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Vaquero
LSU Fan
Member since Dec 2012
124 posts

Valuing a Partially Developed Residential Property
Hey guys, long time lurker of the Money Talk board here. I have a question about how you would go about valuing a partially developed residential property. When underwriting locations for a commercial property, the highest and best use of the property is what's considered from the beginning. Once that's determined, I'm assuming you project out the income the property will accumulate in the future to give you the cash flows you need to determine whether or not to pursue the investment.

So say you own residential property and have been selling lots individually for a number of years. You also occasionally build the home for the individual, but the buyers of the lots have full say in who the contractor will be. If you have x# lots remaining in the development, how would you go about valuing the property? Would it be the individual price of each lot times the number of lots remaining? Could you project cash flows for any fees received from building the homes in the future?

Hopefully this makes some sense. If I'm incorrect in any of my assumptions please enlighten me. I would love to hear the boards thoughts. Thanks.
This post was edited on 12/4 at 2:13 pm


LSUFanHouston
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NOLA
Member since Jul 2009
12627 posts
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re: Valuing a Partially Developed Residential Property
Is this for your own personal desires to figure out what it is worth, or is this to be used for financing or a sale to another party?


Vaquero
LSU Fan
Member since Dec 2012
124 posts

re: Valuing a Partially Developed Residential Property
Unfortunately I do not own the property, but I am connected to someone in a similar situation. With that said, I wasn't told the reasoning behind their situation.

When you ask if this could be used for financing, do you mean as collateral for a loan for another investment of some sort? I don't believe that would be the case if so.

If I had to guess it's the former, and he's attempting to figure out the value of the property to determine whether or not selling to another property would be worthwhile.


Hermit Crab
Gonzaga Fan
Under the Sea
Member since Nov 2008
5920 posts

re: Valuing a Partially Developed Residential Property
Don’t think you should include any building income as part of the property value unless they are contractually obligated to use the seller as a builder.


LSUFanHouston
LSU Fan
NOLA
Member since Jul 2009
12627 posts
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re: Valuing a Partially Developed Residential Property
If the appraisal is being used for anything other than personal knowledge of the owner, I think the only you could do is value the lots. If there are any binding contracts, you could add that value as well.

If it's just for giggles of the current owner, maybe he could use past experience to determine how many lots are likely that he would develop as builder, and a potential income stream.


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CoachChappy
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Boudin Capitol of the World
Member since May 2013
19199 posts

re: Valuing a Partially Developed Residential Property
quote:

If I had to guess it's the former, and he's attempting to figure out the value of the property to determine whether or not selling to another property would be worthwhile.


I would imagine this is his intention as well. He has a couple of options:
1) Hire and appraiser and pay them their fee. It's between $300-$600
2) Do all of the leg work himself. Look at the comps in the area and see what property values for lots like his are going for. Not what they are listed for, what they are actually selling for.


Vaquero
LSU Fan
Member since Dec 2012
124 posts

re: Valuing a Partially Developed Residential Property
That makes sense, thanks for the input


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Vaquero
LSU Fan
Member since Dec 2012
124 posts

re: Valuing a Partially Developed Residential Property
Good deal, I'll forward the information along.

Last question: how would you discount the future cash flows of selling the lots to get a present value? Maybe I'm thinking about this the wrong way
This post was edited on 12/5 at 12:12 pm


CoachChappy
LSU Fan
Boudin Capitol of the World
Member since May 2013
19199 posts

re: Valuing a Partially Developed Residential Property
quote:

ast question: how would you discount the future cash flows of selling the lots to get a present value?




Oh I just thought of a 3rd way, have a friend call a real estate agent posing as a potential buyer of the property. See what they think you can get it for. Terrible but it would work


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Shankopotomus
New Orleans Saints Fan
Who Dat Shack
Member since Feb 2009
18911 posts

re: Valuing a Partially Developed Residential Property
Basically, the question you have about projecting cash flows vs. the vacant lots is CRITICAL to getting a proper appraisal done because:

1. That determines the appraisers basis for the appraisal in the first place "the appraisal problem"

2. that would be part of the HABU (Highest and Best Use) valuation ... as to whether the property is most valuable with or without houses etc. (likely significantly more valuable with occupied housing, but just in consideration of your question)

In other words, you could have an appraiser value it EITHER way - with the expectation of building and without - as a possible alternative value opinion


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