Larry asks: ” Isn’t it too simple a model to look at the sale price of a property by looking at the square feet of the structure? A property around Seattle, correct me if I’m wrong, has about half of its value in the land, and half in the structure. If real estate appreciates or depreciates. it’s the land that goes up and down, not the structure, right? I understand that $/sqf is an index that varies with property value, but this doesn’t seem to reflect the reality that it’s the land value that’s going up and down, which has only a loose relationship to house square footage. Or is it just not workable to try to do a more complex calculation? My concern is that when you have an unusual situation with a large lot, and 2/3 of the value is in the land, this method will give erroneous results.”
Let’s deal with this sentence first and get it out of the way “A property around Seattle, correct me if I’m wrong, has about half of its value in the land, and half in the structure.” No, not true. One can not even begin to generalize, but a good rule of thumb for builders is that the new house will sell for 3X the lot value. But that is ONLY if the lot was worth buying in the first place.
If your land has value separately from the structure, then your structure often doesn’t have any value. When your structure has value with the land on a combined basis, then the (extra) land can usually only add 10% more to that value unless the lot can be split into two or more lots.
If a builder might want the land, then yes, the value of the land is part of the valuation process. If a builder wouldn’t want the land, then no, the land does not “value out” except as “an extra”.
Let’s take a regular neighborhood where the only buyers are those who are buying homes, and not builders who want the lot. How can you tell? Every house on the street is the same age, is a good clue. No builder has ever bought a house torn it down and put a new home on that street, usually means no builder wants to do that. If a house burned down, well then of course the lot would have a value. But if no one is interested in tearing the house down and putting a different house on it, then you don’t value the property by valuing the land first and then the structure. Most homes on the Eastside (housing developments) fall into that category, and any street in Seattle or Kirkland or Bellevue, considered to be a bad investment for new construction, falls into that category as well.
When no one would build a new house on the lot, you value a property based on comps alone, and the value of the land becomes irrelevant. Most times the homes are on lots of about the same size. A bigger lot vs. a smaller lot becomes “an extra”. Sometimes extras add value and sometimes they don’t. Too large of a lot often is viewed by potential buyers as “too much maintenance” and can actually detract from the value. Often corner lots fall into the “more maintenance” category. In these neighborhoods the large lot only values out IF it is SUBDIVIDABLE. If the person buying it can turn the lot into two lots and put another house on that second lot and sell it, then yes, the extra land would be a factor in determining the asking price or offer price.
Before we leave this category of “no” you don’t separate the land when determining an asking or offer price, let’s talk about land as “an extra”. The best rule of thumb for “extras” is they can’t in total equal more than 10% of the value of the property without the extras. Say you have a house that comps out at $650,000. You can’t get more than $65,000 more for that house because of extras, or $715,000. Beyond that it just has too many extras. Extras include, tennis courts, pools, extra land beyond the norm for the neighborhood, and to some extent new kitchens, new baths and any “added value” unless many in the neighborhood homes have also added these things and the comps have grown as a result. If no one in the neighborhood has done ANY improvements since 1968, you can’t get double the price of everyone else’s house because you remodeled your house and have a pool and a bigger lot, etc. That ONLY applies in areas where land is not separated from the structure in order to do a valuation.
So for all of the above, simple methods of price per square foot and adding and subtracting for some things here and there is the only method that works.
Let’s move on to where Larry is correct.
Larry, when the land does matter…then often it is ALL that matters, and the structure does not.
When it’s not all about square footage or value of structure, it often shifts to all about the land.
Example: I had a buyer client who bought a 4-plex at 7th and Market in Ballard. When he sold it two and a half years later (a year ago) the value of the 4-plex was roughly $720,000. I listed the property at $850,000 because IF the buyer wanted to tear down the 4-plex and build townhomes, the value of the land was worth more than the value of the 4-Plex with the land under it. It sold for $855,000 and five townhomes are being built on it as we speak. People called who wanted to buy a 4-plex and it didn’t “pencil out” and a lot of agents thought I was nuts 🙂
When the value of the land exceeds the value of the home plus land, then the structure is “free”. This is true where builders are building and only WHEN builders are building. If builders stop building for five years because the market is soft, then the value will go down to whatever an owner occupant will pay for it, and whomever buys it can live in it and sell it when the builders come back out looking for lots to build on. We are entering a market like that and to some extent have been in that market for 10 months or so in some areas and in some locations.
So to answer your question, the reason it is or is not done the way you suggest is not because the “calculation is too complex”, it’s because it’s unnecessary. A buyer isn’t going to pay you 3X the value of the neighbor’s lot plus the value of your structure, because the lot is 2/3rds bigger, unless it is subdividable into THREE lots. If it can only be subdivided into two lots, then they may pay you the value of your house based on comps and price per square foot, plus a portion of the value of the extra lot, not triple, even though it is 3X bigger. And if it can only be one lot, they may not want it at all, because it is too much maintenance and that can reduce the value overall.
The highest value of a lot is usually where the value of the structure is about nil AND a new house built on that lot will sell. If you live on a street with no newer houses, if no one has ever wanted to build a new house on your street, the houses could end up at no value if no one wants to buy it as is and no builder wants to build on the lot. Then it becomes your home for life…or a perpetual rental property 🙂
A woman approached me this Sunday. She asked me what her property was worth. The house was tiny and worth about $300,000 with a huge yard. The lot was worth $300,000 without the house. When I told her the lot was worth $300,000 she started talking about the house. No! You can’t add the value of the house to the value of the land. No one is paying $300,000 for a big yard. They will only pay $300,000 if they are going to tear the house down. Someone may buy it and live in it, but they will get the house for free if they do. Maybe you can get $350,000 for it. A $50,000 house is dirt cheap and someone may pay an extra $50,000 over lot value and live in the house. But you can’t value the house at price per square foot and add it to the value of the lot.
You can sell it to a builder for lot value, or you can try to find an owner occupant who is willing to pay a little more than the builder will pay for the lot. Those are your options.
Larry, my guess is your land is treated as “an extra” and adds 10% to the value IF a buyer views it as an extra vs. a shortcoming. Today most people don’t want to spend all of their free time mowing the yard. And you can only get 10% more for ALL extras on a combined basis. So if your house is already worth 10% more than your neighbor’s homes because you added a new kitchen…then the extra land is not of value as your exceeded you cap for “extras”.