Evaluating Land Development Opportunity

Evaluation Methodology

Evaluating the suitability of land for the intended purpose can be broken down into two main areas. The breaking down part is easy, the steps within each area can be a bit more complex. Each of the following two areas should be covered as thoroughly as possible during inspection and before closing.

Area #1: Objective Evaluation:

Objective evaluation considers the things that can be measured. If we know there are 43,560 sq. ft. in one acre, then we know that a piece that is 108,900 sq. ft. in size, is exactly 2 ½ acres. If we have a plat map as an additional tool, we can determine not only the size of a property but also its shape. By themselves single objective measurements are helpful in one sense, but objective measurements must be combined to see, if in their totality, a property is viable for the intended purpose.

Area #2: Subjective Evaluation:

Subjective evaluation looks at the intangible qualities of the property. This involves making value judgements based on the feelings of whoever is doing the evaluation.

Using our 2 ½ acre example above, if a rectangular shape is thought to work for the intended use, then a value judgement must be made for an irregular shaped piece to see if that is also acceptable.

Objective evaluation:

We all know every piece of land is unique, so the considerations for one parcel will be different for another. I think the main barrier to a thorough objective evaluation is typically the failure of a prospective buyer to bring the right team of experts into the evaluation. This is almost always due to cost.

The thinking is that to bring a civil engineer, land use attorney, environmental consultant etc. into the initial planning would be costly and useless if you don’t move forward. I disagree, since I believe that the cost outlay for whoever is needed for the objective evaluation is minor compared to the cost of buying a property and then being unable to do the project. I have to admit though, that I have felt this financial pain when paying for experts and eventually walking away from a deal.

For a newbie in land development I would suggest finding the right experts and asking for a feasibility meeting at no cost. Most engineering firms have staff that will be willing to attend at least one meeting at no cost since they hope to get the business for the project. The “no cost” part must be made clear during scheduling however.

With the right team of experts providing objective facts, an investor can accomplish this key goal: obtain the expert advice of the collective group. By doing this the investor has the benefit of multiple brains, looking at it from their individual areas of expertise. This obviously seems better than noodling the whole thing on your own.

A final thought on objective evaluation is that there will probably not be a conclusive recommendation from the experts unless they can clearly see something won’t work. Making the final decision to move forward, along with the risk involved, is yours my friend.

Subjective evaluation:

The best point to make first is this: don’t proceed to this step until the objective evaluation has been thoroughly conducted. It must be something in the water, but land developers love to rely on gut instinct. Unfortunately, there is many a testosterone-fueled investor that has made his decisions based mostly on unrealistic optimism, who got burned later.

Anyway, assuming the fact-based material is at hand, now it’s time to determine if you go further. There are no absolutes in a subjective evaluation, it’s an opinion. Thinking, judgement, experience and expectations are used that are independent of the objective facts already collected.

If I know a project can be done by factual analysis, I ask myself if this is something I want to do and will the finished product be marketable for a satisfying profit? Is the grind of pushing the project through to completion worth the emotional toll on myself and others? What other areas of my life are being put at on-hold or affected if I do this? Is the effort going to produce something I can be proud of? Does it meet my overall business objectives?

Interpretations:

Personal interpretations are something to look at closely. By combining the information from the two areas discussed above, one guy will see the glass half full while the other might see it as half empty. This is where investors need to have done an honest assessment of themselves and their capabilities, since in fact, the case for half full or half empty most likely depends on the skill set and fortitude of the guy involved.

Know yourself and set goals that are a stretch but realistic, since the final outcome based on one’s interpretations will be dependent on the true capabilities of that same guy.

Wrap up:

Distinguishing between objective facts and subjective opinions is the essence of the two areas covered here. A wise investor blends the objective facts with subjective opinions and hopefully arrives at a sound judgement about the risk / reward of a potential investment.

Be wary of the impulse to act on gut and don’t be afraid to bring in people with experience - folks who have done it before. Being able to distinguish between facts and opinions, then blending them for a sound business decision has been paramount to any successes in land development that I have had.