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How do you calculate the unimproved land value? This is an interesting question with the fires in LA right now. Is the land still as valuable as it was before

How do you calculate the unimproved land value? This is an interesting question with the fires in LA right now. Is the land still as valuable as it was before the house burned down, minus the rebuild cost of the house? Or is the value intrinsically tied to the community that was there but no longer is? Or is the value actually higher now that a developer can come in and remake an entire neighborhood?

fastball 2y ago
I definitely recommend reading Lars Doucet's treatment[1] of this subject. You can skip to section 5 if you want the most direct answer to your question, but the whole thing is worth reading. The short answer is that there are many ways you can assess unimproved land value. The "Multiple Regression Analysis" method I think is the most relevant here: you'll see from the linked article a table that includes all sorts of factors related to both aspects you mention: factors of neighborhood/community (some positive, some negative) and factors of potential (some positive, some negative). e.g. there is even a factor of "Proximity to natural disaster areas", which would definitely decrease the land value after this LA-area disaster. In this particular case, I would expect that Land Values would go down after the fires, as there are many more factors related to positive neighborhood features (which no longer exist if the neighborhood has burned down) than there are factors related to "development potential". Though of course it also matters how you weight these things. Anyway read the article, my summary does not do the subject justice! [1] https://www.gameofrent.com/content/can-land-be-accurately-assessed https://www.gameofrent.com/content/can-land-be-accurately-as...
behnamoh 2y ago
Interesting game theory situation: - if land value depends on the community that was there, then owners would all have incentive to rebuild their burnt down houses to regain the values. - but owners probably realize most owners will sell their property as soon as things are back to normal. that would reduce the value of surrounding houses. - so owners will rebuild as fast as possible, probably cutting lots of corners, just so they won't left behind to sell. - some people start selling their houses but the late comers realize it's not worth it for them to sell it because the value has dropped a lot. so they stay. - the new owners move in to the area and house prices go back up.
- kleinsch 2y ago
  Disagree with logic that most will sell. Many people will incur high tax bills (if the property appreciated) or transaction costs to move. People who bought in the 2010s have mortgage rates that don’t exist anymore. Many had a reason to live in the area to begin with. - Many will rebuild to move back - Some will sell their lots to investors - Some will rebuild using insurance money to flip upon completion
adverbly 2y ago
In situations like this, my assumption would be that it doesn't really get calculated so much as it gets measured... to be kind to victims, you might want to assume it drops for tax purposes temporarily, and then raise the valuation once bids go through and you get some post-fire data points.
- kbelder 2y ago
  One problem is that the calculated or measured land value will recursively affect the value of the land.
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x-complexity 2y ago
> How do you calculate the unimproved land value? The first thought that immediately came up for me: - Take the average property value per sqft for each given property - Multiply it by a fixed percentage - Take the (your favorite mean / average type) value per sqft and apply that to the empty lot If that undeveloped land and its surrounding developed areas are controlled by one entity: Recursively expand outwards to factor in the value of the surrounding areas as well. Compared to the methods outlined by fastball's link [0] later in the article, it's much more weighted towards public valuations & has fewer subjective areas, with the cost being that it can be gamed if certain properties were sold cheaply (but then that's an auditing issue). No solution would be a silver bullet, but it's 70% silver, and that's good enough to start from. [0] https://www.gameofrent.com/content/can-land-be-accurately-assessed#5-mass-appraisal-methods https://www.gameofrent.com/content/can-land-be-accurately-as... > This is an interesting question with the fires in LA right now. Is the land still as valuable as it was before the house burned down, minus the rebuild cost of the house? Or is the value intrinsically tied to the community that was there but no longer is? IMO, the land value is lowered because of the destruction of the properties built on top of it, on top of the rebuilding costs that will come later. > Or is the value actually higher now that a developer can come in and remake an entire neighborhood? Not until (a) the land is actually developed, or (b) the market reflects that decision back onto the land values for that area.

fastball 2y ago

I definitely recommend reading Lars Doucet's treatment[1] of this subject. You can skip to section 5 if you want the most direct answer to your question, but the whole thing is worth reading. The short answer is that there are many ways you can assess unimproved land value. The "Multiple Regression Analysis" method I think is the most relevant here: you'll see from the linked article a table that includes all sorts of factors related to both aspects you mention: factors of neighborhood/community (some positive, some negative) and factors of potential (some positive, some negative). e.g. there is even a factor of "Proximity to natural disaster areas", which would definitely decrease the land value after this LA-area disaster. In this particular case, I would expect that Land Values would go down after the fires, as there are many more factors related to positive neighborhood features (which no longer exist if the neighborhood has burned down) than there are factors related to "development potential". Though of course it also matters how you weight these things. Anyway read the article, my summary does not do the subject justice! [1] https://www.gameofrent.com/content/can-land-be-accurately-assessed https://www.gameofrent.com/content/can-land-be-accurately-as...

behnamoh 2y ago

Interesting game theory situation: - if land value depends on the community that was there, then owners would all have incentive to rebuild their burnt down houses to regain the values. - but owners probably realize most owners will sell their property as soon as things are back to normal. that would reduce the value of surrounding houses. - so owners will rebuild as fast as possible, probably cutting lots of corners, just so they won't left behind to sell. - some people start selling their houses but the late comers realize it's not worth it for them to sell it because the value has dropped a lot. so they stay. - the new owners move in to the area and house prices go back up.

kleinsch 2y ago
Disagree with logic that most will sell. Many people will incur high tax bills (if the property appreciated) or transaction costs to move. People who bought in the 2010s have mortgage rates that don’t exist anymore. Many had a reason to live in the area to begin with. - Many will rebuild to move back - Some will sell their lots to investors - Some will rebuild using insurance money to flip upon completion

adverbly 2y ago

In situations like this, my assumption would be that it doesn't really get calculated so much as it gets measured... to be kind to victims, you might want to assume it drops for tax purposes temporarily, and then raise the valuation once bids go through and you get some post-fire data points.

kbelder 2y ago
One problem is that the calculated or measured land value will recursively affect the value of the land.

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x-complexity 2y ago

> How do you calculate the unimproved land value? The first thought that immediately came up for me: - Take the average property value per sqft for each given property - Multiply it by a fixed percentage - Take the (your favorite mean / average type) value per sqft and apply that to the empty lot If that undeveloped land and its surrounding developed areas are controlled by one entity: Recursively expand outwards to factor in the value of the surrounding areas as well. Compared to the methods outlined by fastball's link [0] later in the article, it's much more weighted towards public valuations & has fewer subjective areas, with the cost being that it can be gamed if certain properties were sold cheaply (but then that's an auditing issue). No solution would be a silver bullet, but it's 70% silver, and that's good enough to start from. [0] https://www.gameofrent.com/content/can-land-be-accurately-assessed#5-mass-appraisal-methods https://www.gameofrent.com/content/can-land-be-accurately-as... > This is an interesting question with the fires in LA right now. Is the land still as valuable as it was before the house burned down, minus the rebuild cost of the house? Or is the value intrinsically tied to the community that was there but no longer is? IMO, the land value is lowered because of the destruction of the properties built on top of it, on top of the rebuilding costs that will come later. > Or is the value actually higher now that a developer can come in and remake an entire neighborhood? Not until (a) the land is actually developed, or (b) the market reflects that decision back onto the land values for that area.