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. Buyers typically use formulas and rules of thumb for their initial screening.
These guidelines provide rough estimates on the yield of the site and various cost factors. These are the main aspects that determine the "right' price to pay for land. The price at which these numbers work allows land buyers to determine within minutes whether the seller's request is realistic. The buyer may simply decide to discard the land parcel if the asking price is too high.
Commercial Land Developments
It is not surprising that the method for estimating the site yield and the cost of improvement differs for residential and non-residential developments. The yield of a retail or office lot is the maximum amount of building space that could be constructed. This is usually determined by the number and size of parking spaces on a parcel. Also, the total development limit imposed by the zoning law's impervious area and green space requirements will be taken into consideration. For example, one rule of hand might be used for estimating the total area of land required to park each vehicle on the property. Another would approximate the amount of land area taken up by sidewalks and walkways. Thirdly, a rule of thumb could assume that vertical and horizontal improvements will cost $100/sq. ft. of office space.
Residential Land Developments
Rules of thumb for residential land development would estimate the number and cost of horizontal improvements that the parcel can produce after subdivision. The value for each "raw", unimproved building lot will be determined by the sale price projected of the finished house and its lot, as well as the costs associated with improvements.
The site yield rule might be to subtract the total land area from the parcel and then divide that by the minimum size lot required by zoning in order to arrive at the number 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 Land Development near me sq. ft. divided by 20,000 sq. ft. = 22.87 building lots
This parcel would have approximately 22 building lots. The second step involved subtracting 30% of the total site area to account for waste, lost square footage due to natural constraints (e.g. slopes, floodplains, irregular shapes) and the land area taken up by the new roads within the community.
Be aware that local rules of thumb will vary. You should not apply these rough calculations blindly. They are only rough guidelines. In this case, if the site is a 15-acre parcel with a significant portion in floodplains, it would be illogical to only deduct 30% of its gross area. You should be conservative when you're not certain what rule-of thumb to use.