We’re going to talk about how to value raw vacant land. I got this piece of vacant land and I don’t know how much it’s worth. So here is the answer to that. It depends.
It depends on where the land is specifically. So there’s 2 main types of land that I want to talk about. The first is what I call infill land. So what’s infill land? Infill land is when you have a piece of land that is surrounded by development or it’s where you take an existing property, you demolish the structure that’s there, and you create new vacant land.
That’s called infill land. And it has a tremendous amount of value because typically, that’s where Builders want to hang out. They want to hang out where there’s already development, where there’s already infrastructure, where there’s already people wanting to be there and liquidity in the area. And so, infilland will always be worth more than vacant land on the outskirts of a city. So how much is it actually worth?
Well, a rule of thumb that I learned when I was working with different Builders, is that the piece of infill property should be around 1 third, the value of what the new construction sales price would be. So that was a mouthful. Let me give you an example of what that actually means. If your property once developed would be sold for around $1,000,000. That means that your piece of infill land would be worth $333,000.
So your vacant land when it’s infill should be worth around 1 third of what the new value of the construction would be once it’s developed. Now, let’s look at vacant land that’s on the outskirts skirts of town. And this is where it can get super super hairy and super chocolaty. Why?
Because there’s not going to be a lot of liquidity for pieces of vacant land in the outskirts. And so, how do you value that? Well, I like to look at the closest development to that property. So if there was say a ranch or maybe a small little subdivision that’s nearby, not right there, but nearby, I’d look at the property value of what newly built construction would sell for nearby and I would want to be at around 15 to 20 percent of that value. So if new construction is selling for around a $100,000 on the outskirts of town, then you should be buying vacant land at around 15,000 to 20,000.
15 to 20 percent of what the new value of that construction would be. So those are just some things to keep in mind, rule of thumbs for working with vacant property or vacant land. So one thing you want to keep in mind, if you’re having conversations with sellers that have vacant land is you need to make sure that your contracts have long inspection periods. Builders need time. They need time.
They need time to talk to the city. They need time to talk to their planners. They need time to make up drawings and get site plans created and there’s a tremendous amount of investment that they have to make before they can even see if a piece of land is viable. So if you are going to make it play for having a niche in wholesaling vacant land, make sure that you’re having extended inspection periods. Not so that you have longer to sell the deal, but that your buyer has enough time in order to determine whether or not they can put the kind of development they want to put on that piece of land.
To give you an example of how that has played out in my life. I bought 4 acres of land in a very prime part of Phoenix, Arizona. I thought we hit a gold mine when we contracted those 4 Acres. The problem was, is my inspection period wasn’t very long. And even though I had a tremendous deal, I actually had to close on 4 acres of land at a price of $2,000,000 And I had to hold that land making a hard money payment month after month after month, because the builder that I sold the deal to needed around 8 to 9 months to get their entitlements on that property.
So I literally had to make a payment for 9 months on that land before the Builder actually closed. Now, if I had known better, I would have had an inspection period that would have lasted as long as the Builder needed to determine if the entitlements were actually going to be able to be made. So a lot of folks that are selling vacant land understand that they know the process of development is slow. They know the process of dealing with the city is slow. So don’t walk into a conversation with a seller for vacant land and promise them a fast close because yes, they will contract with you.
But what are you going to do when your buyer needs more time? So remember that, watch the inspection periods on vacant land. And if you’re doing infill vacant land, you want to be at around 33% of the new construction value. And if you’re going to be on the outskirts somewhere between 15 to 20 percent of new construction value. And last thing I want to tell you is pay attention to zoning and density.
That’s another piece of information that every Builder is going to want to know. And if you are talking to developers or Builders about your piece of property and you don’t understand what zoning and density mean, then you’re probably going to need to do a little bit of research.