Curtis Seltzer wrote an article posted on the LandThink.com Blog dealing with the intrinsic value of land. Land buyers and sellers should consider this value when determining what a “good deal” is. The intrinsic value is basically the sum of the value of all of the underlying parts of the property, which may, and probably will differ from the market value of a property.
Take a typical timber property. There are many underlying “values” First there is the value of the land, the surface area, then there is the value of the timber, the value of the water rights associated therewith, the mineral rights, the air rights, recreational opportunities…etc. Some of these elements of value may be valuable to you, and some may not. Some may be of value to you just as an investment, some may have a different type of value to you.
When you purchase land in an area known for producing timber, you can bet that timber value figures heavily into market prices, because this element of intrinsic value holds real value for the market of buyers. The same market that values timber as a component in a land transaction, may not value the mineral rights associated with a property at all. Market conditions still affect how the underlying assets are valued in a given area.
Sometimes Intrinsic value is higher than market value. This signals an opportunity for the savy investor to purchase a property at market value and break it down into its component pieces, or values. This investor can make money by marketing the property in pieces rather than as a whole. Sometimes market value is higher than intrinsic value. This is a opportunity to sell assets that have been held for one of the “intrinsic” components of value. For example, if an investor has held a timberland asset for a while and market conditions change so that the “recreational” value of the has went up, and that investor does not personally value the recreational value of the land, it may be time to sell. However the investor may also hold the property as an investment in recreational value as well.
Here is a link to the article by Seltzer.