Which Appraisal Is Used For Raw Land Valuation?

‍Raw land needs an appraisal when purchased using a loan. So what kind of appraisal does raw land need to determine its value?

Raw land most often needs the most commonly used comparative market analysis appraisal that considers the recent sale price of other plots of land in the area. While there are multiple methods of appraisal including a cost or income approach that aren’t used for raw land all that often.

We’ll discuss the idea of appraisal, what happens during an appraisal, and why appraisers would use each specific method for the purpose of evaluating raw land.

‍What is an appraisal?

Appraisals are most often conducted by a bank to determine the value of a plot of land or home that they will be borrowing money on. Appraisals and another common word, assessment, are not the same thing. An assessment is used more for determining tax value.

A bank typically does an appraisal to have a third party know the value of the land so that buyer and seller don’t get carried away and sell a plot of land for too much. If the bank ends up owning the property because of a failed loan, they want to make sure they own it for the right amount.

What kind of appraisals are there?

There are three kinds of common appraisals depending on how you plan to use land.

Market Data Approach

This is the most common kind of appraisal for vacant land. The market data approach compares data between locally sold plots of land in the same area. Since no two plots of land are exactly the same, the appraiser is effectively providing an “estimate” of what the land could sell for based on its similarities to another plot of land.

As you might be thinking, this can be a challenge, especially if you have a truly unique piece of land, or land hasn’t sold recently in the area during a roller coaster of a market.

In the context of vacant land, the market data approach also considers how easy the new owner can connect to a frontage road and how usable the land will be right after purchase. A less usable plot of land or one that requires substantial investment will appraise lower. Other factors include whether or not land can be subdivided, and the amount of work needed to make it liveable.

The market data approach also shows the buyer which plots of land were used for comparison, though it doesn’t often give lots of details about why the plots of land are similar. One thing to keep in mind here is that between seller and the open market, you won’t see land overpriced all that often, so the appraisal will likely fall in line with what the buyer has offered the bank.

Income approach

You probably won’t use this approach as it is more often used for what will be commercial properties like a retail store or shopping center. The income approach more literally takes financial accounting and the potential for commerce into play - often subtracting predicted economic expenses from potential gross income. In this case, banks are simply taking the return on investment into the property and whether or not the new owner could afford to pay for the property on a long term basis.

Note that the income approach can be used for farm land. Farm land is intended to generate revenue for the owner

Cost approach

This method is used less often for vacant land, mostly because the cost approach method takes existing structures and the cost to rebuild them into account when appraising. A piece of land without any structures on it won’t have much to discuss from a rebuilding standpoint.

Why is market data used most often?

Many more people begin the process of buying vacant land to eventually build a home and farm then purchase vacant land to build a commercial center. Your average shopping center is designed and developed in a place where the amount of local traffic is proven, so commercial buyers might stay away from vacant land because of the cost to make the land commercially ready.

Market data is also the most concrete method of knowing what a place is worth. Real estate is worth what people are willing to pay for it, and has many variables that determine the value.  Appraisers are also aware of pricing tends and know that a piece of land might have sold in the same city a couple of years ago during more friendly market conditions - and a similar plot of land a couple of years later isn’t worth the same anymore.

To be fair, there really isn’t a better way of evaluating the price of land. If you were to compare two vehicles you were thinking about buying, you would have similar factors: what features do the cars have, and how much have people been willing to actually buy the car for recently?

What if the appraisal is too low?

There is plenty of market data out there to prevent this, so it doesn’t happen very often. It is, however, possible for the appraisal to come in tens of thousands of dollars off what the buyer agreed to pay for it.

A buyer or seller can appeal an appraisal - which more literally means they can hire another appraiser to give a second opinion. It is possible for land and housing prices to raise or drop - after events like natural disasters or the housing market crisis of the late 2000s.

Who pays for an appraisal?

The buyer typically pays for an appraisal and is often referred to an appraiser who works with the finance company or bank. Appraisers can cost anywhere from a couple of hundred dollars up to thousands depending on the size and complexities of the lot.

Does an appraiser visit the land?

An appraiser should visit the land to verify that information from the seller is accurate. The appraiser will have a chance to ensure that utilities are installed and that the square footage is correct.

Much of the rest of the appraisers work is done using a computer and county as well as real estate data. Consider that an appraiser is tasked with comparing land they have seen to land they probably haven’t seen within a similar area. The only reference points they have to make a decision on the value of the land are those stored by another appraiser, so appraisers are more focused on numbers and value than on seeing land.