Land valuation typically involves numerous calculations to determine how much money a plot of land is worth. Among other things, valuation requires a determination of how much the land is worth independent of any buildings, how much the neighborhood is expected to develop in future years, and the likelihood of either appreciation or depreciation. Performing land valuation is generally a very complex endeavor. Valuation assessors often use more than one method of determining land value before coming to a final number.
Knowing land value is important for a number of reasons. Prospective land purchasers often want to know how much a piece of land is worth before investing in it, for instance. Governments also have an interest in knowing how much a given piece of land is worth in order to assess property taxes. Land valuation is the process of ascertaining the actual current value of any piece of land, developed or not.
One of the most common valuation methods relies on the sale price of other, similar land. The comparable sales method surveys the recent sales of similar land within the same geographic area to get a sense of what the land would sell for on the open market. Often times, the comparable sales method requires subjective adjustments for differences in the land and surrounding area. The selling price of an enclosed lot may help determine the value of a similarly sized lot nearby, for instance, but if that lot abuts a busy street, its value will necessarily be a bit different.
Many valuation assessors also use a cost of development model. Under this method, assessors study the existing costs involved in developing similar plots of land, and consider any physical land attributes — such as streams, irrigation wells, or rocky soil — that might affect building potential. This type of valuation is typically quite exhaustive, taking many different factors into account.
If buildings are already attached to the lots, things often get more complicated where valuation is concerned. In these cases, land valuation requires a calculation of how much the buildings are affecting the sale price, and what the value of the land would be without those buildings attached. There are several methods for making this calculation.
The income analysis and cost analysis methods are among the most common. In the income analysis method, land valuation assessors estimate how much money the property makes each year. Then, the agents determine how much the building is worth, and allocate a portion of the earned income to the building. The remainder is the land value.
Assessors also look at building value under the cost analysis method, but only in terms of how much it cost to construct them. Under this method, the land value is the property value minus any construction costs. Cost analysis valuation is often criticized for not taking depreciation or upkeep costs into consideration.
Rather than make a lot of guesses and calculations on their own, many modern-day valuation agencies are using computers and technology to help them perform faster, more accurate land valuations. A variety of programs have been designed to develop formulas and calculate land value based on a number of different factors. This process is known as computer-assisted mass appraisal, or CAMA.
CAMA programs usually tap into larger databases of property records, sale information, and tax assessments from years past. These databases are known as geographic information systems, or GIS. No computer can do the work of a human, but used properly, a computer running a CAMA program can make a valuation assessor’s work considerably easier.