Land value is formed by the land type, scarcity, and effective demand. And these factors are often in change. In order to make a correct land valuation, it is necessary to do a careful analysis of these factors and correctly judge their changing trend. At the same time, due to the fixed location and limited area, the land market is an imperfect competition market, that is, an inadequate market.
There are various methods for evaluating land value, and different methods are based on different economic principles. In order to make the price of land parcel with individual characteristics more accurate, in practice, reasonably evaluate the value of a land need to base on the condition of the land parcel. The results obtained by different methods should be checked with each other to determine the final valuation price of the land parcels.
At present, there are many methods to evaluate the market value of land in United States, among which the basic methods are sales comparison method, cost method, income method, and profit method.
Sales Comparison Method
The sales comparison method is a valuation method that compares the land to be valued with the land of the same type that has been traded recently. According to economic theory, in the same market, goods with the same utility should have the same market price, that is, there is a complete substitution relationship. The price of two or more goods in the same market will converge because they compete with each other. The price of the land to be valued is obtained by correcting the known price of the similar land that has been traded. It is only applicable to the region with a large number of transaction cases, and the transaction cases have a strong correlation and substitution with the cases to be evaluated.
The cost method first calculates the sum of the various costs of land development, and then adds certain profits, interest, and taxes to determine the value of the land. The cost method examines the value of land from the perspective of investment cost, but it cannot completely reflect the true value of the land. Because the value of land mainly depends on the income generated in the future by using the piece of land, rather than on the cost of the land investment and transformation. The Cost Method is especially suitable for the valuation of land with neither income nor many transactions, especially for the valuation of newly developed land.
The income method is one of the common methods of land valuation. It is the basic method to evaluate land or other assets with income property. Since land is sustainable, people can expect the income of land. This is the price of land when it is converted into its current value from the net gains that will be made over the next few years. When this method is used in land valuation, the acquisition of land is regarded as an investment, and the capital invested is the price of land which can generate revenue in the future years. This method is most suitable for the valuation of land for the purpose of obtaining revenue. It is most suitable for the valuation of commercial, leased, or potentially profitable land, and less suitable for the valuation of non-profitable land.
In the profit method, the land value is determined by deducting the construction cost, professional fees, interest, profits, and taxes from the transaction price of land. The theoretical basis of the profit method is basically the same as that of the income method, which is the calculation of future income. This method is applicable to the valuation of the land to be developed and the real estate to be demolished and transformed.