How Land Contributes to Value
Bigger is not always better. Some examples off the top of my head are hair, sugary drinks, shoulder pads, cholesterol and spiders. Clearly this is a subjective list. Perhaps you disagree with my list. I’m sure you could add many examples based upon your experiences. The fact that I came up with these items is probably disturbing as well. The same can be true of land value. Land value is sometimes counter intuitive. For that reason, it is commonly misunderstood. For instance, say a person wants to sell their home. Vacant land sales in a neighborhood are selling for $100,000 per acre. Their home has 5 acres. Comparable homes in the neighborhood with only 4 acres are selling for $400,000. Does that mean the home with 5 acres will sell for $100,000 more? That would be awesome! But that’s not usually how it works. Why?
Often a vacant lot that is buildable, has a higher market value than one in which a home is already constructed. Once there is a home on the property, much of the value typically shifts to the dwelling itself. For instance, if a family of five are looking for a home that they can comfortably live in, they might choose a home with less acreage if the home offers more living area, instead of a home that is considerably smaller that offers a larger lot.
To illustrate, let’s think about a pizza. Hopefully you will not find this example too cheesy. When a person orders a pizza, they don’t usually say, “I’ll have a nice large crust pizza and by the way, just throw whatever toppings you want on it.” While the crust, to a pizza connoisseur, is probably very important, it is just part of the overall experience. If you’re craving a pizza, the toppings make a huge difference. (No disrespect to the crust). So different toppings make for different levels of appeal based upon the individual. What’s your favorite topping? If you had a vacant piece of land and could build anything you wanted, what kind of home would you construct?
Here’s the point. When a member of the market is considering a property, a vacant lot may be more desirable because they can build what they want on it. It’s like a blank canvas onto which they can construct what they want. Once a dwelling is in existence it changes and really limits the market appeal to a more specific group of market participants. The home in existence may be too large for some or too small for others. Some may desire a ranch style while others desire a colonial or some other style. The value of the land becomes secondary, or contributory.
Of course, that is not always the case. When available vacant land is scarce things may change. When vacant land is scarce, it becomes more common for some who desires to build a new home, to purchase a property with an older home, just to tear it down and build a new home. This can also be the case in areas in which land is very desirable such as waterfront properties, properties with golf frontage or very desirable views, and so on. By the way, if you’re looking for an excellent article on valuing lake front properties, I recommend reading an excellent article entitled “Appraising Lakes, Beyond Front Footage”, written by Rachel Massey who is in appraiser and blog writer at Ann Arbor Appraisal. (Click on the article title for a link)
The market value of vacant land may also be negatively affected by its utility. For instance, if a lot is not buildable, it usually has a considerably lesser market value. Perhaps the land is too small to build on because of zoning regulations, its shape, or its topography is such that it cannot be built upon.
Last year one of my clients hired me to appraise on a small portion of their land. They wanted to split this small piece of land from their main lot. The piece of land was too small to be buildable. They also wanted an appraisal of their home with the same small area of property included as part of their total property. It is interesting that the market value of the small portion of land, detached from the main property, was less than if it were attached to the much larger property. This is because being attached to their larger parcel offered a higher utility. Detached, it really couldn’t be used for much, except perhaps bird watching or the occasional camp out.
Some other things to consider are location, topography, zoning, size, shape and certain characteristics such as the amount of tillable land. An appraiser must determine what types of income the land could produce, which differs greatly from region to region. It is also interesting that typically, the smaller the lot size, the higher the contributory value is per square foot, which is also counter intuitive to many people.
Can land be so big that there is little or no value in part of it? Going back to the pizza illustration, have you ever been so hungry that you ordered a much larger pizza than you were able to really eat? When you open the pizza box it all looks delicious. But in all honesty, how much of that pie are you going to be able to eat and enjoy? Probably not the whole thing, unless, of course, you have teenage boys like I do. Then the whole thing is enjoyed at record speeds, leading to pizza scarcity, which is a real bummer. But if there are left overs, they could be considered the excess. Some lots are so large that there are portions that just can’t be utilized for much. The term we use in real estate to describe that is surplus land.
Surplus land is land that is not currently needed to support the existing improvements but that cannot be separated from the main property to be sold. Surplus land does not have a separate highest & best use.
But what if the additional land can be split into a second buildable parcel? In real estate, that is called excess land. If it is legally and physically possible to split the parcel and if it is financially feasible to do so, then there is a chance that it is also more profitable to so do. Why? Remember that vacant land typically has a higher market value than a property that has improvements on it already. In this case, it would have its own highest and best use, separate from the main property, as its own buildable lot. It should be noted that in rural areas, land sizes differ greatly. The market in some areas may accept a larger lot size without the desire to split it.
There are many other factors that must be considered when it comes to the value of land. This article just touched on some of the basic things we consider as appraisers. One size does not fit all when it comes to land valuation. What may be true in one scenario may not be in another. The way land contributes also depends greatly on the market. Some parts of the country have different market reactions to how land contributes to value. There are no shortcuts when it comes to land valuation. Only careful research and analysis by a qualified appraiser who knows the nuances of your area can provide a reliable valuation.
When it comes to the contributory value of the land on your property, don’t have a pie in the sky mentality. Hire an appraiser to do the work needed to determine the value or contributory value of your land. You will be glad you did!
4 thoughts on “How Land Contributes to Value”
It’s always a good thing when you use pizza to describe a real estate concept. 🙂 Thanks for the post Jamie. One thing I’ve noticed in my market is the value of land depends heavily on the market too. Are people building in the area? What can be built on the site? And are people speculating on land? Back in 2004 and 2005 there was massive speculation on land, so it was selling at absurdly high prices. But today we don’t see that same sort of land speculation, so prices feel a little more realistic or down to earth.
Haha! For sure! I agree with you. The market is super important to know. In the city that I live in there’s not much vacant land in the suburbs and people want to build here. People are even tearing down homes that are in tact because they want the land to build something new. I have actually used some of those sales to estimate value on some vacant land appraisals. In other cities in my market, vacant land is going for cheap. There huge differences in land value. That’s probably the case in most cities. Out here there is more building of new construction than I can remember in the 20 some years since I began appraising. Most land values in the suburban areas out here are increasing at a fairly steady rate. I’m good with steady.😃 I think part of the reason is a shortage of residential inventory. Interesting to watch.
Greetings, Jamie. I am a Louisiana native but attended graduate school at CU in the mid-1970s. After graduating, I returned to LA and have been a practicing residential real estate appraiser for 30 years in Lake Charles. That stated, leaving Colorado was the biggest mistake of my life but I try to visit as often as possible.
Although written in 2018, your thoughts on the subject of contributory value of an improved site really resonated with me. After appraising for a few years it never quite made good sense to use vacant land sales as the basis for adjustments of an improved site. Thanks for article.
Steven, you are very welcome! And thank you so much for writing! I’m glad my article gave you a new way of looking at things! I continue to learn new things about valuation all the time!
I grew up in Denver, Colorado. My family is still out there. It’s a beautiful place. I still miss it! Lake Charles sounds like a beautiful place also. My best to you! Stay in touch!