Appraisals and Land Valuation
Valuation foundations for land
Land appraisal uses the same three approaches as other real estate, but land-specific mechanics matter. A candidate must know which approach fits which land type and the traps in each.
The approaches
- Sales comparison: primary for vacant land. Adjust comparables for time, location, size (larger parcels often sell for less per acre - the size/quantity discount), access, zoning, and utility. A key trap is failing to apply a per-acre adjustment when parcel sizes differ.
- Income approach: for income-producing land (farms, leased recreational land, timberland). Use capitalization: value = net operating income ÷ cap rate. Land capitalization rates generally run higher than improved property because of risk and lower liquidity.
- Cost approach: rarely meaningful for raw land (land is not depreciated), but useful for improvements like site work, plantings, or infrastructure. The trap is applying depreciation to the land itself.
Concepts to master
- Reconciliation: weighting approaches to a final value opinion, not averaging blindly.
- Market conditions/time adjustment and the difference between retrospective and prospective value dates.
- Per-acre vs. per-unit bases: price per acre, per tillable acre, per animal unit, per board foot.
- Excess and surplus land: excess land can be separately developed; surplus land cannot.
- Easements, encumbrances, and partial interests reduce value and must be identified.
Worked rule of thumb
Income approach: a farm generating $60,000 NOI with a 6% land cap rate → $1,000,000. If the question gives a gross income and expenses, compute NOI first; a common trap is capitalizing gross income instead of net.
Traps
Using depreciated cost for land; ignoring size discounts; and capitalizing gross rather than net income.