The Importance of Getting Your Offer Right
If your land offer is too high, you’ll get sellers saying yes, and you’ll get some contracts. The problem is that your buyer pool might be slim if you’re overpriced. And if you’re asking price is perceived as inflated too often, buyers will not want to look at your future deals.
Another consideration is time and energy- You don’t want to waste your time trying to sell a deal that is priced too high.
Thirdly, if you discover that you’ve offered too much and you have to go back to your seller and ask for a price reduction, your seller will not be happy. You might get a price reduction, or you may have to cancel if the seller does not agree to a lower price..
This is why it’s important to learn the skill of comping and property and market analysis so that you can maximize the potential of your seller leads and get deals sold and closed.
How to Calculate Your Land Offer
In a nutshell- find comps for similar properties nearby, establish an estimated market value, deduct your desired profit from the estimated value, and you will have your maximum offer amount. Calculate 60-80% of that number, and you have your initial land offer to the seller. Offering 60-80% leaves room for negotiation.
There are multiple tools and methods for comping and arriving at an estimated retail price- Zillow, Trulia, Propwire, Propstream, Tax (assessed) value, and the 10% rule are what I’ll cover in this post
Platforms for Calculating Your Land Offer
You ideally want to find comparable properties, or comps, within a mile or two of your subject property, and sold within the past year. If comps are scarce, then you might have to expand the distance from your subject property. You don’t really want to go back in history more than 18 months to 2 years, values can change a lot over time.
Zillow is free and in urban areas, you can usually find a few comps to help you calculate your land offer. Search your area or the property you’re comping, filter for “lots/land” and property type “sold”.
Trulia is similar to Zillow. Same search parameters- land, sold.
Propwire– This is a free platform. You can type in your property address and then click on comps.
GIS– This is found by searching your prorty’s County + GIS. Useful for checking things like slope, flod zones, taxes and more
Propstream– This is a subscription service that works very similarly to Propwire- type in your address, and under property details you will find comps.
Once you have a few comps- properties in the same area, roughly the same size and features, then you can calculate your land offer.
Land Offer Calculating Methods
Averaging the comps– If you’re able to find 3-4 comps that are within a pretty close range, then you can take the average of those. I’d recommend rounding down, or going with the lowest comps. For example if you have four comps and they are 35k, 34k, 32k and 31k, maybe go with 31k or 32k as your estimated retail. It’s always good to be on the low side. If your property had positive aspects, maybe you can go with the higher end. We’ll discuss those later.
- Range- inside of 1 mile from the subject property is ideal. If there are no comps inside of a mile, then you can expand your range. Note that the further you go from the subject property, the less likely the comps are to be a match. One you get into different subdivisions or across major roads values can change.
- Time frame- Preferably you want comps from within the past 12 months. If you can’t find them, you can go back 18 months or 2 years, but they may be less accurate numbers as the market changes.
- Zillow trick- if there are no land comps, but there are new houses in the area, click on the new house listing and scroll down to price history. There may be an entry from when they purchased the lot prior to building. This will tell you what a builder paid.
Another note- throw out any outliers. If you have 35k, 35k, 32k and 50k. Throw out the 50k. Same with a low number, such as 10k in this scenario. It could have been a gift or a family transfer.
Tax Value– Often you are safe to offer a % of tax or assessed value if you are unable to find any comps. I find most buyers won’t pay more than tax value unless it’s a hot area. For example, if a lot has a tax value of 17k, and you want to make at least 5k profit. You could offer 10k to the seller. This leaves 2k wiggle room and a max of 12k you could commit to. In this scenario you’re projecting that buyers will pay you tax value or greater.
The 10% rule- This one, like tax value, is not a guaranteed measure of what buyers will pay, but often puts you in a good ballpark.
How does this work? Look at what houses have sold for near the lot, Or if there are no recent solds, then look at Zillow estimates of value. Take 10% of the average home value and use this number as a benchmark for estimated retail value of the lot. For example, if houses are averaging around 350k sales price, then you can project that the lot will sell for 35k. Throw out high and low outliers. I’d also recommend going on the low side. Maybe use 32k as your estimated retail to give yourself margin for error.
Other Factors to Consider When Making a Land Offer
Negatives– Factors that may make land worth less. If these are present, then offering lower is a good idea.
- Railroad tracks, busy highway or road, landfill, factory, cemetery nearby
- High crime neighborhood
- Extremely low home values
- Slope greater than 15%- you can find slope on the GIS site for the property
- Flood zone
- Private road or a lot that is behind another property [flag lot]
- Excessive trash or debris that needs to be removed
- Heavily wooded lot- there will be a cost to clear it of trees and brush
- Excessive back taxes or liens owed
- Easements and encroachments
Positives- Factors that are in your favor. You can feel more confident offering up to your max or even beyond.
- Flat and cleared lot
- Existing well and septic on the lot
- Existing water and sewer taps on the lot
- Existing driveway/ culvert
Deal Breakers– Reasons to pass on a lot
- Landlocked- no road access or deeded right of way
Finalizing Your Land Offer
Once you’ve done your research and established your best estimate of retail value, then the next step is to deduct what you want to make and then offer 60-80% of the remaining amount. For example; If 30k is your estimated retail and you want to make 5k minimum, then your max offer would be 25k. In this case you might offer 20k. This leaves space for negotiation with the seller. If they agree to your initial offer, then great, you’ve got a chance to make a larger profit!
Good luck with your offers! Leave questions and comments below if there’s stuff you’d like to know more about.
Check out my free ebook on land investing and also my podcast, Cool Wholesaling and LAnd Deals for more tips and strategies