Land to Value Ratios

We received this question from a local Realtor concerning land to value ratios as they relate to the appraisal process. 

“I remember hearing percentages thrown around with regard to land value vs house value in appraisals for conventional financing.  Is it true that the land can only be worth a percentage of the total price being paid and if so, what is a good percentage/number to be working with as a rule of thumb?”

Great question, thanks for submitting it. 

As for the land to value ratio, there really is no number set in stone by appraisers or the appraisal profession.  From an appraisal point of view the land value will be based on comparable sales and the Highest & Best Use of the land.  In some cases, the land value will comprise a large part of the overall value of a piece of property.  This will depend on location, permitted usage, etc.  An example of this would be down the Shore where the land value makes up the majority of the of the total improved value a given property.

From what I understand, the idea of a percentage is something that created by loan underwriters and evolved out of the Great Depression.  At that time, the old home loan organizations lost millions making loans on vacant parcels.  Now, when the market goes south, the last thing a bank wants to have in it’s portfolio are loans on vacant land.  Vacant land is the one of the hardest things to get off the books in a down economy.  Hence the 30% rule grew as an arbitrary benchmark.  If the site value was more than 30% of the total value of an improved property, the property was considered to have too much land.  This is also why many lenders will not touch unimproved land for lending.

That being said, generally speaking, most loan underwriters are looking for a land to value ratio of 30% or less.

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