Pricing land is the most important decision a seller has to make. However, pricing land can be more complicated than pricing other types of real estate. Unless it is going to be redeveloped, a single-family home generally has a single target market, the residential homebuyer. Likewise, a commercial retail center is likely going to market to retailers. However, a land tract may have a number of uses, and therefore multiple target markets of buyers for the seller to consider. A single piece of land may be suitable for residential, agricultural, or even development use; and each one of those markets has a different set of supply and demand curves.
In simple terms, this means that different buyers are willing to pay different amounts for your property. For example, a production farmer may only be able to pay $4,000/acre, while a retiree not needing to make a living off the property may be willing to pay $5,500/acre for the same property simply because “it’s the right one.” Further, if there is growth in the area, a developer may be willing to pay $10,000/acre for the same farm! The typical response in this situation is to price a property to the highest and best use, or in this case to $10,000/acre. However, it is also important to understand the supply and demand for each of these markets, and the impact the price has on the time it takes to sell the property.
In the above scenario let’s say that you priced your property toward the developer. You immediately eliminate all potential agricultural and residential buyers from the equation. Further, what you may find is that though it’s a possible market, the demand for new development is limited and there is a good supply of lots available. As a result, it may take you years to sell the property to a developer for the highest price. On the flip side, if you price your property to the residential buyer you may find that the demand in that market segment is much higher, and in addition, you have also incentivized a developer to consider your property as an investment. As a result, you become exponentially more likely to sell your property in a much faster period of time. This explains how price and the time on the market are generally directly related to each other.
To simplify this, I have created several pyramids for my explanations. The height of a pyramid reflects the price of a property. The width of the pyramid reflects the number of potential buyers that exist at that price. At the top of each pyramid, there is one person in that market segment that is willing to pay you that amount for the property. As you move down in price, the number of buyers in that market increases. This increases the interest in the property, and the likelihood of a sale, and generally leads to a shorter time on the market.
The pyramids below represent the scenarios discussed above. These visuals help you understand the demand from each market segment and help you see how many more buyers you reach as the price decreases.
Finally, the graphic below shows you the combined total demand for your property for a given price. As you can see, the lower the price, the more the demand for your property grows, which in turn means you are more likely to sell your property more quickly.