People who want to invest in land to either “develop” it (as that term is defined in the articles in this Land Development Values series) or to build on it and sell a total package (e.g., a new home on its lot) have to sift through many parcels because everybody wants to try to sell them a property! The process of identifying the parcels that are worth pursuing, therefore, is very time consuming, and land buyers need tools to enable them to quickly weed out the junk and identify those parcels that warrant further consideration. So buyers typically use rules of thumb and formulas for their preliminary screening.
These rules of thumb are designed to provide rough estimates relating to the yield of a site and different cost factors because these are the key aspects in calculating the “right” price they should pay for the land. By defining the price at which the numbers work, land buyers can see within minutes if the seller’s asking price is realistic. If the land parcel is substantially overpriced, the buyers can simply discard the property and move on to better prospects.
Commercial Land Developments
Not surprisingly, the methodology for roughly estimating site yield and improvement costs is not the same for both residential and non-residential land developments. For retail or office parcels, the yield is the amount of potential building space that can be built. This is usually a function of the number of parking spaces that will fit on the parcel and taking into account the overall development limits imposed by impervious coverage and green space requirements set by the zoning ordinance. One rule of thumb might be used to estimate the total amount of land area needed for each car that would be parked on the office property (e.g., square feet for parking space plus drive aisle). Another would approximate the amount of land area taken up by sidewalks and walkways. A third rule of thumb might assume that the cost for vertical and horizontal improvements would be $100/sq. ft. of office space.
Residential Land Developments
The rules of thumb applied to residential land developments would be designed to estimate the number of building lots that the parcel could produce once the subdivision had been completed, and the cost for horizontal improvements. The value of each “raw” building lot would be calculated based on the projected sale value of the finished product (house on its lot) and the improvement costs.
One site yield rule of thumb might net out of the gross land area of the parcel the amount of square feet that would be wasted or couldn’t be used for whatever reason and then would divide the result by the amount of the minimum lot size required by the zoning to come up with the number of lots. For example, the rule of thumb calculations might look like this for a 15 acre vacant parcel zoned for 20,000 sq. ft. lots:
Step 1: 43,560 sq. ft. x 15 acres = 653,400 sq. ft.
Step 2: 653,400 sq. ft. x 70% = 457,380 sq. ft.
Step 3: 457,380 sq. ft. divided by 20,000 sq. ft. = 22.87 building lots
The final result is always rounded down, so there would be roughly 22 building lots for this parcel. In the second step, 30% of the gross site area was deducted to account for wastage, square feet lost because of natural constraints (e.g., slopes, floodplain, irregular shape) and land area that would be taken up by new roads in the community.
Remember that rules of thumb can vary by geographic area. They are rough estimates so you should modify them as circumstances warrant and not just apply them blindly. If a substantial portion of the 15 acre parcel was in floodplain, it wouldn’t make any sense to deduct only 30% from the total gross site area. If you’re not sure what rule of thumb to use, be conservative.