Raw land underwriting is different from building underwriting because the asset has no income, no comparable sales of the finished product, and the value is entirely a function of what you can build on it. The asking price is anchored to nothing. Your job is to derive what the parcel is worth to you, given what you can permit, build, and sell. This guide is the seven-step process serious developers run before signing the LOI.
Why raw land underwriting is different#
An apartment building has rents, expenses, and a cap rate. The valuation conversation is bounded. Raw land has none of that. Two buyers can value the same parcel at numbers that differ by 50 percent or more, and both can be defensible for their respective business plans. The dispersion is the opportunity, but it is also the risk: the seller is anchored to the most optimistic version of the analysis, and you have to defend a more disciplined number.
Step 1: Confirm zoning and entitlements#
Pull the parcel on the municipal portal yourself. Do not trust the broker. Confirm the current zoning designation, the allowed density, and any conditional use overlays. Then determine the entitlement path: by-right, variance, or full rezone?
Each path has a timeline and a probability. By-right is fastest (4 to 8 months for plat approval) and lowest risk. Variances add 6 to 12 months. Rezones can take 18 to 36 months and may not approve at all. Price the entitlement timeline into the carry, and price the entitlement risk into the contingency.
Step 2: Lot yield analysis#
The single most important number in land underwriting is buildable lot count. Start with gross acreage, deduct rights-of-way (typically 18 to 25 percent for new subdivisions), open space requirements, wetlands, slopes over 15 percent, and required stormwater detention. Remaining net acreage divided by minimum lot size gives buildable lot count.
Get this wrong by 10 percent and your entire revenue projection is wrong by 10 percent. A 40-acre parcel with a 6,000 SF minimum lot size does not yield 290 lots. After deductions, it yields closer to 220. A civil engineer will run the precise yield in 60 minutes with just the parcel ID.
Step 3: Off-site improvements and impact fees#
Off-site improvement costs are the silent killer of raw land deals. Bringing water and sewer to the parcel can run $15K per lot in established suburbs and $50K-plus in greenfield areas. Road widenings, traffic signals, and lift stations add another $5K to $25K per lot. Get a written estimate from the civil engineer before signing the LOI.
Impact fees vary widely. School and road impact fees alone range from $8K per door in low-cost states to $50K-plus in coastal markets. Pull the fee schedule from the city or county, in writing, dated. Verbal quotes from the planning department are not bankable.
Steps 4 through 7: title, soils, market, and financing#
- Step 4: Title and survey. Order a preliminary title commitment and a boundary survey. Look for easements, mineral rights, prior plats, and any encumbrance that reduces the buildable area. A 30-foot utility easement through the middle of the parcel can cost you a row of lots.
- Step 5: Soils and environmental. Order a Phase I environmental assessment and a basic geotech report. Phase I findings can require a Phase II at $25K to $80K. Geotech findings can require imported fill or expansive soils mitigation that adds $5K to $20K per lot.
- Step 6: Sale comp validation. Pull six to ten closed sales of comparable finished product within 18 months. Match by product type, size band, and submarket. The median closed price is your exit assumption, not the asking price.
- Step 7: Financing. Get an indicative term sheet from a construction lender for this product type, in this submarket, with this sponsor. Verify LTC, rate, recourse, and any unusual covenants. Verbal indications are not financing.
The walkaway test#
After all seven steps, run the residual land value calculation. If your RLV is below the asking price, the deal does not pencil at your target return. You have three moves: renegotiate to RLV, find higher density or a better product mix that lifts revenue, or walk.
Walking is the most underrated skill in land development. The sponsors who win over a 10-year career are not the ones who close the most deals. They are the ones who walk away from the bad ones and only commit equity when the underwriting clears every test.
River runs all seven steps automatically when you submit a parcel through the development analyst. The diligence checklist is tailored to your product type, the comps come pre-pulled, and the residual land value sits at the top of the investor memo so you walk into negotiations with a defensible number.