oc | Sunday 26th January

Putting a Price on Land Value

Market is useful when considering , however unlike with the share market, the market of a is often more a concept than an exact figure – and everybody has their own ‘recipe’ for how to go about it. But there are three consistent ‘ingredients’, that agents use to get a sense of the likely market value of a home: + Building + Emotion (or X factor).

So how do we put a price on these different components?

Let’s start with land, in many ways the most straightforward component.

For canny investors land is the key ingredient. Certainly, when we are buying for $M+ investors we look closely at the land value to price ratio as a pointer to growth.land

By way of example, imagine three identical blocks of land up for sale side by side. If two were vacant blocks that sold for $1,600,000 and you bought the other one, which had a home on it, for $2,000,000, then your land to price ratio would be 80%. That’s an exceptional ratio, a pointer to good capital growth and a common ratio for .

But if, on one of the vacant blocks, a neighbour spent $1,600,000 to build a nice new home with a pool and a lift  and a whizzbang kitchen, then their land to value ratio would be 50%: Land $1,600,000 + Building $1,600,000 = Price $3,200,000.  Next to your property, that is only OK (financially), but a lot better than many which have as low as 10%.

Back to values – if the three blocks were each 800 square metres in size, the land would be assessed as $2,000 per square metre. Say if you were interested in a block nearby that was 600 square metres in size, what selling agents would do is multiply the size of the block by the $2000 square metre unit price (in this case), just as we do when buying cloth at the market or meat at the butcher. So, in this case 600 sqm x $2,000 per sqm = $1,200,000.

Seems simple.  But remember that it is rare to find such a scenario. More often than not, in inner cities such as Melbourne, vacant blocks are rare or they’re not all the same size or recent sales are limited (and given how the market shifts every week, the more recent they are the more relevant). Or they are in different areas with different characteristics, say on a main road or with water views or they’re bigger or smaller or you can develop them or you can’t. But with some diligent study, with all the sales and facts in front of you, you as a buyer could with hand on heart say that this 600 square metre parcel of land currently has a market value of $1900 to $2100 per sq metre or $1,500,000 to $1,700,000.

It is important to get this figure as close as you can to “right” or “market” value, by gathering many recent sales of similar blocks in similar areas of similar sizes bought in similar market conditions – and then taking an average or range as your result. If you cannot easily do that, you may be best advised getting professional buying assistance. This is what we do on a daily basis.

If your information is inaccurate, and leads you to believe that the land we talked about above should be $1600 per square metre, it’s likely you will think it is overpriced and you won’t buy it. Similarly, if you think the land is worth $2,500 per square metre you will happily buy it at $2,000,000 – but long term you may struggle for growth.

So these are the nuts and bolts of valuing a vacant block of land. If you think that was complicated, prepare for the next part  where you work the value of the building. That’s where it gets really interesting – as we’ll hear about next time.

Printed each week in The – Melbourne’s Million Dollar Plus Magazine


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