Determine value on raw land with permits in place.

[Clayton Smith]

I purchased a 5 acre parcel of land with a single family home this year in the middle of my town. I am working with the city to get it rezoned to develop this property. I will go in front of the zoning board next month with my plot plan. As of right now I will be able to fit 38 town homes on the land. They will be side by side duplex style townhomes. The ARV for these will be $225-$250k each after construction. With the location being close to the University of Alabama there is also a possibility for the buyer to build these to rent for $1800-$2000 each. I am looking to sale the property and realize the gain instead of staying on for construction to a finished product. I listed to "on the market" and James Daner said that land typically sells for 20-25% of the ARV. But my question is how is the best way to value the land? I am thinking that in my market I should take no less than 15% of the ARV for the land. I do not plan on doing any of the land development. Just selling the raw land as is with permits in place so a builder can get started the next day. How should I determine the value? Should I pay for a commercial appraisal to make sure I list it for the right price?

[Chris Seveney]

Quote from @Clayton Smith:

I purchased a 5 acre parcel of land with a single family home this year in the middle of my town. I am working with the city to get it rezoned to develop this property. I will go in front of the zoning board next month with my plot plan. As of right now I will be able to fit 38 town homes on the land. They will be side by side duplex style townhomes. The ARV for these will be $225-$250k each after construction. With the location being close to the University of Alabama there is also a possibility for the buyer to build these to rent for $1800-$2000 each. I am looking to sale the property and realize the gain instead of staying on for construction to a finished product. I listed to "on the market" and James Daner said that land typically sells for 20-25% of the ARV. But my question is how is the best way to value the land? I am thinking that in my market I should take no less than 15% of the ARV for the land. I do not plan on doing any of the land development. Just selling the raw land as is with permits in place so a builder can get started the next day. How should I determine the value? Should I pay for a commercial appraisal to make sure I list it for the right price?

My recommendation is to get an appraiser in to give some idea of pricing. Whats missing is the cost of construction. If it is costing $200k to build a unit worth $225-$250k then its not going anywhere anytime soon. The only major component is going to be land development costs and what will it cost to bring in the infrastructure.

Are you taking it all the way through entitlement and when you say permits are you referring to site plan approval? I assume you are not also designing the homes and getting building permits.

[Clayton Smith]

Quote from @Chris Seveney:

Quote from @Clayton Smith:

I purchased a 5 acre parcel of land with a single family home this year in the middle of my town. I am working with the city to get it rezoned to develop this property. I will go in front of the zoning board next month with my plot plan. As of right now I will be able to fit 38 town homes on the land. They will be side by side duplex style townhomes. The ARV for these will be $225-$250k each after construction. With the location being close to the University of Alabama there is also a possibility for the buyer to build these to rent for $1800-$2000 each. I am looking to sale the property and realize the gain instead of staying on for construction to a finished product. I listed to "on the market" and James Daner said that land typically sells for 20-25% of the ARV. But my question is how is the best way to value the land? I am thinking that in my market I should take no less than 15% of the ARV for the land. I do not plan on doing any of the land development. Just selling the raw land as is with permits in place so a builder can get started the next day. How should I determine the value? Should I pay for a commercial appraisal to make sure I list it for the right price?

My recommendation is to get an appraiser in to give some idea of pricing. Whats missing is the cost of construction. If it is costing $200k to build a unit worth $225-$250k then its not going anywhere anytime soon. The only major component is going to be land development costs and what will it cost to bring in the infrastructure.

Are you taking it all the way through entitlement and when you say permits are you referring to site plan approval? I assume you are not also designing the homes and getting building permits.

building costs in my area are around for this style should be $110-$115 SQFT. I talked with a developer that had similar plans at another site and they were going to build it out for $131k per unit. Land development should run about $500k. Infrasture is adjacent the property so the cost will be minimal for that. Land is level so not a ton of grade work. I am thinking build out will be $6.5 million give or take. ARV would be $8.5 mil on the low end $9.5 on the high end. Still a lot of meat on the bone for a developer paying me 15% ARV. I will take it through entitlements. I would not be designing the homes or getting the building permits. In my area we just need to give the city a general idea of what type of property will be built for approval. Not to have finished design. Less red tape for developers in my market.

[Mike Wood]

@Clayton Smith No way is undeveloped raw land worth 20-25% of ARV. Maybe infill lots with existing roads, sidewalks, drainage, utilities, etc. in the best of area would be that high.

In my area (which has similar construction costs, but high value per ft2 than you), infill lots in the best areas (A+) would be 25% of finished value, which rental areas (B areas) being 15% of finished value.  That is infill lots where there is zero land development costs.

I would venture to guess that each lot (19 lots, assuming a townhouse style duplex is built on each) would value in the at $25k or less (5% or less) per lot, given the costs and risks associated with developing the raw land. 

As another stated, the only way to find out is the get an appraiser that has experience with raw land development, or talk to big developers and see what they will offer.

[Clayton Smith]

Quote from @Mike Wood:

@Clayton Smith No way is undeveloped raw land worth 20-25% of ARV. Maybe infill lots with existing roads, sidewalks, drainage, utilities, etc. in the best of area would be that high.

In my area (which has similar construction costs, but high value per ft2 than you), infill lots in the best areas (A+) would be 25% of finished value, which rental areas (B areas) being 15% of finished value.  That is infill lots where there is zero land development costs.

I would venture to guess that each lot (19 lots, assuming a townhouse style duplex is built on each) would value in the at $25k or less (5% or less) per lot, given the costs and risks associated with developing the raw land. 

As another stated, the only way to find out is the get an appraiser that has experience with raw land development, or talk to big developers and see what they will offer.

 Thanks for the info. I have talked to a few developers and once approval goes in place they are ready to make offers. I am working on getting an appraisal done. A typical infill lot would be $45-$50k in my area so I am basing some of the potential value on that. I actually have been thinking $25k per does sound about right so its good to hear that I am at least in the ballpark.  If it really is that large of a price difference I would consider putting in the infrasture myself. 

[Mike Smith]

@Clayton Smith Your raw land is worth the going price for development land plus whatever the developer is willing to pay you for getting it through entitlements.  Or you can find the retail price of finished lots less development costs less development margin.

Example 1:

You have 10 acres of bare ground.  Bare ground that is developable is selling for $30,000 per acre in your area.  You spend 6 months and $10,000 getting it through entitlements.  A developer will probably pay you 10 * 30,000 = 300k plus 20-30k for entitlement work.  Entitlement work is worth more the longer it takes.  If you live in rural Arkansas and entitlements take 30 days, you won't get much for it.  If you live on the California coast and entitlements take 4 years, the developers will pay much more for it.

Example 2:

You have 10 acres of bare ground.  Your plat shows 25 finished lots with a retail lot price of 20,000 each (based on market research).  Development costs are 100k.  The developer wants to make 30% development margin.  Your ground is worth 25 * 20,000 = 500k less 100k development costs less 150k development profit.  Net of 250k.

Not going to happen example 1:

You have 10 acres of bare ground.  You plat shows 25 finished lots that will fit 1500 SF townhomes selling for 300k each.  You calculate the builders profit 20% of 300k.  Theoretical builder profit is 25 * 300k * 20% = 1.5m.  You ask the builder to pay fair market value for the land (300k) and gift you 33% of the profits because you own the land they bought (or you are just a nice guy that deserves a large monetary gift) = 800k.

Not going to happen example 2:

You have 10 acres of bare ground.  Your plat shows 25 finished lots that will fit 1500 SF townhomes selling for 300k each.  Total value is 7.5m.  You figure your land is worth 20% of that, so 1.5m.  You forgot about development costs and development margin....

[Clayton Smith]

Thanks for the info. I am in Alabama so the entitlements are not extremely long but do take around 6 months. The location of this development is pretty prime. I have been looking at it more in example 2. I just need to hone in on develope costs.