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How to Determine a Fair Market Value of a Land

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The sale of land can result in capital gain or loss. Before you buy a land for development or speculation purposes, take time to investigate the true market value of the land. This market value varies but within a certain range. To buy at market price means paying more or less for the land, this comes at the discretion of the seller. Some people may agree that a land is worth whatever anybody is willing to pay for it. A real estate investor should plan to buy below true market value or worst case scenario at market value.

The actual market value of a land can be determined in several ways and it is depended on so many factors. You should be able to access and ascertain if the asking price is below, close or a lot more than the actual market value.

Below are factors to consider why estimating land value.

Real estate appraisal:  This can be achieved through the services of a valuer (professional appraiser) who has the technical know-how to estimate the actual going rate for the land as at the time of enquires. However this service will cost time and money, so people eschew doing this and put in their offer for quick closure of the deal before other prospective buyers do so.

House rental rate in the area: This involves using property rental income or potential income to estimate the market value of the land. For example you can estimate how many duplexes or apartments can fit into the land without violating government policies. Then estimate value of the building and what the total annual income from tenants would be using the going rate in the area. Calculate by working backward to estimate the range of values for the land. Note your return on investment (ROI) should be less than 12years (for investors) after deducting operating expenses (maintenance, property taxes, property management fees, insurance etc.).

The listing prices of similar land and recent sale price in the area: This entails checking the value of comparable lands (often called comps) in the same area. This can be achieved by going to the internet to pull comps and check the listing prices or sale price of lands in the area. Note that what you see most times may just be inflated prices posted by some agent.
 So make sure to compare lands of similar sizes, shape, location, title, fence and gate, infrastructural amenities in the area, flooding conditions, etc. You may need to adjust the value by adding or subtracting based on the above conditions to get the market value.

Get comparative estimate from local real estate agents in the area: Most times talking to local agents can give you a realistic idea of what land values are in the area. They can tell you most importantly prices of recent lands sold (closing cost) in the area. Sometimes this may be inaccurate, so ensure to talk to lots of local agents to get the information right. This kind of information may not be readily available online. What is more available is listing prices (asking prices). The information gotten from local agents can help you make a better informed decision on what to offer for the land you are buying.

Supply and demand: Land’s main economic benefit is scarcity. If land is scarce in the area, it may drive up the price especially if the demand is high because more people will be interested in acquiring the property. But investors in real estate cannot buy land based on emotions. They are investing to make profit. So any land that will reduce their profit or delay their return on investment is highly discouraged.

Prices of lands few years back: If the value of lands in a particular area has increased tremendously within a short period of time. Find out why the value of lands in the area is on the rise. This is because some land value may go up for reasons that cannot be substantiated. High price of land do not necessary means higher rental rates. However the sudden increase in land value may be due to upcoming infrastructural projects, businesses or if developments of any kind are coming to the area in the near future.

The title of the land: The title of a land adds value for the seller. If the land has certificate of occupancy it means the government knows the seller as legitimate owner of the land thus the risk of being claimed by a land grabber is low. Also it means the land does not violate any government policies and its use for residential, commercial or mixed development is clearly spelled out.

Conclusively, it is never sufficient to use any of these factors by itself. A combination of several of these factors will give you an in-depth insight of the land’s fair market value. If the property is bought for investment purposes, it will be wise to buy at or below the fair market value. This way you are sure  to be making profit already when the deal is closed. This has a role to play on your return on investment because the quicker you get back your investment the better.

It is now left for you to decide on how much to write on the offer letter and hope that other interested buyers will not offer more.

 Liquidity of Real Estate and What You Should Consider
 What To Expect From Workers During Building Construction
 How to prioritize your budget to get back the best sale or rental value

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