Figuring out what a Country or Homestead property is worth can be done by anyone willing to learn a system to do so.
In this article I will teach a system that allows anyone to figure out the value of a Country or Homestead property.
How to figure what a Country or Homestead property is worth involves:
- Understanding factors affecting property values
- Understanding economic factors and interest rates
- Learning to gauge market conditions
- Understanding what is most important in Country or Homestead property
- Learning to compare properties
The following article will explain how to figure out what Country or Homestead property is worth.
This will be a tremendous aid when you go to buy Country or Homestead property.
Understanding Factors Affecting Property Value
The first step in learning how to figure what a Country or Homestead property is worth is understanding those factors that affect property value.
I will discuss these factors in detail for you.
Supply And Demand
The most basic factor determining the price of any item, be it land or otherwise, is the Law of Supply and Demand.
Another way of saying it is the relationship between supply and demand determines value.
If the demand is greater than the supply, prices rise.
If the supply is greater than the demand, prices fall.
As the American Humorist Will Rogers once said,
‘Buy land, they’re not making any more of it!’
There is a finite supply of land available because they are not making any more of it.
From that aspect one would expect land prices to always rise.
However, that is not the case!
The availability of land for sale fluctuates as large ranches, farms and tracts of land are subdivided into smaller parcels and placed on sale to the public.
This subdivision of land can increase the supply of land relative to the demand and prices can actually fall as a result.
Just a 30 minute drive from our homestead is a vacant subdivision of 5 acre lots.
Each lot is fenced, on a paved road, has electricity on site and each lot has a well already drilled that produces at least 5 gallons of water per minute.
The subdivision is 10 years old but no lots have been sold. Why?
The large parcel of land was bought at the peak of the Real Estate Market.
Subdivided, roads made and paved, electricity run to each lot, wells drilled.
And the lots fenced just prior to a Real Estate Bubble bursting.
The demand for 5 acre lots exceeded the supply but the developers did not factor in the economic situation.
The result can be viewed by anyone who drives by this vacant subdivision.
All locations are not valued the same.
Real Estate classes taken by future Real Estate Brokers and Agents say that the most important factor in a property is Location, Location, Location.
Location, as taught to future Real Estate Brokers and Agents usually means the property needs to be near to schools, public transportation, stores, medical and dental care, recreational activities and a job location.
When you are looking for Country or Homestead property that type of location may be well down on the list of important factors.
Other factors such as the presence of water, type of soil, level land and south-facing are more important.
In an urban or suburban scenario, accessibility can mean a short walk from a bus stop or a place to park a car with easy access to good roads leading to stores, schools, medical and dental care, a job, or recreational facilities.
In Country or Homestead property situations accessibility can mean having a legal easement across a neighbors private property to get to your land.
I go into detail about this in “Easement To Property (Legal, Recorded, Shared, Prescriptive).
Accessibility can also mean knowing if the road to the property is a County Maintained Road or a Private Road.
There are several critical aspects to consider when choosing a homestead that you can read about in “Homestead – Critical Aspects And Important Considerations”.
If you have school age children and do not want to homeschool them, accessibility in your case could mean knowing where the school bus routes are.
House Type, Style And Age
Is the house a ranch style, a 2 story farmhouse, does it have an attached garage or is the garage detached.
Is the house fairly new and well insulated or is it an older house with unknown insulation R-factors?
We once rented a 2 story house with an attached garage that was heated with an oil furnace.
The house had been added onto by a former owner who added some 950 square feet to the house.
After adding onto the house there was no upgrade in the size of the oil furnace or the size of the duct work distributing heat throughout the house.
The house was always cold in the wintertime, even with the thermostat turned up pretty high.
When the roof needed replacing we discovered that the insulation in the roof was only half as much as recommended for that latitude!
More heat is lost through the roof than through the walls and floor combined because heat rises.
This house was in northern snow country.
The combination of a too small of an oil furnace combined with duct work that was also too small and insufficient ceiling insulation in a large portion of the roof made for a very cold house in the wintertime.
That house did not look very old.
It was some 30 years old in its original form and less than 15 years old in its added on to form.
But substandard insulation and a substandard heating system markedly reduced that house’s value.
Upgrades to a house can improve the homes value.
New roofs improve the homes value by 80% of the cost of roof repairs.
Upgrades to kitchens and bathrooms improve the homes value by the cost of the upgrade if done well.
A 1/4 acre or a 1/2 acre city or suburban lot on a paved street with city water and sewer, public electricity, curbs, maybe a sidewalk in front, and a short distance to stores and schools can cost as much as 5 or more acres in the country on a gravel road with the only utility already present being electricity.
As a rule of thumb; the larger the tract of land, the lower the cost per acre will be as mentioned above.
If the land does not have public water and sewer there will need to be a water source, usually a well, developed and a septic system installed.
If the Country or Homestead property already has a water source and septic system or has been approved for a septic system, the value and the price of that land will be more than raw or undeveloped land.
There are 5 Key Factors that I talk about in “Choosing Homestead Property – Water, Soil, Trees, Location” that need to be present when choosing Country or Homestead property.
Planning And Building Regulations
Many rural areas have little and some have no building regulations once outside of a city or town.
This means that it is a good idea to have some basic understanding of construction techniques and building codes.
You need to look for a complete foundation under the entire house.
If there are portions of the house that do not have a foundation under it, you may have trouble being able to finance the property.
Also, make sure to look for cutoffs on sinks, toilets and refrigerators that have ice makers in them that will go with the house.
Cutoffs are small valves behind toilets and inside the cabinet work underneath sinks and behind refrigerators with ice makers that allow you to turn the water off when repairs or replacement is needed.
If cutoffs are missing, it is a sign of cheap construction and you can bet that there are other areas of construction that were skimped on.
In rural areas with little or no building regulations or inspections you need to check for the ease of opening and closing of windows and doors.
See if the floors are level or if they give when you walk on them.
You can check the level of non-carpeted floors by setting a marble in the center of the floor and seeing if it rolls toward one side of the room.
Check to see if all light switches control something and that all lights work.
When you spot problems, the value of that house goes down.
Understanding Economic Factors And Interest Rates
The economy plays a role in the prices of Country and Homestead property.
During a Recession, such as 2008 to 2012, local economies with many real estate and construction related jobs had large decreases in Real Estate prices.
Wages and income growth in the area plays a large role in whether Real Estate prices increase, decrease or stagnate.
Unless the area is a popular year round resort area the local economy by and large controls Real Estate prices.
As an area recovers from a Recession, the Real Estate prices tend to increase.
However, the recovery period increase in prices can be too much too fast and set the area up for another Real Estate Recession.
Real Estate Bubble
Former Federal Reserve Chairman Allen Greenspan once remarked,
‘You can’t identify a bubble until after it bursts.’
That’s not true!
In Residential Real Estate, even in Country and Homestead Real Estate it is not hard to identify a bubble.
The best way to identify a Real Estate Bubble is when local homeowners could not afford to purchase the homes they live in if they had to buy them at the current price of Real Estate.
Let me give you an example.
In 2006, the County Newspaper in the County where I lived at the time ran a front page article.
The article showed that local residential Real Estate was so expensive that the average worker, even County Government workers, could not afford to buy property.
I had seen a Real Estate bubble before in another State where I had lived.
I knew the carnage a Real Estate bubble could cause.
I had seen good people who got into financial difficulty lose everything trying to hold on to overpriced property.
I happened to talk to a local Real Estate Broker stating that I felt there was a Real Estate bubble and that when it burst a lot of good people would get hurt.
The Real Estate Broker disagreed with me saying that in their 30 years as a Real Estate sales person and with Brokerage experience, the Real Estate Market was right where it should be.
I explained that the definition of a Real Estate bubble was when those living and working in the area could not afford to purchase the houses they currently lived in if they had to buy them today.
The Real Estate Broker disagreed.
I asked if that Broker had ever seen a Real Estate bubble burst and I was told “No.”
I replied that I had seen one burst and that I hoped it did not happen there.
Because that area was a fairly popular resort area it took a little longer for the bubble to burst.
But 2 years later it did burst and property prices dropped by 1/3 on the average before the market stabilized and began to recover.
Identifying Real Estate Bubbles
In trying to identify a Real Estate Bubble, one can learn a lot by looking back to the Real Estate market crash of 2007, 2008.
What precipitated that crash?
There was a push to get everyone to experience the American Dream of Home Ownership.
It was one of those great ideas that did not work out the way the powers that be believed it would.
The problem was the powers that be forgot basic economic reality.
Basic economic reality is the same yesterday, today and tomorrow.
To try and defy the rules of basic economic reality, the powers that be created a set of circumstances that were doomed to ultimate failure.
First the Fed, under Greenspan kept interest rates artificially low.
Banks and Mortgage companies pushed the idea of borrowing the equity in one’s home to the point that home equity was to many people their personal ATM machine.
Then came new forms of borrowing to purchase Real Estate.
These forms had names such as Interest Only Mortgages, Short Term Balloon Mortgages and even Negative Amortization Mortgages.
Money was easy and seemingly in endless supply.
So people who now fancied themselves Investors started borrowing money and pushing up the price of Real Estate to the point that because of the price, Real Estate no longer made any fundamental economic sense.
Then like the old saying before the space age, What ever goes up must come down.
And down it came.
I can drive just 30 minutes and look at the vacant results of broken dreams of people who did not understand basic economic fundamentals.
In that area it took 10 years to make it back to the point of the bubble just before it burst.
What does the economic future hold for Real Estate?
If you see a situation where the current property owners who are still gainfully employed, could not afford to purchase their current properties if they had to buy them now – beware.
Economic Reality is the same yesterday, today and tomorrow.
We’ve already been there and done that.
Question is, did we learn anything or are we just going to have to do it again before we learn?
When we use the generic term interest rates, it commonly refers to the Federal Reserve Interest Rate.
This is the interest rate Banks are charged when they borrow money.
What interest rates banks are charged and what interest rates those who borrow from banks are charged, are two different things.
The spread, the difference between what banks are charged when they borrow money and what you and I are charged when we borrow money from banks, is profit to the bank.
For each 1/4% increase in interest rate charged by a bank to a loan borrower, the monthly payment on a $100,000 thirty year mortgage increases by $22.53/month.
When looked at in this example it is not so bad.
But, when the interest rate is raised by the Fed a 1/4% two or three times a year, to the bank that is a different story.
If the interest rate the bank pays goes up 1/2% in a year, all new mortgage loan interest rate goes up by at least 1%.
If it is a $100,000 loan, the payment goes up $90.12/month on a 30 year $100,000 mortgage for each 1% increase in interest rate.
What if the mortgage loan is for a more reasonable $250,000 over 30 years?
The payments on a new loan increase by $225.30/month for each 1% increase in interest rate.
At some point in time, the increase in mortgage interest reaches a point where property prices have to fall for people to be able to afford to purchase property.
So interest rates play a role in the price of Real Estate.
Learning To Gauge Market Conditions
There are three different types of Real Estate Markets.
They are Buyer’s Market, Seller’s Market and a Stable Market.
This is where there are many more properties on the market than there are Buyer’s for properties.
In this type of Market there is much more supply of properties for sale than there is demand for properties from Buyers.
When the supply is a lot greater than the demand, prices fall.
In this market a Seller may have to wait a long time to get even one potential Buyer to look at his property.
There is a pressure from Seller’s who need to sell and from Real Estate Agents who need a commission to lower prices.
If a Seller has his property on the market but is not in a hurry to sell or does not have to sell, that Seller may not be interested in lowering his price.
Evaluating the property’s value before making an offer is still the best policy.
In a Buyer’s Market there will be a lot of Seller’s who will be willing to lower their price to get a sale.
The buyer is in control and should have no trouble finding Seller’s willing to lower their prices to get a sale.
This is where there is more demand from Buyer’s for properties than there are properties for sale.
There are a lot more Buyers looking for property than there are Sellers who have properties on the Market for sale.
When the demand is greater than the supply, prices rise.
In this type of market it is not unusual for there to be Buyers who need to find a property bidding against each other on any one property.
Sellers and Real Estate Agents love this type of market because sale prices and commissions are higher.
In this type of market most properties sell for the asking price or very close to the asking price.
If there is a bidding war between two or more Buyers for the same property the sales price can be well above the asking price.
If you are having to buy property in a Seller’s Market, it is very important to understand the need to evaluate the value of the property.
Avoid getting carried away by the emotions of a bidding war or you will over pay for a property.
This is a market where there are about the same number of Buyers for properties as there are Sellers of properties.
In this market the Law of Supply and Demand does not favor either the Buyer or the Seller.
This market is also referred to as a Normal Market.
Evaluating the property’s value before making an offer is the preferred method of approaching this market.
Buying A For Sale By Owner Property
There can be several reasons why a Seller is selling his property himself.
One common reason is the Seller was not happy with a Real Estate Agent’s suggestion as to a sales price for the property.
An evaluation of the property’s value can be crucial in dealing with a FSBO (For Sale By Owner) property.
Many times these properties can be overpriced due to unrealistic Seller expectations.
Since there is no Real Estate Agent involved in a FSBO sale, the agreed upon price should be 6%, the average Real Estate Commission, less than if the same property was being sold through a Real Estate Agent.
Understanding What Is Most Important In Country Or Homestead Property
There is a different order of importance of factors in looking at Country or Homestead property than there is when looking for urban or suburban property.
The most important factors in Country or Homestead property, in order of importance are, water, soil, trees, access and location as I explain in “Choosing Homestead Property – Water, Soil, Trees, Location”.
When you are evaluating a property, don’t forget to compare the gallons per minute (GPM) flow of the well or other water source when water is not supplied by a public utility.
I share more about this in “Financing Land – Undeveloped Land, Conventional Loan, Water”
Location, when evaluating Country or Homestead property, does not mean the nearness to schools, shopping, medical care and other factors usually emphasized by Real Estate Agents.
Location has to do with the lay of the land, the elevation of the land and the direction the land faces.
The best land is fairly level to slightly sloping.
Country or Homestead property can have hillsides and even valleys as long as there is enough level or slightly sloping land for a house, outbuildings, pasture if you plan on having stock animals and room for a garden.
If the property is located in the mountains in northern climates the elevation of the land is important.
The best location is on a bench of land 500 or so feet above the valley floor.
This elevation will give you as much as 30 days longer growing season than on the valley floor or above 1000 feet elevation.
If the property is level and not shaded by hills or mountains that is one ideal location.
If the property is in hill country or mountainous areas you need to pay special attention to which direction the land faces.
In the northern hemisphere the best direction the land faces is due south.
This gives the most amount of sunlight for garden growth and for solar generation of electricity if you are interested in solar power.
The next best direction for the land to face is southeast.
This gives exposure to the early morning sun that will warm up gardens plus exposure to mid-day sunlight.
It is also a good location for solar panels.
The third best direction for the land to face is southwest.
This gives exposure to mid-day and evening sunshine for gardens and decent exposure for solar panels.
However, late afternoon sun can sometimes cause wilting of garden plants but there are ways to protect them to help prevent this.
Eastern or Western facing property will have some sunshine in either the morning (eastern), or the afternoon (western), but is much less desirable than southern facing property.
Property that faces a northerly direction is not suitable for a homestead as there is a much shorter growing season, not enough sunlight, and it tends to be much colder which is not conducive to gardening.
If you are in the southern hemisphere, you will need to reverse the directions the land faces from that listed for the northern hemisphere.
When evaluating the price of country or homestead property, the most valuable property faces south, then southeast, then southwest, then east and lastly west.
I do not recommend property facing any other direction in the northern hemisphere.
You need to know if the property can be accessed from different directions and drive to it from each possible access direction.
Visit the property at different times of the day to get a feel for it and, if possible, in two different seasons.
If the property is in snow country, one visit should be made to it when snow is on the ground.
View the property using Google Earth and or a drone to get a clear idea of what is on the property.
This will give you ideas of what to look for when you do a walk over of the property before Closing of the sale.
Visit neighbors and ask them about the property and also about the area.
If there is a garden or orchard on the property keep an eye out for any indication of commercial fertilizers used on the property.
You may see partially empty containers of commercial fertilizer in barns, outbuildings or garages.
If you discover commercial fertilizer use and you want to grow organic produce, you might want to scratch this property off your list.
Because it can take 10 years or more before the land would test negative, if it ever would, for chemical fertilizers.
You want to have an accurate survey of the property with the corners marked.
That is the only real way to know exactly what it is you are purchasing.
If you are using Zillow.com to search for country or homestead property, be aware that the Zestimate given for each property is not a good guide to the value of country or homestead property.
With Country or Homestead property, the Zestimate can be off by more than 50% of the property’s actual value.
Zestimate can be only 5% to 20% off in suburban or urban property.
Do not trust it for Country or Homestead property.
Learning To Compare Properties
The standard method for determining a properties value is to compare the property with comparable properties that have recently sold in the same area.
This is done by comparing the property you are considering with 3 other similar properties.
In rural areas this is not as easy as in city or suburban areas that have more sales over a period of time.
As far as possible, the 3 properties you are comparing to the property you are considering must be equal in as many aspects as possible.
When an aspect of the properties are not identical, you will need to adjust the price up or down depending upon whether the differences add to or subtract from the property being considered.
How much to adjust the value up or down will require some research on your part.
You may need to ask a general contractor the difference between the cost of a single and a double garage for example.
Working through the comparisons can give you a good estimate of the value of the property you are considering buying.
Sources of comparisons:
- Tax Assessors Office: can usually give dates, sales price, and other property information
- Online Databases: using key words such as recent sales of 20 acre properties in County and State
- Local Newspapers: may have quarterly sales of real estate
- Real Estate Agents: If using a Buyer’s Broker or Agent have them do the comparison for you
Property Comparison Chart
I know it can be difficult to determine the value of a property you are considering purchasing.
So in thinking about it I came up with a way that can be of tremendous help to you.
I made up a Country and Homestead Property Comparison Chart that you can download that will help you in determining the value.
I also wrote an explanation to the Country and Homestead Property Comparison Chart to aid you in how to use it.
I created a blank comparison chart you can download for taking with you when looking for your Country or Homestead Property.
Is the cheapest land the best land?
There may be an instance or two where the cheapest land turned out to be the best land.
That is an exception, not the rule.
The cheapest land is usually land that is deficient in one or more of the 5 Key Factors that are needed for a homestead that I talk about in “Choosing Homestead Property – Water, Soil, Trees, Location”.
Will a 5 gallon per minute well supply sufficient water for a homestead?
A 5 gallon per minute (GPM) well is the usual minimum well output needed to be able to finance country property.
Depending on the homestead, a 5 GPM well may not be a sufficient flow rate for all the homestead needs as I explain in “Financing Land – Undeveloped Land, Conventional Loan, Water”.
Why would someone rent for a year before buying homestead property?
The best way to have the time to do a proper evaluation of country property is to live in the area for a year.
You can rent and be able to see what the area is like year round as well as have a much better idea of property values.
“Renting Before Buying Property Can Save Money – Here’s How” is an article I wrote that talks about renting before buying.
You can also shop for property in a more relaxed manner.