The value of land

There are many things to consider when you think abut the value of land. The most direct value is the sale price, but unfortunately you must sell it to test the value that way. And you may not get as much as you can, even then. I will discuss sale and sale forced by government, which is called condemnation, at the end of this article. Selling is the final benefit of ownership.

The second value of land is its value in producing income. This is ascertained by its rental value and using a multiplier. Even what multiplier to use is subjective. Bankers have a formula that gives the value of a series of deposits or payments, but this is usually for a specified period of time.

Land may be more value to you in producing income than renting. However, if you must have the knowledge and the wealth to put improvements, such as fences, barns, signs, a house, machinery and livestock with it to develop it for a farm. Or you may choose to do other kinds of development. You must also have a lot of initiative and time to do any development, though. Most people lack one or the other.

Timber is another way raw land can produce income. However, it requires some management, too.

A third value of land is as a home. Most people in this day who own a tract have a house on it. Your most important need is for food for your family. When that is met, your family needs a place to relax, sleep and be comfortable. When you use a tract as a home, you become attached to it beyond its value as property. Other people identify you with it, and judge you to some extent by its value and how you keep it. If you own a tract that is home, it will likely be yours for years and it gains a value to you that is beyond what it would have to someone who might buy it.

Speculation on the increase in value of land is another common use. In my lifetime this has been a one-way street, always increasing in dollars, but that is not the case over some time intervals, and may not be true in your lifetime. Another very important factor to be considered is the decrease in value of the dollar. Inflation makes land seem more valuable because the price is denominated in dollars. You want to make time comparisons of price in real money, taking into account depreciation of the dollar through inflation. This is may be done by finding the price at the beginning of the time using the CPI, the Consumer Price Index, published by the United States Government Bureau of Labor. Subtract this from the price at the end of the time period. The difference is the gain in “real money.” The dollar has fallen to one third its value in the last 25 years or so. (This is written in 2005). (See note below.) Short term speculation is safer, and the longer the term, the greater the risk both of greater gain and of loss. If you have other uses for the land you buy, you just have to ride the waves of change in prices. Speculation is probably not justified unless you have special knowledge the land you invest in will change use in a few years or less. Of course you can make a change of use that will increase the value.

Land may also have mineral production value. Under the laws of West Virginia this can be severed, that is, ownership of one or more minerals and the right to produce them its separated from the remainder. This residue is often referred to as the surface, and it is the part that is of most interest to the small owner. The surface estate is less valuable as a result of loosing the right to produce the minerals because it will entail a right of way and drilling sites for the oil and gas producer. At one time, when gas was abundant, the producer granted free gas which went to a house on the farm, but this is being lost as succeeding generations come between the surface owner and the mineral owner.

Water leaving the farm can be expected to be valuable in a few years as more of the earth’s surface is polluted, especially where the water on the land comes from a spring or well. Coal is slow now, but will have value other than for fuel far in the future. It is great starting material for organic chemicals. Other minerals are valuable in some places, and may be expected to provide value where they are discovered.

The development rights, that is, the right to build housing or commercial buildings, can be sold and the farming rights retained. The idea of this is to preserve the land as farmland. The purchaser would be a local government agency or some nonprofit group dedicated to farmland preservation. Check this option out carefully if you decide to take it. It is a one-way street, just as is the sale of mineral rights, but it has its advantages for some families.

Land has recreational value for the family and has potential to attract other people. Hunting, mushrooms and other wild plant gathering, firewood from non-timber trees (selling firewood is not practical since it involves so much time and labor), poles for construction, camping (a very large topic, study it carefully before starting it) and other possibilities are available.

Land can be used to secure a loan, but try to avoid using it that way. The value of the land may be much more than the loan it is used to secure, so be careful. Default on the loan and you loose control of what happens to the land.

Land can be used to set up your own non-farm business, if you have a satisfactory location. This may be related to agriculture or not. Having the land is a significant start. The farm can be a source of materials such as rock, timber and dirt for a business. It can be a site for a business that must be hidden from public view, such as a junkyard or that must be located away from the public for safety. A spot on our farm was once considered for an explosives storage facility.

Market price and condemnation


Of all the ways to value land, the most important to understand is market price. This is the legal basis for value, and is defined as the price paid by a willing buyer to a willing seller. It is determined by a host of factors for a particular piece of land.

The expected use for the land is one. Forest, farming, housing, commercial development for such uses as highway, factories, stores and so on are some possibilities. In this list, if land is suitable for the use later in the list, it would be expected to sell for more than land restricted to an earlier use. This use is referred to as the highest and best use of the land. Location is another factor. If the land is accessible to town or to a major highway, it is more valuable. Obviously the market price is ascertained by selling. How is it established in absence of sale, or in case of a forced sale?

There is an appraisal industry devoted to ascertaining the market value of pieces of land and developments. It is not the same as the real estate industry, which is devoted to locating buyers for property sellers. Real estate often involves a salesmanship factor theoretically not recognized in appraisal. The appraiser chooses three or more similar properties that have sold recently in the same area called comparables and arrives at a fair market value based on the characteristics of the tract he is estimating and the characteristics of the comparables.

The testimony of a professional appraiser is required for condemnation of land for public use and many other legal uses. Note, however, that current use is the basis of condemnation, not the intended future use. If you find yourself in a situation where an appraiser is needed, it would pay you to see a few samples of an appraiser’s work to see how it is done. A word of caution, however. The in-house appraiser, the appraiser who is employed repeatedly by a utility, such as the gas company, or by a government agency, such as the Corps of Engineers, habitually shaves the estimate for his/her employer. (They know which side of their bread is buttered.)

If you face condemnation you might be justified in hiring your own appraiser to put up against the condemning agency. I did a study of condemnation at the Burnsville Dam (a Corps of Engineers taking) and almost everyone who fought the Corps got more for their property if they took it to court. Consider the cost to yourself, though. It is a gamble to not accept the agency offer, but a well advised decision might pay off. It depends on the jury and luck.

If you own land, you are a professional land manager, whether you like it or not.

Note: As this is published in 2008 the dollar is going down like a rock. The CPI calculation has been changed several times in recent years. According to Liz Saunders of Charles Schwab & company, writing in June of 2008, "Over the past 30 years, major changes have been made to the calculation of the CPI due to "re-selection and reclassification of areas, items and outlets, [and] to the development of new systems for data collection and processing," according to the Bureau of Labor Statistics. If you eliminate those adjustments and calculate CPI as it would have been calculated in 1980, it would be nearly 12 percent today.” So a simple calculation using the CPI is not really accurate, after all. This further proves my point: value of land is a very subjective matter.