Location Is Not The Most Important Factor To Land Value

277F338D00000578-3036160-image-m-52_1428889284673Entitlement Is The Most Important Factor To Land Value

If you are like most people the adage location, location, location has been drilled into your head as being the most important thing in real estate. When it comes to land values this is not true; land use or entitlement is the most important factor.

Most land in the world is mined, forested, farmed, and ranched and its value is determined by its use and what entitlement it has. Only a small percentage of the world’s land is located in urban centers and developed into homes, shopping centers, offices, and warehouses. If you are lucky enough to own some of this land, of course, you want a great location but what you can build on your property is what determines value. One acre located in the center of town on which you can build a home is not going to be worth as much as one acre on which you can build a ten-story office building.

Recognizing that land use and entitlement are the most important factor to land values is critical because millions of dollars are lost each year on land that does not have the necessary permits to be developed. It will also give sharp investors and developers the ability to turn lower cost land into valuable building sites.

What most people do not realize is that most decisions related to urban land use are discretionary, meaning that any change to the land use must go through a lengthy process that includes governmental and public input. The discretionary process makes any change in land use difficult, expensive, and risky and is the reason most people shy away from owning land, which is too bad because land can be the most profitable of all real estate investments.

Most real estate assets have a value determined by the amount of money that can be charged or earned on the property. Because the amount of annual income a property will generate does not change that much year over year, the value of income producing real estate does not change by that much either. It is rare for improved property values to increase by more than a few percent in any given year, but land investment gives you the unique opportunity to achieve substantially greater returns.

The reason land has this unique ability to increase in value is because you can change the use or entitlement of a particular property and increase its value exponentially. For example, by re-zoning a lot from single family to office or by subdividing 100 acres into 150 lots, you can double or triple the original cost of the land.

 

People Determine Land Use

So why don’t more people invest in land? Because changing land use is difficult and risky. But once you realize land use is a people business it becomes the ability to work with other people, to collaborate, and to negotiate and compromise that are the keys to changing land use. The tricky part of being in the people business is keeping emotions in check and staying open to everyone else’s perspectives, even when they are attacking your project and you.

Even the best people person will lose their cool after spending years and hard earned dollars changing the land use on a property they own, only to be turned down by a group of neighbors that simply do not want change. This is one reason that having an experienced land development manager that is not personally attached to the project is important.