What Is My Land Worth?
Very often, contract negotiations get hung up on two important, but related issues: price and entitlements. Why are these issues related? Because to a buyer, land has far less value without entitlements than it does if fully entitled. Most sellers, however, believe that they are giving away their land. The result is irresistible force meets unmovable object.
Too often a negotiation progresses with a buyer offering a price that is attractive to a seller, but with contingencies for all necessary zoning, land use, and other development approvals. When the seller looks at the time line for these approvals, the offer comes back with the approval date crossed out, the contingency watered down or eliminated, and the closing date changed to 30 days after the due diligence period. The seller doesn’t think to lower the purchase price in exchange for these material deal changes because the seller thinks that his or her property has the same value to the buyer.
I recently represented a client who made several offers on different agricultural properties in a rural county north of South Florida. The client’s intent is to develop any one or more of these properties for multi-family use. Each property is owned by different local owners and each offer was made with the same contingency – that closing would occur after the client obtained all necessary approvals, including plat, site plan, zoning (with variances), and environmental, to construct the maximum number of residential units on the property. We anticipated that the process would take twelve months (including design), but every seller we approached was only willing to give us up to 90 days due diligence and 30 days to close. In one case, the seller exclaimed, “It’s only a bull pasture”. No one understood that their “bull pastures” weren’t worth the money offered, but would be worth the price paid if we could develop 200 or more units on the property. As a bull pasture, perhaps someone would pay 10-15% of what my client was offering.
After three deals fell apart, one seller decided to accept the price for land that would be entitled and accept the risk that the approvals might not come through. The seller understood that to get that value, the client would spend tens of thousands of dollars in engineering, design, and legal fees, and therefore, would have more at risk and an incentive to be successful. The buyer’s success would be the seller’s success.
If beauty is in the eye of the beholder, the value of land is truly in the eye of the developer. While an owner might have certain preconceived ideas about his land value, it is a good idea to work with creative buyers and allow them to obtain entitlements prior to closing so as to maximize the sale price.