How to figure what land is worth in Panama is an issue that seems to be debated and talked about over and over. Since, for tax purposes, the recorded price of most land sales is dramatically lower than the actual sale price, getting accurate information is extremely difficult. So then, how does someone figure out what their land is really worth?
In Panama as in other countries there are three methods; sales comparable, cash flow analysis, and land residual. By far the most common method is the sales comparable one except that in Panama this has serious limitations as we will discuss. The next is cash flow which applies if there is actual cash from any business operating on the land. The third one is land residual and applies if there is a market for something that can be built and sold on the land, typically housing.
Sales comparable method: The sales comparable method in Panama can be more accurately called the “Hearsay” method because it relies on verbal assertions and statements from other land owners and real estate brokers as to what the land sold for. Although this is far from accurate as it is human nature to exaggerate (who knew?) with enough experience and through multiple contacts it is possible to get a range of values for land in any one area that has some sales activity.
The most common mistake made both in Panama and elsewhere is using a square meter price, or square foot in the USA, on a well located small lot that is flat and 100% usable and apply that same square meter price to a much larger parcel in the same area. The reason the larger parcel does not have the same square meter value is that it won’t be 100% usable like the small lot unless it is subdivided into similar sized small lots. Then one has to factor in the costs of the subdivision process ranging from soft costs like architects, engineers, and permitting to hard costs like grading, road construction, wet and dry utilities, etc.
Cash flow analysis method: The cash flow analysis method can be broken down into three separate processes. The first is strictly cash flow net income multiplied by a factor of 3 to 5. This works well when net profits are high such as high yield agriculture products; milk, sugar, etc. The second is total asset sale where the improvements are part of the land value such as buildings, roads, bridges, damns, water flow channels, etc. The third is more of a combination of the first two, where one balances accounts payable, assets and inventories, and accounts receivable to maximize value for the total sale. This method is used when the net profit is generally low.
Land residual analysis method: The land residual analysis method can be used if the land is suitable to build and sell something; housing for example. In this case a proper market study will determine what type of housing is most suitable to be built and sold on the land. This will determine the actual number of housing units either attached or detached that can be built on the land and sold at what price. Once this is done, the hard and soft costs of construction are deducted followed by the land improvements and fees (grading, road construction, wet and dry utilities, common area amenities, permitting, etc.). Included in these numbers will be the minimum profit margin a builder will accept, and return on capital any financial partner will accept, in return for the risk of building the homes. The remaining number in this calculation is the “residual” land value which will be what the land is worth as a building site. As home values and construction costs rise and fall, the residual land value also rises and falls along with it.
The goal of all this is for the seller to realize the best price possible, save the buyer as much money as possible, and utilize the tools available to close the land sales transaction for all. Ultimately of course, what a piece land is worth is what a qualified buyer is willing to pay real dollars in today’s market.