Determining Highest and Best Use for Land Values

During the recession nearly a decade ago, many real estate investors began buying up vacant land lots with plans to keep them until the economy improved.

“The lucky ones who had the cash were able to buy vacant land at pretty favorable rates; pricing was attractive," says Phil McGinnis, an accredited land consultant and member of the Realtors Land Institute. "Now we're seeing development from those landholding speculators as prices go up," he says of land owners who are selling those plots of transitional land to developers or building on the land themselves.

Undeveloped land often attracts investors looking for a low-maintenance, hands-off investment. Generally, if the land is considered quality—it is situated in a prime location, has good soil, and boasts access to utilities—it will increase in value over time.

It's often cheaper to buy undeveloped land than to purchase an existing development. Still, the buy and hold strategy is a slow way to earn a profit, as it can take years for the area to become popular or for the market to evolve.

Larger profits come in the form of transitional land investments, where real estate investors work with professionals like land appraisers and those who conduct feasibility studies to determine the highest and best use for a property.

“The highest and best use is always one of the key factors you have to employ," McGinnis says. “Whether the land is residential or farmland, you have to recognize what the trends are going to be."

Often, the highest and best use involves transitioning the land from its current use—as a family farm, for example—to a commercial use such as a multifamily residential development or a commercial shopping center. Each property is unique, and therefore the process for determining how to transform the land to maximize the return on investment is complex.

Here are some of the factors to consider, according to land consultants in the field.

Know Local Market Trends
“When you're looking at transitional land, you always need to look at growth patterns and demographics," says Jeramy Stephens, an accredited land consultant and the national president of the Realtors Land Institute. He helps clients determine which areas are growing and transitioning from rural land to more urban and suburban environments.

It's critical to identify what's needed in a certain market, especially in a transitional area. Stephens encourages clients to think about what types of services are needed in the area that will be beneficial and serve the public while also generating profits for the developer. This information will help you determine the highest and best use for the property.

Beware of Barriers
When considering an investment in transitional land, it's important to identify barriers—both natural and physical.

“Look at the natural barriers—do you have rivers running through or near the property, wetlands, or unusable land?" Stephens asks.

Infrastructure is important, too. Figure out how close the highway is, and whether there are on-ramps and off-ramps nearby. Plus, proximity to rail lines is important too.

“For example, if you bring in an automobile manufacturer, you need rails to ship the cars across the country," adds Stephens.

For industries that require shipping products by air, you'll want to know how close the land is to a local, domestic, or international airport.

Don't Forget Sewer Systems and Utilities
A mistake many transitional land investors make is not adequately researching the property's access to proper infrastructure, such as sewer, water, and electricity lines.

“If you can't get sewer and water, and roadways can't accommodate a development, that will limit the investment," McGinnis says. “The trick for the investor is to find out where the infrastructure is moving."

While you can probably install your own water lines and sewer systems, it will cost a lot more than building in an area that already has the infrastructure in place or has plans for the government to build it out soon. Sites that operate on well water or septic systems are not as appealing, notes McGinnis.

Getting a proper feasibility study before investing in transitional land can save you time, money, and aggravation when it comes to your investment.

Avoid Zoning Battles
It's also important to consider local zoning requirements if you're planning to transition a residential property into a commercial or retail use, or building an industrial park or warehouses.

“I hear terrible stories about how long it takes to get zoning and how difficult it is," McGinnis says. When a town or city's comprehensive plan is already in place, however, getting the proper zoning can be much easier and quicker.

Investing in transitional land offers opportunities to transform the property into a profitable commercial or residential use. They key to success is working with an experienced real estate professional who can help you conduct a feasibility study for the property and determine the highest and best use given the location, natural barriers, access to utilities, zoning requirements, and of course, market trends.