Documents Needed
PSP, Preliminary Site Plan Approved, at a minimum. This document shows the layout of lots, streets, common areas, retention, etc. A civil engineering firm will create your plat and submit it to the local planning department for approval. The first step in the approval process is Preliminary Site Plan (PSP) approval.
Purchase Contact
Shows price paid for “Blanks”, an industry term used to describe raw land approved for subdivision development.
Infrastructure Cost
The cost to construct underground utilities, roads, accel / decel lanes, etc
Ratio Analysis as a "Road Map"
Take the average retail price of a finished home, multiply by 35% and you get the "indicated" retail value of each lot. Ratio analysis give you a "guide" to go by for a quick check of economic feasibility and for "comp selection".
Example (Assume)
100 lots in a subdivision with homes that sell for an average price of $600,000.
Next, apply a 35% Retail-to-lot value Ratio. This is typical, however, check this ratio in your market with builders, brokers and appraisers.
Multiplying the $600,000 Price by the 35% Ratio reflects $210,000 per lot as an "Indicated" lot value. Note: Check with industry experts for market support & move forward only with a price/value that can be suportted by the market.
Next, $210,000 x 100 Lots = $21,000,000. This is the "Indicated" Gross Retail Sales (GRS) of lots. This is NOT the "prospective market value".
Same as absorption period, should be market supported
Appoaches to Value
Discounted Sellout Analysis (DSA)
Likely a quarterly income & expense cash flow calculation, often discounted at 10% over the sellout period. The present value of these cash flows reflects a value indication via the DSA. For example, you might find that "absorption" of similar lots in similar subdivisions are being sold or "absorbed" at (5) lots / month or (15) lots per quarter.
Income Approach
Projected gross retail sales less projected cost-of-sales reflects the "buk value" via the Discounted
Sellout Approach (DSA). The cost-of-sales over the projected sellout period includes real estate taxes, RE comissions, debt service, entreprenuer's profit & property maintenace costs.
Cost-of-Sales Ratio
Based on my experience in the apprasial of hundreds of single family subdivisions, and using a detailed income & expense analysis, the expense ratio is often approximately 25% when the projected sellout is one year or less. In this example, a "bulk value" of $15,750,000 or $157,500 / Lot is "Indicated". This 25% ratio is only a "guide" and must be supported by market-based figures from projected income and expenses. This ratio may be higher or lower.
Sales Comparison Approach
This approach provides market support to the Prospective Bulk Value of ready-to-build lots via the DSA when lots are "sold as a package". Look for marekt-based sales of similar lots that have been sold in packages of (5) or more per transaction. Like anything, the more you buy of an item, the deeper the discount.
Cross check
Comparable Bulk sales of lots via the the Market or Sales Comparison Approach should suport the prospective value derived by the DSA, a type of Income Approach. Remember, an Income Approach can be either "direct capitalization" or the present value of future anticipated cash flows discounted for time.
USPAP
The Uniform Standards of Professional Appraisal Practice (USPAP) has a strict rule and strict fines against referring to gross retail sales as "value".
Economic Feasibility
The bulk value must exceed the cost of land, soft costs, & infrastructure by a dollar amount that makes sense to investor for the amount of risk taken in terms of time and money. My experience has shown this amount to be at least $600,000 for a proposed subdivision of (100) lots or more.
Many times, lenders will require that "take-down agreements" are in place whereby home builders will place groups or "packages" of lots under contract and agree to "take-down the lots over a specified period of time. I have found that the "take-down-price" is somewhere between the "retail" price and the "wholesale" price or value of the lots.
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