Starting Off With Real Estate Math

There are 43,560 square feet in one acre, and there are 640 acres in a section of land. The question arises regarding land uses and valuations. Commercial land is a higher economic use than a similar size residential-sized lot. In the course of planning, develop­ers study the market demands and the appropriate use of a parcel of land and determine the best land use before buying. The planning and zoning process, which I learned after my house buying experience, incorporates the information learned along with the market demand to create the highest and best use. With that said, consider the math for a parcel of land. It may look something like this:

Usually land owners sell large parcels of unzoned land in areas outside real estate mathtraditional development cores in bulk at a per-acre price. In urban areas, commercial or multifamily property is usually sold by the square foot. It’s really a convenience because it all reverts back to the dollar amount paid for the land, the ultimate sales price, and profit. This practice is convenient for both the buyer and seller. It’s similar to the way we use inches as a measurement division of a foot. For example, rather than say it’s one-quarter of a foot, we say three inches, which is easily understood. Per­haps smaller measurement practices were used to influence a buyer’s percep­tion of the amount being paid for the product. It is like figuring out why gold is sold by the ounce and not by the pound. At the end of the day, it’s perception.

Many other projects followed for me. I developed everything from business parks to large, master-planned communities. The lesson I learned through it all was to plan and divide the land, visualizing what a property could be and what it “wanted” to be. A residential community wants a compatible use like a grocery store, restaurant, pharmacy, or other convenience. That means forcing a prop­erty to a higher-return use doesn’t make sense if it doesn’t blend and fit into the surroundings. You’ve driven around your town and seen buildings that don’t fit. The right products in the right places feel right and look right, and the neigh­bors know that. I saw how my friend, Joe Beer, went house-to-house to let the neighbors give input, to ask them questions, and most important, to listen as he petitioned for rezoning. This is a good practice particularly if you do this with forethought and patience and are willing to modify and compromise and he sensitive to the neighbors. You may actually find throughout the process that the land you bought by the acre may indeed be sold by the square foot.

real estate math 02Let me share some of my experience, I was involved a few years back in the sale of a site for a post office. The buyer wanted an environmental report to ensure there were no hazardous substances on the site. This is very typical. But as my partners and I were working our way through the due diligence process with the buyer, an environmental problem came to our attention. Although the issue seemed to possess a very low chance of causing any real problem, the inspectors sent over a backhoe to test the area. During the test, a sample of soil showed a completely new problem: The sample contained oil. Impossible, we thought. So, they tested the same sample again with the same results. Perplexed and bracing ourselves for a costly soil remediation, which given the past use of the property seemed un-fathomable, we decided to take a walk around the property. Thank goodness we did this. While we were walking by the hack hoe, one of us noticed it had an oil leak. Upon further inspection, the oils matched up with the leaky equipment. Retested with a new backhoe, the soil turned up clean as originally expected. Walking the site can make all the difference. Hands on requires a physical look, not just reading a report.

Starting Off With Real Estate Math
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