It's Not Just "Location! Location! Location!"

Mark Twain once said “buy land, they’re not making any more of it” That is so true! We relocated to southern California from northern California (the real northern California, not the bay area). Having lived in the same area for most of our lives we knew every piece of dirt in the area, and developed our fair share of it over the years. In moving to southern California and being builder/ developers, we knew that land here would be extremely hard to come by. What’s worse, is that when the rare parcel of residential land is listed for sale, there seems to be no rhyme or reason for the pricing. I’ve come to the conclusion that it’s because the agents see vacant parcels of land so rarely that they have no idea of what gives a parcel value. This isn’t just a problem in southern California, but in many areas of the country.

What Gives Land Value?

Location
Zoning
Topography
Geology
Availability
Parcel Size

Location! Location! Location!

We’ve all heard those words in regard to real estate, the concept that location is THE most important criteria when it comes to property. However; it’s only one piece of the puzzle. The best location in the world won’t make any difference if the other pieces of the puzzle are missing. At the same time, if everything else is perfect, but the location is off by 1/2 block it can kill a deal. Other things that play into value can be views, proximity to natural resources, shopping, downtown areas, schools, and a host of other things, that sometimes are had to put a dollar value on.

Zoning Rules the World

No matter how great a location a parcel of land is in, if it isn’t zoned for the specific use you need for the type of project you want to build, the property has no value – to you. Cities are nothing but parcels of land, bundled up and divided into various zoning sections. Whatever business does or does not happen in the area is determined by those zoning areas. Where people live and how they live, is determined by zoning.

Topography

Here in southern California the topography of the area includes flat land, gently sloping parcels, and parcels that are so steep in order to develop it, the house needs to be hanging out over a canyon! Sometimes those parcels have the most magnificent views and are breathtaking – but at the same time, they are very costly to develop.

Geology

Aside from the topography of land, the geology of the land varies considerably around southern California. Some areas have dirt packed so dense it resembles rock, others have sandy soil, and everything in between. The cost of construction on each type of land, and the infrastructure needed to address each condition can vary widely, and increase the development costs considerably.

Availability

Buildable lots available for sale, in southern California are rare, and therefore; are usually expensive. However; the fact that there are few lots for sale in an area doesn’t necessarily mean a higher asking price for a lot is justified.

Everything is relative. If there are no lots for sale in an area, and one comes up in an established neighborhood (house burned down, fell down, etc.) but all the homes in the neighborhood are older homes, 1200 sq. ft., with a maximum sales price of $400,000; and the seller asks for $300,000 for the lot, it’s not going to work. Builders know that the cost to develop a house are X amount, and the lot costs can only be a certain percentage of that cost. A new home will obviously be more attractive to a buyer, but at the same time, you don’t want to overbuild to such a degree that an appraiser can’t justify the value.

On the other hand, if there’s a lot in an area like Laguna Beach, CA that is listed for sale for $2,00,000 and already has pre approved plans; and the lot is in a ravine and calls for the house hanging out over a cliff, but will have a spectacular view of the Pacific Ocean, it could be an unbelievable bargain. Why? In Laguna Beach, it can take anywhere from 1-2 years to get plans approved, and little 700 sq. ft. cottages sell for over $1,000,000. The fact that the lot already has approved plans adds significant value. The area is also a much sought after area for tourists; and vacation rentals can rent for thousands of dollars a week, giving properties potential to generate considerable income for the owners.

Parcel Size:

To have value to a buyer, the lot has to be able to accommodate the use the buyer intends it for. It has to be large enough to handle the building, landscaping, common areas, and parking for the use. If you want to build something other than a single family residential home, THE most important factor that will probably determine whether or not you can do that, is if the parcel is large enough to accommodate the parking requirements for your use. Every use has different parking requirements, and after zoning they should be the next thing you check when looking at land.

As you can see, when listing or buying land, there are many things that need to be taken into consideration aside from the price of the lot; and all of those things go into giving the lot value. If you are a buyer looking at a parcel of land, or an agent listing land, it’s important for you to understand the costs that will be required for a developer to bring the property to the point of being able to build on it; and price or pay accordingly. There are things like installing electric, water, fire hydrants, pulling permits, having surveys done, completing site plans, soils tests, etc. that all go in to developing land. The more of these things that are already at the property or have been done, the more value a parcel has for a buyer.

I hope this has given you a better understanding of how a developer and builder views land, and what goes into developing property.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.