Subdivision Method of Land & Site Valuation

Instructor: Kyle Aken

Kyle is a journalist and marketer that has taught writing to a number of different children and adults after graduating from college with a degree in Journalism. He has a passion for not just the written word, but for finding the universal truths of the world.

The subdivision method is used for land and site valuation when a large plot of land is to be sold as smaller individual parcels over time. This method of valuation is risky particularly with land sales.

Valuation Propagation

There are many methods for the land/site valuation process. One of these methods is the subdivision method, which can be used when a large amount of land will be purchased to be sold as parcels of land. This can be for residential subdivisions, unit developments like apartments, or even business and industrial areas. It is an analysis of the potential cash flow that can come over time if a large plot of land is sold separately as smaller parcels at different times. This is often rural and/or agricultural land being sold for residential and/or commercial use.

Subdivision Analysis

Th subdivision method involves an analysis of four important factors. The first factor is the timing of the sale of each parcel, as well as any assumptions of value increase. Second is accounting for holding costs. This could include a variety of expenses, such as improvements in infrastructure, taxes, special assessments, marketing, management, commissions to be paid, closing costs, and more. Next the analyst will estimate the absorption period for each individual parcel. And finally, a suitable discount rate will be chosen to be applied to the cash flows over the time of parcel sales. Once these four factors have been analyzed, then preparation of a discounted cash-flow analysis begins, utilizing information from the entire process to yield a net present value of the land/site.

With this analysis assessors will determine highest and best use. That is, they will determine what will be the best and most profitable use of the land. Let's take a residential subdivision as an example. The assessor would apply the subdivision method by estimating the costs of developing the entire land parcel into a subdivision, and then subtract these costs from the estimated or predicted sale prices of the developed individual parcels.

Land Sales

The subdivision sale of land carries a large amount of risk. The sale itself is risky. It is also very difficult to predict the potential income stream from land sales, and the timing is very hard to predict. The area may suddenly boom and the land could be sold quickly, or it could take years or even decades. Carrying costs also become an issue with land sales for subdivision. For this reason, selected discount rates for land deals often exceeds twenty percent.

Valuation of 'raw land' requires much more subjectivity by the analyst for a wide array of factors. Brokers can play a small role in the analysis of individual parcels, or may take on larger and much more complex projects for the subdivision of the land. Other professionals are often required to determine the highest and best use, however, especially with certain legislation in some states. Brokers can earn fees for coordinating the subdivision method of valuation, which can involve oversight of the project surveyors, environmental specialists, and engineers.

Examples

Let's examine an example of the subdivision method. The highest and best use for a large 20 acre parcel of land was determined to be single family subdivision residences. This land also has the zoning for this use. It has been determined that four single family lots can be developed on each acre including streets.

The first factors to consider are supply, demand, and purchasing power. If the market indicates a valuation of 3.2 million dollars (\$3,200,000) upon completion of the development of the entire land parcel (\$40,000 per lot), then the costs of development would be subtracted from this total amount of valuation. At this point, much research is done into the predicted costs of the development project, such as overhead, cost of sale, profit, and interest. Site development for this example would include roads, sewers, water, site planning and prep, etc. Let's say that site development will cost about 25% of land sales.

Overhead will also be about 25% of the cost of land sales, and profit and interest during development will also be about 25%. From these estimations, it can be gathered that the remaining 25% of money from the sale of the lots/parcels is the contributory value of the raw land. Using the subdivision method, the entire parcel of land in this example would be valuated at eight hundred thousand dollars (\$800,000). This is calculated using the following formula:

3,200,000 x .25 = 800,000

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