The valuation of raw land presents unique challenges. The analyst is working with a blank canvas of sorts, forced to analyze a variety of factors and make rational assumptions about a site’s best potential use.
At a minimum, a broker should be able to perform a base level of analysis for a client and should know what to look for in evaluating a formal analysis. (For complicated assignments or when regulations require it, hiring a more experienced valuation professional is recommended.) The valuation process essentially consists of two parts: determining the highest and best use for the land and applying the appropriate valuation technique.
Highest and Best Use
The ultimate value of a parcel of raw land depends on determining its highest and best use. Unfortunately, when looking at a piece of raw land, highest and best use often is a matter of perspective. For example, the highest and best use for a developer might be a shopping center, for an environmentalist a nature preserve, for a housing advocate a low-income apartment project, and for a neighbor a high-end single-family subdivision.
The highest and best use generally is the use that is reasonably probable, physically possible, supported by the market, and returns the highest value to the land. The final estimate of highest and best use should be defensible, the logic internally consistent, and the conclusions well supported and documented by facts as well as opinions.