How Can I Determine The Value Of A Vacant Commercial Lot?

[Nate Brown]

Hello fellow BP members! 

I'm a novice wholesaler. Through my marketing, I met the owner and landlord of a single family house in Coatesville PA. The house is a 4/1 and rents for $1500 per month. However, as of today (10/4/17) it is vacant. The current market value of the house is 120K and I have it under contract for 105K. In addition to the house, the contract also includes 2 vacant lots that are adjacent to the property and an other vacant lot across town. The two adjacent lots are zoned for both residential & commercial use. As such, the property tax for the house (which includes the two lots) are $4,863 per year. This number makes the numbers in a buy & hold scenario for the house marginal (8% cash on cash & 6.99% cap rate). I feel the true profit potential is in the 3 vacant lots. More specifically the two zoned for commercial use. So FINALLY, my question is how do I determine the value of the lots for commercial use and how do I go about getting them in front of buyers/developers?

[Taylor Hazard]

I would first pull sale comps for similarly zone parcels, but to understand how a developer/buyer will underwrite the deal you need to understand what you can build and how much of it. Answering those two questions will let you derive a lease rate that you can back into a cap rate and figure out how much can be spent on the land from there.

For example:

If the lots are 1 acre total you can conservatively assume 35% coverage which gives you a 15,246 SF building. If the lots are in a residential area they will most likely be retail or office / mixed use. 

Construction costs for the building will be wholly dependent on building type and tenant finish etc. but lets assume $200/sf (or $3,000,000.00). 

If market lease rates for our make-believe building are $20/sf NNN and the target cap rate is 7% then the land can arguably be sold for $1,356,000.00

$20 x 15,246 SF = $304,920 gross annual income

$304,920.00 x 7% cap = $4,356,000.00 value

$4,356,000.00 - $3,000,000.00 construction costs = $1,356,000.00

Please note this is a GROSSLY over simplified analysis and there are far more costs associated with a new development than the pure building construction costs and land costs but you get the idea. 

It sounds like this is more of a neighborhood commercial zoning (think attorney/CPA/Insurance agent who offices out of a house) in which case the above doesnt really apply, but if its true commercial than start thinking in the above terms.