Land investors who wish to invest, either to "develop" the land (as defined in this Land Development Values Series) or to build and sell an entire package on that lot (e.g. new homes on their lot) must sift though many parcels. Everyone wants to try to convince them to purchase a property. It is time-consuming to sort through all the parcels to find those that are worth considering. Buyers need tools to help them quickly eliminate the junk and select the parcels which deserve further consideration. Buyers typically use formulas and rules of thumb for their initial screening.
These rules of thumb are designed to provide rough estimates relating to the yield of a site and different cost factors because these are the key aspects in calculating the "right" price they should pay for the land. Land buyers will be able to tell within minutes if an asking price is reasonable based on the number of numbers that work. The buyers will simply throw out the parcel if it is overpriced.
Commercial Land Developments
As is to be expected, the methods for estimating site yields and costs of improvements are different for residential and commercial land developments. For retail and office parcels the yield is defined as the potential amount of construction space. This is usually a function of the number of parking spaces that will fit on the parcel and taking into account the overall development limits imposed by impervious coverage and green space requirements set by the zoning ordinance. One rule of thumb might be used to estimate the total amount of land area needed for each car that would be parked on the office property (e.g., square feet for parking space plus drive aisle). A second rule would estimate the area of land taken up by the sidewalks and pathways. The third rule is to assume that improvements vertically and horizontally will cost $100/sq. The office space should be at least 100 sq. ft.
Residential Land Developments
To estimate the number of lots that a parcel of land could produce, once the subdivision was completed, as well as the cost for horizontal improvement. The value per "raw" building parcel would be calculated by calculating the value of the completed product (the home on its own lot) as well the cost for horizontal improvements.
One rule of thumb for site yield might take the gross land area, subtract all the square feet that are wasted or can't be utilized due to whatever reason. Divide the result by minimum lot sizes required by zoning and you will get the number of parcels. The rule of thumb calculation might look something like this, for example, for a vacant 15-acre parcel zoned 20,000 square feet. ft. lots:
Step 1: 43,560 sq. ft. x 15 acres = 653,400 sq. ft.
Step 2: 653,400 sq. ft. x 70% = 457,380 sq. ft.
Step 3: 457,380 sq. ft. divided by KO Excavation 20,000 sq. ft. = 22.87 building lots
This would mean that there are roughly 22 lots of land for this parcel. The second step involves subtracting 30% from the gross site to account of wastage and square feet lost due to natural constraints, such as slopes or floodplains.
Keep in mind that the rules of thumb may vary depending on your geographic location. The rough figures are estimates and should be modified as needed. A substantial portion of a 15 acre parcel would have to be in floodplain for it to make sense to take only 30% off the total gross site. When you are unsure of the rule-of-thumb to follow, it is best to be conservative.