Welcome to 2021! I hope you all are hanging in there and doing as well humanly possible.
To start off the new year, I thought that I would tackle the topic of land. It can be easy to over-simplify value because value is not always as clear cut as it appears. For example, if a one-acre lot is selling for $10,000, does that mean that a two acre lot is worth $20,000? Not necessarily.
The value of something usually changes depending on its size. (Cue Captain Obvious.)
What may not be so obvious, is that the value per unit of measurement of an item, usually decreases as the size increases. For instance, the price per square foot of a smaller lot is generally higher than for a larger lot. The price per sq. ft. typically decreases, the larger a lot gets. Why?
This is due to the law of diminishing returns. To illustrate, imagine a person wants to buy a car. They only need one car. What if the car salesman tried to sell a second car to a person who only needed one? The buyer would probably say they were not interested in buying a second car. Of course, if the salesman said that the second car, could be purchased for half-price, the buyer might be interested because they could resell the second car and make a profit.
However, what if the car salesman said that the buyer would have to sign a contract stating that they could not resell the second car? They would just have to figure out a way to use it. Clearly, the value of the second car would be diminished. And if that is the case with a second car, how much more so with a third or fourth car?
The point is that we can only use so much of something. Once we have more of something than we need, the value becomes less. Now, instead of a car, think about something of value in a home, like a bathroom, or a garage. A homeowner can only use so much of any one thing. At some point, buyers may not see any additional value in having more of a particular amenity. A home with two bathrooms may be very desirable in an area. However, what if a home has four bathrooms, when two bathrooms is more than sufficient? At some point the additional bathrooms begin to add less contributory value and may not add any value at all.
That is how value works. Let’s apply this concept to land.
CONSIDERING LAND IN THE APPRAISAL PROCESS
When appraising a property, we must analyze what the highest and best use of the land is. In that analysis we must determine if the use of the land is legally permissible, physically possible, financially feasible and most profitable.
I’m not going to delve into the highest and best use topic in this article. However, when it comes to land, part of our analysis is to determine whether the lot could be split into multiple buildable lots. There are several things to consider.
First we must examine the zoning ordinances to see what the minimum size a lot can be, to be considered buildable, meaning suitable for building upon legally. We also must consider setback guidelines as well as the shape, size and topography of the land. There are times when a lot falls into one of two categories. Excess land or surplus land. I appraised some properties last year that demonstrate these two situations nicely.
Let’s talk first about excess land.
Excess land is land that is larger than what is typical for the neighborhood and capable of a separate use. Excess land is land that could be split-off and resold as a buildable lot. In the example below, the zoning required a minimum lot size of one and a half acres to be buildable.
The left lot (below) offers three and a half acres. However, the three-and-a-half-acre lot on the left cannot be split because the home and improvements sit right in the middle of the lot. The owner of the lot on the left also owns the five-acre lot on the right. The lot on the right could be sold on its own and turned into several buildable lots.
At first, one might think, isn’t a home with an eight-acre lot much more valuable than one with three and a half acres? After all, bigger is better, right?
Interestingly, this home was listed for $500,000 and then had its price dropped to $450,000. It was listed for almost three months, in a market where most homes are selling in thirty days or less, and did not sell before being taken off of the market. It was listed as being sold with both parcels of land, totaling eight and a half acres. My research revealed that homes with three to five acres were selling for about the same price as homes with seven to eight acres. There really was not much of a price difference.
This is an indication that the market did not see much value in the additional acreage. Based upon the sales that I analyzed, the property with only the three and half acres of land would likely sell for between $420,000 and $440,000. I also found that the lots with around five acres were selling for $50K-$60K.
Therefore, while the home didn’t sell for $450,000 with eight and a half acres, it probably would sell for around $430,000 with only three and half acres. If the owners split the five acre parcel, they could sell the five-acre lot for around $55K, making a total of $485,000. So, the highest and best use of this property would be to split the parcels and sell them separately.
Now on to an example of surplus land.
Surplus land is land that is not needed to support the existing improvements but cannot be separated from the property and sold off. Surplus land does not have an independent highest & best use and may not even contribute to the value of the improved parcel of land.
A good example of this can be seen in a property I appraised last year. It has just over ten-acres of land. The zoning for this property requires a minimum lot size of two acres to be buildable. This property offers a little over 500 feet of frontage. Building ordinances state that a lot needs to have two hundred feet of frontage to be buildable.
From an aerial view, it appears that the parcel could easily be split into two parcels, much like in our example of excess land. This is where it gets interesting.
Upon inspecting this home, I found that the home sits on a huge rock formation, which takes up a good portion of the left side of the property. This property has numerous crags and sits upon a huge stone mass. The stone mass that the dwelling sits upon is extremely high. The only way to get a driveway to the dwelling is to use the right portion of the lot, since there is no economically feasible way to add access to the property from the left portion of the lot.
By the way, this was one of the most beautiful lots I have seen in many years.
Based upon my analysis, the right portion of the property is needed in order to support the dwelling on the left side. For this reason, based upon my research and analysis, it is not feasible to split this property into multiple parcels because too much of the land to the right is needed to support the functionality of the existing dwelling.
Based upon my research, land over five-acres is surplus land. Now, you might be wondering which portion of the property offers the five acres is surplus land?
In this case, the rear half of the lot is considered to be surplus land, as the front half is needed in order to support the dwelling and access to it. My research also revealed that the additional five acres in the rear did add some minor value. However, the contributory value of the rear five acres was considerably less than that of the front five acres.
In this example, topography played a major role in determining whether the land was excess or surplus land. Having said that, if I were to appraise this property without ever having seen it, such as when performing an appraisal where the scope of work does not require me to inspect the property, namely, a desktop appraisal, it would be very easy to completely miss this.
This is just another reason why an appraisal with a physical observation of the property leads to a more accurate opinion of value.
Hopefully, I’ve given you some things to think about when it comes to how appraisers analyze land, when determining the highest and best use of a property. There’s a lot to think about! What seems to be pretty straight forward, may end up being much more complex when we start digging.
For this week, I will leave you with a little video make you laugh. Who doesn’t love a good cat video?
Thanks so much for being here! I’m working on a new article that will be out in a couple of weeks.
Have a great weekend everyone! Be safe out there!
Looking for a qualified real estate appraiser in your area? Go to www.FindMyAppraiser.com
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If you are interested in stats, and nothing but the stats, for neighborhoods in Northeast Ohio, check out my other podcast. In it, I provide short episodes that provide you with stats on median sales prices, marketing times, housing inventory and other related stats, on specific neighborhoods in Northeast Ohio. You can find me on Apple Podcast, Spotify, Google Play Music, Breaker, Overcast, Pocket Casts, Radio Public or you can listen right here at the Cleveland Appraisal Blog.
Here are some links to other articles I’ve enjoyed recently! I hope you will also…
Not All Housing Billiard Tables Go Unused – Housing Notes by Jonathan Miller
Crazy Appraiser Stories – APPRAISAL TODAY
Real estate trends to watch in 2021 – Sacramento Appraisal Blog
Bias in Resolutions? – George Dell’s Analogue Blog
Condos and Townhouses – You’re Comparing Apples to Oranges – The Appraiser Coach
Random Thoughts of an Appraiser – Matt Simmons on Appraisal Buzz
Coronavirus: Fact vs. Fiction – Covid Science for Everyone
Scope of Work! – Tim Andersen, The Appraiser’s Advocate Podcast