We get this question a lot: How much is an acre of land worth in [Location], and like so many things in real estate, it depends. For purposes of this blog lets perform a thought experiment with the following property.
Here we see a 67-acre parcel of land in Athlone, Ireland, but for our purposes, lets set that aside. This single parcel has 1) Road frontage on what appears to be a major roadway, 2) River frontage in the top right, 3) What appears to be agricultural land in much of the center, 4) and lets assume for this case that the dark area in the upper left is an industrial site.
So, what is an acre of land worth in this parcel? Clearly there could be many answers, but this begins to get our mind to ask the right questions.
What is the Highest and Best Use - There are 4 tests that a property should pass in order to determine the market value of that property.
Physically Possible - What can physically be done with the property? Obviously placing a Boat Marina on the road frontage area is not physically possible, but perhaps it is on the river.
Legally Permissible - If I build a home on the riverfront, only to find out that the law prohibits building in that area due to flooding, then I will have wasted a great deal of time and money.
Financial Feasible - Perhaps its possible and permissible to build a home on the riverfront, but the soil there requires such extreme needs in terms of foundational work that the resulting home that one would build would cost too much for anyone in the market to purchase.
Most Profitable - If given a choice between equally possible, permissible and feasible plans, which would create the greatest value? For example, should the 67 acres be one single-family dwelling lot or 67 1-acre lots for a subdivision? Lot values for the second will very likely be much higher than the first, and this may be the better case.
All of these factors will affect the buyer pool, which will ultimately set the market value. Individuals looking for hunting land pay less than farmers looking for cleared land, and these pay less than land developers. Why? Because there is more profit to be had as we go up through those buyers’ interests.
Within those four questions, the following items are given consideration
What are the External Factors - is the site located next to an industrial site, near a nuclear power plant, near a paper mill - then expect that the land will demand a lower price.
What are the Internal Factors - is the property cleared and level, or a cliffside of giant boulders?
Land valuation may seem simple, until all of the factors that affect the market value of land are considered. Here is a graph of vacant land sales in Armstrong County and an analysis of 3 primary factors.
Above we see three types of vacant land transfers graphed on a price/acre per acre basis. Orange - vacant land that transferred with Oil, Gas and Mineral rights. Grey - vacant land that was suitable building sites. Blue - Vacant land that was not a suitable building site at the time of transfer (either the property was heavily wooded, the topography would prohibit it, etc). Here are some takeaways:
We see the law of diminishing returns at work in all three: The more of something that you have, the less each additional piece is worth.
The vacant land with OGM rights intact is very similar to the shape of the graph of those without OGM rights. The difference can in fact help in the process of extracting the value of the right to extract oil, gas, and minerals from a property (which is very different from the valuation of the oil, gas and minerals themselves). Appraisers do not value OGM rights in appraisals for lending purposes. This is because banks do not place a lien against those rights typically. In other words, if the land is purchased as well as the OGM rights, the OGM rights can be sold off separately from the land itself.
Buildable lots have a more steep decline. Most buildable lots in Armstrong county are of the 5-10 acre variety, and very few are buying 100 acre lots to build their new home. As a result, there is a higher demand for lower acreage building lots, and therefore a higher price per acre.
So, how much is an acre worth? It depends, on a lot.