Valuing land – the five main valuation methods explained
Valuing land and how it is done is one of the most frequent questions we are asked, so in this latest blog, we explain the five main methods of doing this.
1. The Comparison Method
The comparison method is the process that is most used when valuing land or property because it is literally compared to up-to-date market transactions. Using the information available from other similar sales, the comparable factors (location, size etc.) can be accounted for leading to an estimated value, and it is also used when assessing the market value of farms, farmland and land with development opportunity. Typical sources of evidence that a valuer can use as ‘comparable’ include information published on databases and knowledge from discussions with other valuers/agents, although a caution regarding the latter and transparency. However, the challenges the candidates may face when using the comparable method include evidence not being up-to-date and limited marketing transparency.
2. The Profits Method
Applied as a process when the comparable method is not possible, the profits method estimates a business’ gross profits then deducts working expenses to yield a workable balance that is divisible between tenant and landlord. This introduces the concept of market value vs investment value, the latter relating to the measure of value of the benefits of ownership between the existing owner against the buyer and assessing how they may differ.
3. The Residual Method
Particularly useful for the sale of land, the residual method values development potential and/or vacated land that is already in development. The calculation process for the residual method is the gross development value minus the cost of its development, and that includes the developer’s profits. This ‘residual’ sum is therefore the ‘value’, although there are potential pitfalls to this method, making it difficult to incorporate as a valuation method without expert help.
4. The Contractor’s Method
This method tends to fall into the ‘specialist’ category, i.e., when the above three methods are not appropriate and/or the land in itself has a specialist nature. Often the basics such as supply and demand are the driving force of this method. Again, expert advice regarding this method is advised.
5. The Investment Method
The last process is the investment method, which is used when there is an income stream to value, include commercial, residential retail, industrial and agricultural land. This process assesses rental values and the annual return on investment, as a percentage of capital value and will certainly require the valuer to reflect risk in each calculation. If you’re selling land, understanding how the investment method is applied is important to best manage expectations around those risks.
Contact NFC Homes
When you need an answer to the question 'How much is my land worth?' you must understand that there are numerous factors to consider. You are generally likely to make more money selling land with planning permission, but a thorough examination and survey must be carried out to ascertain the value. NFC Homes is a residential and commercial property development group operating throughout the UK. We have expertise in land appraisals and valuations as well as planning, surveying, legal and construction considerations. If you need help establishing the true value of land you wish to sell, contact NFC Homes and we can help guide you further.