consider the location of the property.
Two very similar vacant lots can have a vast difference in terms of market value if they are located in two different locations. For instance, a property situated in a thriving retail or financial district in a big city can have a higher market value than one situated along a country road in an undeveloped town.
Also, a property located in a commercial zone and one situated in a residential district can differ by thousands of dollars. Vacant land planted with hardwood trees in an area that thrives with logging activities will have a high market value as well. That’s how important the location when we’re talking about the market value of the land.
A changing real estate market is also another factor that will cause the value of the properties to go up or down.
Why Do You need to Determine the Market Value Before Listing a Land?
You need to figure out the market value of the land before listing so that you can offer a competitive price that will attract potential buyers. A lower price than the property’s market value may not be advantageous to you financially. A higher market price than the market value, on the other hand, may not appeal to most buyers, causing them to look for another property that will suit their budget.