Valuing land crucial in real estate transaction

Learning how to value land and some of the important characteristics to watch out for is essential for both Realtors® and appraisers, according to Melanie McLane, a real estate and appraiser instructor.

“Incorrectly valuing land can get both appraisers and real estate agents in trouble,” McLane said. “It’s crucial to realize that valuing land is way more complicated than many agents realize.”

Two key issues:

• Recognize the highest and best use for the property. If that’s not done and done correctly, everything else will be wrong.
• Understand what the relevant characteristics of the land are. These values will not stay the same as the community around the property changes.

McLane said incorrectly valuing land can have significant consequences. “A real estate agent who sold a residential property for an estate sale, priced the property as residential and sold it quickly. The person who bought the property sold it for twice as much to someone who built a parking lot and two office buildings on the land.”

In this case, the real estate agent failed to check the zoning. “She pulled the wrong comps, priced the property incorrectly and was sued,” McLane said. “An appraiser was called in to testify because had the agent checked the zoning, she would have discovered the property was zoned village commercial.”

In Lycoming County, many issues have arisen due to storm water management. “When I got into the business,” McLane explained, “we didn’t have wetlands. We had swamps and we filled them in. Today, the Chesapeake Bay Foundation makes reports to the federal government regarding wetlands. So both Realtors® and appraisers need to understand the complications surrounding wetlands.”

Valuing land has become more complex, requiring more inspections and research. Issues such as subsurface gas and minerals rights, timber rights, wetlands, etc. have created a more difficult scenario.

“As an appraiser or a real estate agent, it’s imperative to ask yourself, ‘Is this my area of expertise? Am I competent to value this type of land?’” McLane said. “If not, it’s probably best to bring in someone who has experience in that specific area.”

Editor’s Note: McLane will be presenting two programs at the Triple Play Realtors® Convention in Atlantic City, December 8-11. Her courses include: “Valuing Land” and “2014-15 USPAP Update.”