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One of the most important questions you'll have to answer as a land investor is this:
"HOW MUCH SHOULD I OFFER FOR THIS PROPERTY?"
This is an important question because your offer price has everything to do with your ability (or inability) to make money on each deal.
With this in mind, I'd like to explain the basic math I use to formulate an offer price for any given property.
The Challenges of Pricing Offers
There are several challenges with formulating offer prices.
Even if we assume we've made a perfect valuation (which is rarely the case because valuing land is often tricky and subjective), our offer price may go higher or lower based on:
The desirability and uses of the property.
The market demand and speed of selling where the property is located.
If we're willing to make any improvements or changes to force appreciation, the property's value will go even higher than it's currently worth.
If the market is hot and/or the property is highly desirable with several potential uses, we will have a reason to offer more money.
On the other hand, if the market is slow, if the uses are limited, and if we're not planning to make any changes or improvements to the property, we'll want to stay more conservative with our offer price.
Another challenge with pricing offers is that the market is always changing.
The market was very slow when I started investing in land in 2009. I could offer absurdly low prices and get plenty of offers accepted.
However, as the years have passed, property values and the demand for land have increased, and the land-flipping industry has become more competitive. Making absurdly low offers doesn't work as well as it once did. If I wanted this business to keep working, I had to offer more and work with thinner margins.
Depending on how I determine a property's market value, I'll typically adjust my offers up or down as a percentage of what I think it's worth.
The Sliding Scale Offer
Depending on the competitiveness of the market where I work, the highest and best use of the property, and how quickly I think it will sell, I use varying sliding scales to determine offer prices. The offer ranges will change based on what I believe a property is worth.
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