Valuing Older Properties - Land-to-Building Ratio $/SqFt
August 31, 2020
By Michael P Jacobs, MA, MAI, SRA
Land-to-building ratio can tell you something about the value of older properties under the right conditions - especially with auto dealerships, industrial yards and even freestanding commercial.
Long ago I learned of a relationship between land-to-building ratio and price per square foot of land, but it took years for me to finally include it in my tool-kit. While not especially credible as a statistical method in all cases it is good for a reality check.
Consider this: improvements decrease in relative value as they approach the end of physical and/or economic life so that the land-to-value ratio increases. The new building value usually exceeds the land value, but with time the relationship flips. Eventually, the building has no (or even a negative) value.
So, I always consider the price per square foot of land in my analyses. If the properties are somewhat comparable or at least share similar location attributes, the price per square foot of land can be more reliable than the price per square foot of building area.
The relationship is not linear, but over the last ten years incorporating this analysis in appraisal reports I’ve found that it is almost never useless. For more information about this just drop me a line. I’ll leave you with a typical graph from one of my appraisal reports so you’ll get the idea.
Click the graph and it should open the redacted appraisal report, and then use the PDF keyword search for "Land-to-Value Ratio and $/SqFt" to see the whole analysis and how it fits into the appraisal.