Can you think of some things in which less is more? The week I wrote this article, my family and I were on vacation in Kissimmee, Florida. As we were sitting by the pool, I asked them to come up with some things in which less is more. Here is what they came up with. (Participant ages range from 11 to 55 years old).
Talking (something what my wife reminds me of), golf scores, taxes, rashes, cologne and spices…Okay, these things are totally subjective.
What about in real estate?
What sounds more appealing to you? A one acre lot or a lot that is .15 acres? I think if I was taking a poll, the majority would say that a one acre lot is more desirable, and therefore worth more. But that is not always the case. I recently appraised a property in which homes with .15 acre lots were selling for more than very comparable dwellings on lots that were around an acre. Say what?!
AN EXAMPLE OF LESS BEING MORE IN TERMS OF VALUE
At this point, you might be thinking, “Here we go again with this crazy appraisal mumbo-jumbo”. Please read on. You might change your mind. The home I appraised was in a neighborhood in which typical buyers were on the lower end of the income range. This neighborhood was not REO driven. However, there was some REO (Real Estate Owned, Bank Sale) activity. Interestingly, the home I was appraising had two lots. The adjacent lot used to have a home on it. That home had been sold in a bank sale and demolished several years ago. The owner of the main lot I was appraising, purchased this lot to make their lot larger.
Before we go on, it’s good to note that I only appraised the main parcel because the Highest & Best Use of the second lot was as a buildable lot that could be sold as such. So this second parcel was not included in my valuation. In real estate, when a lot is larger than what is typical in a neighborhood and capable of being used separately, like to build a dwelling upon it, this is referred to as excess land.
The main parcel that I appraised still had one acre of land. In this neighborhood, the typical lot size was around .15 acres. Due to the configuration of the lot, there was no way to split the one acre lot into smaller lots. Since this additional area of land is not needed to support the existing improvements, but cannot be separated from the property to be sold off, this additional land is referred to as being surplus land. In other words, more land exists than will contribute to value. The dwelling itself was very comparable to other dwellings in the neighborhood. The only big difference is that the lot size of the subject was much larger than most in the neighborhood.
MORE OF SOMETHING DOESN’T ALWAYS EQUATE TO HIGHER VALUE
One might conclude that a one acre lot is more valuable than a lot with only .15 acres. In many cases it is! However, not in this case. As I mentioned, the neighborhood was attracting lower-income buyers and a lot of flippers. I think that for most buyers in this neighborhood, having a one acre lot is desirable in terms of having a little extra space and land. However, along with that extra land comes a lot more maintenance!
More maintenance means spending more time and money. The typical buyer in this neighborhood is simply not interested in, or able to spend time and money to maintain a lot that is the size of the subject lot. This was clearly seen in my research.
Furthermore, there are a lot of investors buying up homes in this neighborhood to use as rental homes. A home with one acre is not demanding any more rent than a similar home on .15 acres. If an investor was to purchase a property with an acre of land, they would likely have more expenses which means less income.
What it all boiled down to is that the subject lot was so much larger than most in the neighborhood that it actually had a negative impact on market appeal and value. Sometimes, smaller is more desirable!
When searching for comparable sales, I discovered that homes that offered around a half an acre, or more, were typically selling in the $80’s. Whereas very similar homes on lot sizes of around .15 acre were typically selling in the $90’s. While there were not a lot of comparable sales, in terms of lot size, I did find a handful that had sold in the past two years. One of them had sold on the same street as the subject, within the past year. That sale also offered an acre of land. The differences were very clear. Homes with .15 acre lots were definitely selling for more than similar homes with lot sizes over a half-acre.
This appraisal was for a purchase. The purchase included both parcels. As mentioned, I only valued the one parcel. My opinion of value came in slightly below the contract price.
The seller provided the bank with numerous sales that they felt supported a higher value. The bank presented them to me as part of a value dispute. Most of those sales presented only had .15 acres of land. The one sale, that was in the neighborhood, and that offered a comparable lot size, actually sold for around what I appraised the subject home for. (Go figure) The listing agent called me and stated that they had talked to another appraiser before listing the home. They had told him that they would have just used the sales with the considerably smaller lots and made adjustments upward. So, the agent was surprised that there was a value issue.
If I had used the sales with .15 acre lots, and made adjustments upward, it would have a created an artificially high value that is not supportable on any level.
USING THE MOST COMPARABLE SALES IS BETTER THAN USING LESS COMPARABLE SALES AND MAKING MORE ADJUSTMENTS
I recently read two excellent articles, one by Rachael Massey entitled “Seeing The Forest Through The Trees”, and another by Dustin Harris called “Should Adjustments Actually Be Done?”. These articles both made the point I am trying to make. Sometimes, applying adjustments can lead to a less than accurate value conclusion.
The best comparable sales need few if any adjustments. This situation demonstrates the importance of choosing sales that are truly comparable in all aspects. It’s also important to understand why the market reacts to differing situations. In my example, it’s a matter of affordability. More land requires more time and money to care for. If the sales utilized are not really comparable, just applying some adjustments to those sales will not always lead to a realistic value conclusion. The sales that I used all offered around a half-acre to just over an acre. I made no site adjustments as none were supportable.
There are times when less is more when it comes to value. There are also times when there is little if any difference in market reaction to certain features of a home. Even if an adjustment may be able to be derived, that does not always mean that making one is supportable, or advisable.
By the way, I take adjustments seriously. I think that often, adjustments help appraisers to estimate a more precise value opinion. When derived and applied properly, adjustments can be very revealing when it comes to value. However, when applied incorrectly, they can do just the opposite. Recognizing if and when making an adjustment is supportable, and the amount of the adjustment to make, is something that appraiser’s have a responsibility to understand and explain. USPAP (Uniform Standards of Professional Appraisal Practice) does not dictate how larger or small an adjustment should be, or whether one should be made at all. If an adjustment is made, the appraiser also needs support for those adjustments in their work-file. I also think that if no adjustments are made, especially where it might seem that one should be made, the appraiser will need to be explain why no adjustment is supportable.
In addition to land, there are other home features in which something can be too large and have an adverse impact on value. This is often referred to as being super-adequate or over-improved.
I know these kinds of situations sound counter-intuitive to many. That’s why I wrote about it. Hopefully, after reading this article, you will see that a lot of careful analysis goes into each appraisal. Value is not always obvious at with a simple glance of some sales. In performing an appraisal, appraisers have to understand not only what people are buying, but why they are buying a certain kind of home. What might not make sense at first, may make more sense when all of the facts are presented. By the way, I wonder if an AVM (Automated Valuation Model) would have caught the market reaction to the larger lot sizes? Somethings tells me it would not have.
Thanks for being here and reading my article. I greatly appreciate it! Have a great day!
HERE IS MY MARCH 2019 MONTHLY MARKET UPDATE
You can also download a .pdf copy of this report by going to the County Market Report section of this website.
Here are some other articles and videos I enjoyed recently! I hope you will also…
London Calling Reminds Me Of The Expanded Mansion Tax – Housing Notes by Jonathan Miller
It might not be an appraiser at the inspection due to new “hybrid” appraisals – Sacramento Appraisal Blog
7 Things Buyers Should Know About PIW’s & Hybrid Appraisals Or You’re Screwed – Birmingham Appraisal Blog
Seeing the forest through the trees – Rachel Massey, SRA, AI-RRS, IFA, CDEI
Phil Welcomes Jason Frazier from The Industry Syndicate! – Voice of Appraisal With Phil Crawford (PODCAST)
Should Adjustments Actually Be Done – The Appraiser Coach Blog
Price Per Square Foot Facts and Misunderstandings in Real Estate!!! – Advanced Appraisal Blog
Straw Bale House; Revised FHA Handbook 4001.1 – APPRAISAL TODAY
Woodland Ridge Baton Rouge Post-Flood Home Sales Report – Baton Rouge Housing News
What is Gandysoft – The Approach Coach Podcast (PODCAST)
Who Cares About Appraisal Opinion? – George Dell’s Analogue
How to Pick a Real Estate Agent to Sell Your Home – Bill Gassett – Active rain
8 Attic Renovation Mistakes That Cause Setbacks – or Spell Disaster – Terri Williams – Realtor.com
5 Important Home Buying Mistakes to Avoid – Xavier De Buck – Realty Biz News
Here are some articles I enjoyed related to Northeast Ohio
Into the groove: Was Mage owner spins vinyl records into trippy works of art – Karin Connelly Rice – Fresh Water Cleveland
Land Conservancy study finds Cleveland’s east side neighborhoods rebounding from foreclosure crisis – Karin Connelly Rice – Fresh Water Cleveland
Act local, eat global: Culture. CLE set to spotlight Cleveland’s unsung ethnic eats – Jen Jones Donatelli – Fresh Water Cleveland
Free Samp: All things freein the #CLE for April 2019 – Dana Shugrue – Fresh Water Cleveland
4 thoughts on “In Real Estate, Sometimes Less Is More”
Good stuff, Jaime. You are so right here. A home with twice the size isn’t automatically worth twice as much (same thing with a lot). Though a double lot in Midtown could actually be worth that amount because investors are splitting and building there. But in the ‘burbs? Fat chance. Anyway, hope you have a great day. Congrats on your break recently. I saw the pics on Facebook and it looked so relaxing…
Thanks so much Ryan! There’s always a lot to think about when it comes to value. It’s not always easy to recognize with some deeper analysis. Thanks for the vaca congrats!😃 We did have a relaxing trip. I always enjoy some down time with my family. We all soaked up the sun, which we don’t get a lot of until spring. Our vitamin D has been restored. I saw you are going to be doing the same later this week or next. Have a great time with your family!
Great post Jamie. Wonder what the automated models had to say about your appraisal….
Haha! Thanks Joe! Good question. They would probably disagree with my conclusion.😁