Land development is the process of preparing raw land for the construction of improvements.
Property value is determined by its highest and best use. A piece of property that can be developed into a regional shopping mall will be more valuable than a property that can only be developed into a single family home. This is because the end use of the former has a much higher finished value than the latter. The value of the materials are more and the expected income from renting or owning the first is significantly more valuable than the second. It all comes down to profit and a return on investment. Generally speaking there is more profit to be made in larger commercial buildings than a single family home. However, the commercial property takes significantly more risk and money to develop.
There are six steps in the process of development.
It is important to perform a feasibility study by researching the supply and demand in a given market and estimating the potential profit of a given project.
The supply is other residential homes and land currently on the market. This includes all land and residential homes for sale, as well as homes that may come on the market between now and the time your potential home is completed, as well as the expired properties that did not sell.
Demand is determined by researching the area’s demographics. It helps to know how many people are moving into the neighborhood and how many are moving out, how fast the homes sell or not sell. If your zip code is expecting growth of 2,000 people over the next year, and the ratio of owners to renters is 50%/50%; that means your market will need to add or absorb 1000 new rental units and 1000 new homes.
You have found a hot market, now all you need to do is find the available land to purchase and develop.
Remember, to have an professional at your site who performs all researches and planning, the better you’ll know your market the fewer surprises you’ll run into later. Many developers have gone broke thinking that they can develop a lot just because the home across the street sold for a certain amount. Market’s change, costs go up and down, and contractors can get busy.
Once you’ve find your site or your area, you’ll want to estimate the potential future profits. This is done by performing a highest and best use analysis.
Highest and Best Use
The highest and best use of a piece of land is determined by answering four questions in the following order:
- Is your proposed project legal?
- Can it be built practically on your site?
- Will your project generate the desired return?
- Does the proposed use represent the use that will deliver the maximum return?
When developing single family homes, find an area that allows that kind of home to be built. Determine the allowed sf to build on two stories, that style home must be able to be built practically on your site.