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”.
I’m seeing this in my neighborhood. A year ago, a .25 acre lot was going for $500K+ and the new homes (on a busy street) were being priced at $1.5M+. Now, there’s a teardown on a half acre sitting at $375K for months. This is a few blocks from a new construction 5K sq ft home on a 17K sq/ft lot priced at $1.2M after a series of price reductions.
Not that long ago marginal lots were capable of supporting million dollar homes. Now, not so much.
Oops.
Thank you R.U.B. And when someone buys that house, it will never appreciate beyond lot value. If it is on a busy road, and builders only buy lots in better locations, it may become a perpetual rental property. If it is in a great school district and the house is large enough, it could be a good opportunity for a parent to get in cheap.
Personally I think buying a P.O.S. so your children can get into the best school or live in a safe neighborhood is a worthy endeavor. But I’m old fashioned that way. I rarely have a buyer client who agrees with that logic. To me where is always more important than what.
Excellent analysis, Ardell. I am seeing some similar lots in Edmonds where the builder got caught holding a tear-down/lot at the top of the market. Now, instead of building that expensive home on a semi-busy street, the builder is trying to sell the lot alone or with as a custom home. The builder/Realtor’s other new construction listing around the corner on a small lot next to a park on a quiet street has been sitting on the market for many months now.
Ardell said “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
Very interesting and informative post, Ardell.
Is that why you’re contemplating getting out from under that lot your living on? Because it can support $700K only if builders are building?
Leanne,
I mean it didn’t pencil out as a 4-plex based on cap rate. It did pencil out for townhomes, but there was a tiny risk that you could only put 4 of them instead of 5 of them. Another builder only wanted to pay a price to support 4, even though there wasn’t much chance that the City wouldn’t approve it for 5. 5 are going up and my client got the price for 5.
They aren’t finished yet as far as I know. I checked a few weeks ago. I want to see them when they are finished.
biliruben,
LOL!!! It should be on market by the end of the month. I’m going to try to get it on Zillow at least before I head off to speak at Inman on the 22nd.
My house is too big to be a teardown at 3,300 sf. So I can’t “add the structure to the lot” the same as my advice to Larry 🙂 Though it is in a location where builders would still want it IF it was a teardown. It’s the busier roads that are suffering the most at the moment.
In my neck of the woods the busier roads are 7th Ave, 6th Street and 3rd Street. I’m in “the view corridor” between 1st and 2nd on 10th Ave. My weakness isn’t location for sure. It’s the fact that the whole second floor is a 750 square foot master suite. Fabulous view, but not suited to people with small children as the other bedrooms are in the basement. It’s one of those “odd” houses.
Everyone should come over when I have my first Open House and we can sit on the deck and drink wine.
The biggest problem is all the builders think they can get $1.6M for just about everything. Not so. A new house on my lot shouldn’t be more than $1.3…but the builders would price it at $1.5 minimum. Greedy and delusions of grandeur.
Jillayne,
You know Edmonds is not in my normal travels and I am Sooooo glad I sold that one back in January at the edge of the Bowl. At one point she was thinking of taking it off market and bringing it on in the Spring. We left it on without changing the price for about 5 months and it sold in December and closed in January. We were darned lucky on that one!
Ardell, You make several good points in the context of a teardown, but for houses that are not in that category I think Larry’s original question has not been answered. If you look at http://seattleweekly.trulia.com/real_estate/Seattle-Washington/, and click on the Avg sq ft tab, it shows the cost per sq foot for different numbers of bedrooms. It goes down as the number of bedrooms increases. Obviously additional bedrooms are not reducing the value of the house, but they are a proxy for larger houses. Simplistically, there is a fixed cost for the land, and variable cost for each sq ft. Other factors are view, etc. etc. Of course for a tear down, you are correct that the value/sq ft is $0.
Jon,
I did answer it, at length. It’s an extra unless it is subdividable. As an extra he may be able to get up to 10% more than the neighbors with smaller lots.
But generally, you can find comps with same size lots or similar sized lots and the land is not a factor. The land does not value out at a price per square foot.
I’ll try to get some examples and post them here in the comments.
mls is down for maintenance…I’ll have to get them tomorrow.
Thanks, Ardell, very interesting.. I’ve been calculating cost per square foot for all the for sale homes in my neighborhood. Without exception, the numbers are right around $230 give or take $5. The homes, however, run from 1950’s ranchers to new craftsman mcmansions, and the lots from 1/2 to 8 acres, with 3 being more the norm. Given the diversity of the homes, I was quite surprised to see the predictability of cost per square foot. Your analysis of “extras” probably does a lot to explain and account for the consistency.
Thanks for the tips, Ardell. Am I wrong in thinking comments like Larry’s are pretty common for people trying to assess their home’s value? Maybe for home builders who had to buy their land and build their house, they see the two as mutually exclusive. Just a thought.
Last year I was pricing homes in Woodway, and I found no difference attributable to having a 2 acre lot over a 1 acre lot, where the lot couldn’t be subdivided.
But this entire discussion is somewhat academic. Except for modular homes not yet set in place, a house has no set value. Cost to build is only one factor that appraisers look at in determining the value of a house, and it’s probably the one they discount the most. As alluded to above (by Ardell?), you can overbuild for the neighborhood, and that will limit your future appreciation. It’s conceivable that you could build two identical houses at the same time on two different lots, in two very different neighborhoods, and not be able to recover even the construction cost of the house in the lower end neighborhood.
Ardell, I think I understand what you’re saying, but are you saying then that the way the county apportions land and structure value is completely fallacious?
You are very welcome, Scotsman, but I clearly can’t take the credit. I learned that from a most excellent appraiser many years ago, and I’ve found the 10% rule of thumb for extras to be wise advice for both buyers and sellers. For buyers, a limit to what they will pay for extras and for sellers a limit to how much to improve a property beyond your neighbors.
“beyond your neighbors” is key. If you live in a neighborhood of 25 year old homes, as example. If all of the neighbors are now starting to upgrade with new roof, new siding, remodled kitchens and baths…then those are not “extras” once 1/3 to 1/2 of the neighborhood has done them. Comps equals three sold homes in recent history in close proximity. So what the comps have is not “extra” and you can go 10% above the comps with extras.
Same is true for tear downs and new builds. The 1st one to do it does not make as much as the one who has three new houses nearby to comp off of. Of course this is in a sane market and not the anything goes market of the last few years when no one gave a RA about wise rule of thumbs 🙂
I saw a news report a year or two ago where there are apparently some properties in the Bellevue area where a fairly nice house might be valued by the county at only about $10,000, because it’s in a likely tear down area. I’ve never actually run into such a property, however. (I’ve run into teardowns, but not one valued nominally.)
Larry,
You’re talking about taxation, not valuation 🙂 No, it isn’t “fallacious” but they reserve the right to be incorrect. You bring three comps showing the corrected valuation and you can get your taxes reduced.
The last time we had a run up and down turn I brought carloads of senior citizens from a neighborhood (the one I lived in) with older homes on larger lots. Every one of them had their taxes reduced because the assessments were raised at the peak of the market.
Often I say to agents “trust the assessor!” meaning look for what the assessor is noticing. If you have three comps assessed at $550,000 and the property your buyer is making an offer on is assessed at $520,000, don’t stop trying to figure it out until you see why the assessor discounted this one by $30,000.
Generally speaking assessors and appraisers and builders don’t discount enough for busy road or other weaknesses like near power lines. The market in weaker times is MUCH tougher on inherent weaknesses than any valuation method.
I’ll bring my laptop to the Broker’s Open today and show some figures for how the assessor treats larger lots in the same development. English Hill would be a good place to use as example for both market valuation and assessor valuation, since the area is huge and the lot sizes are varied. If there’s too much traffic at the Open, I’ll do it when I get back.
I agree that land will not price out in sq ft unless it is buildable, but I didn’t read Larry’s question as one about sq ft of land. I think he makes an important point that is not talked about nearly enough in comparison to its importance. If the land value in question is significant in comparison to the house, we are talking about something qualitative such as school district, view, waterfront, something like that. Each of those can add $100Ks. The value of the structure will go down as time goes on, but the land value does not, so those two have to be considered separately when deciding on a price. I think there is also an interesting effect that for an older structure on a very expensive piece of land, the $/sq ft drops off really fast over the years because anyone interested in paying that much for the land is not going to be satisfied with an older structure. That building would have held its value better sitting in a less expensive area.
Kary,
I have run into many where the structure (improvements) were valued nominally. In the post…the woman who asked me what her “house” was worth. The land was assessed around $200,000 and the house at $17,000.
Back in 2004 when everyone and their mother was looking for houses to flip, they used the tax records and nominally valued homes relative to land value to go door knocking. Builders doas well.
Shoot…mls is still down. It was supposed to back up by 6 a.m. I was going to look up the house next door to me. I would gess it to have a similar relatinship between land value and improvement value.
Though I doubt an assessor would automatically just plug in nominal value based on neighborhood alone, as I have seen many homes with nominal structure values in neighborhoods where no one is tearing down and building.
BTW, the 10% rules does NOT work in reverse. While a house shouldn’t be more than 10% above the comps for extras, there is no such limitation on the downside. A house can sell for 30% or more less than the neighbors due to deferred maintenance and distress.
Houses do not appreciate. Land appreciates. Houses do not have locational value. Land is all location value.
Every homeowner is in a constant battle against depreciation. But even with good maintenance, houses depreciate. Systems get old and wear out: roofs, windows, heat, plumbing, air conditioning, floors, appliances, electrical. Technology moves forward: more efficient furnaces, water-saving toilets, shower heads that can be turned off briefly to save water without losing temp settings; better insulation that saves heating and cooling costs. Tastes change: dining rooms may be unpopular, great rooms fashionable, home offices, mud rooms, laundry rooms; room sizes, layouts. An older home may appeal to some people, but others will prefer modern efficient technology, new systems, current design.
Larry’s initial point, that half the value is in the land, is spot on. A May, 2006, Federal Reserve Board Study (see http://www.federalreserve.gov/pubs/feds/2006/200625/index.html) found that among the top 46 metro markets, on average, land represented 50.9% of the value of single family homes in 2004, up from 32.0% in 1984 and 39.7% in 1998. For Seattle metro, they found the following:
1984: 31.8%
1998: 54.8%
2004: 62.6%
[For San Francisco metro, 74.9%, 81.1% and 88.5%. Those $660,000 homes are not much fancier than Seattle’s $264,000 homes at the time; the difference is mostly land value. See Tables 6a through 6g, and Appendix Table A-1.]
Houses depreciate at about 1.5% per year (same study).
Every teardown gives us an important signal about what land values are in the neighborhood. In Greenwich, CT, about 1/4 of residential transactions result in a teardown, and you would be amazed what gets torn down. The assessor there recognizes that a 20 year old house is virtually 100% depreciated. Land is what has value. Buildings become technologically obsolete; land doesn’t.
A good assessor values the land first, and then treats whatever building is on it as the residual — the difference between the value of the whole property and the value of the land itself. Land value maps should show reasonably smooth gradients of value per square foot of land. The 100% location in town is obviously the highest, and values slope off in all directions. Positive amenities (parks, views, good schools, transportation, etc) boost values; negative amenities reduce land values within some radius). [Transportation can actually boost land values enough to pay for the transportation, if only we’d utilize that land value properly!]
In a brand new neighborhood, it may not matter how large the lots are. But in an older neighborhood in a prime location, a slightly larger lot may be worth a good deal more than the smaller lot next door, if the larger lot allows a buyer to (a) add on to the house; (b) tear down and build a larger house on the lot; or (c) site a new house better on the larger lot than is possible on the smaller lot (e.g., to provide a glimpse of the ocean or river). Some people will pay more for a larger lot because they want a garden, or a play area; others will be more focused on the house, and not pay a cent more for a larger lot than a smaller lot (excluding the possibility of subdivision).
I agree about the “extras” like pools, tennis courts, etc. Unless most people find them a desirable asset, they aren’t going to add to the value of the property nearly as much as they cost. Relatedly, few remodeling projects add as much to the value of a home as they cost. The exceptions seem to be a 2nd bathroom in a home with only one, perhaps a deck. The others don’t pay back financially. An investment in good landscaping can pay back, because as the trees mature
Ardell [#2 comment] — houses don’t appreciate. Land does. The whole neighborhood rises together. And it has nothing to do with anything that individual homeowners do, or even all of them together. Rather, it is the location with respect to good jobs, good schools, good views, none of which the current owners are particular contributors to. We all are. And Elizabeth Warren and Amelia Tyagi, authors of “The Two Income Trap,” agree with you about the importance of good schools, and about middle class parents bidding up the value of homes — actually land — in those districts. And most single-income families simply can’t compete.
By the way: there is an alternative way to conduct ourselves: remove the taxes from our buildings, and place the taxes on land value, remaining revenue neutral. It will promote redevelopment of our cities and inner-ring suburbs by the private sector, and tend to reduce sprawl, while providing housing for many more people. But not everyone finds housing people close-in desirable, so it may not fly in your area. Harrisburg is thriving on it. [What would you build, if you wouldn’t incur an annual penalty from your community?]
“The value of the structure will go down as time goes on, but the land value does not…”
Oh yes it does! Just look at the comments of R.U.B. and Jillayne. The land value rises and falls based on the interest of builders. At present a home that relied on elevated land values is being hit the hardest in this market, especially in weaker locations like busy or semi-busy road.
The value of the land drops in direct proportion to the total price a builder can get for a finished product on it.
I’m missing something here. If a house’s value is determined by “location, location, location”, then it’s the land that gives it its value. If that weren’t the case, a 2000 sqft house in Roy on a 9000 sqft lot would cost the same as that same house and lot on Queen Anne. What’s the difference? The lot.
jon, some older houses hold their value better than newer houses, although perhaps not on a VERY expensive piece of land (e.g. Lake Washington waterfront).
Ardell wrote: “Often I say to agents “trust the assessor!
Ardell [@#22] As interest rates rise and fall, the same monthly or annual carrying costs will support smaller and larger mortgage principal amounts. The builder may not be so focused on his carrying costs for the development period, but he has to be focused on the buying power of those in the marketplace when his project is complete.
There seems to be a rule of thumb that says that a builder maximizes his profit by building a house that will sell for about 4-5 times whatever he paid for the land. I’ve seen it said repeatedly, but I’ve never figured out the underlying dynamics. But it seems to be a good explanation for why they’re building so many large houses [a/k/a McMansions) even if the buyers end up sufficiently strapped that they can only afford to put furniture in a few rooms for the first few years.
If we could lower the price of land, we could find that builders would be maximizing their profit by building more modestly sized homes — which would cost less to buy, less to heat and cool, less to maintain.
Placing more of our taxation on land value, and less on the buildings, would tend to bring down the selling price of the land, because just as higher interest rates reduce the buying power of those who must borrow to buy, a higher land tax is capitalized into the price of the land. Is this good for the community? I think so. [remember, I’m talking revenue neutral, just shifting the tax base slightly.]
Is it good for baby boomers and others who are counting on living off their home equity? Not so much. [I tend to think that in many places, financially strapped boomers who have accumulated home equity — mostly via land appreciation, not primarily from paying down their mortgages, since many have refinanced — will end up moving to less expensive parts of the country for retirement — places where land values are low, and locals don’t believe in taxing themselves much to provide good schools, libraries, and other services which make their communities great places to live. But I could be wrong.]
Kary, the way it’s supposed to work, if you take out a building permit for the remodeling, the county just adds the value of the remodel on to the structure. However, a lot of people do some very major work without permits, and then the county has no way of knowing. I don’t think they have the personnel to go out and inspect periodically, and compare to permit records. If they did, some people could have to rip out some very expensive improvements.
The “land is 20% of the value” rule of thumb may be pretty good for a new house, but from there, the house depreciates and the land appreciates, and the land percentage rises.
At least, the land appreciates if population is growing a bit in the area; but if no one wants to move there, the land value will fall, too. Think of some of the rust belt cities.
California’s Proposition 13, keeping assessments low and therefore property taxes artificially low, has also caused the land to appreciate — sort of the flip side of the tax being capitalized into the land value. Prop 13 has caused all sorts of havoc. They have the 4th lowest homeownership rate in the US — but their seniors, the people who were already homeowners when it came in 30 years ago — have a HIGHER homeownership rate than the remainder of the US! Think of what this has meant for young families. Ouch! Long commutes, expensive housing, high taxes — sometimes 3 or 4 times what seniors [or their children — see the recent articles about Cindy McCain’s trust house] are subsidized at.
Larry, I was saying the assessor didn’t come out to look at the remodel so see what was done.
I do remember they sent me something asking me to tell them how much the value went up. They offered some sort of incentive if I did that, like a freeze of assessments for 3 years or something. I just threw it away.
LTV Fan,
…and there are people who bought vacant lots all over the Country (Internationally even) sight unseen, whose value ended up as zero as no one wanted them. The owners let them go for taxes, as they were an annual expense and a liability, but really of little or no value. But that doesnt’ make the taxes zero.
“I’m missing something here. If a house’s value is determined by “location, location, location
“Houses do not appreciate.”
Some houses do and some houses don’t. Historic homes with character that is basically irreplaceable and priceless clearly do appreciate. If the house becomes functionally obsolete, then it will depreciate. A 4 bedroom 2 1/2 bath Craftsman home from 1910 with a large main floor foot print and all bedrooms up, that has been well maintained and updated over the years, clearly will appreciate in value.
“They offered some sort of incentive if I did that, like a freeze of assessments”
I have seen many assessments where there were permits and the County has all the info, but the assessment wasn’t raised in proportion to the improvements. There have been incentives over the years for improving historic homes and upgrading areas that were getting run down. My own assessment is ridiculously low and doesn’t account for the view at all. It has something to do with the fact that when the previous owner expanded it from 1,000 sf to 3,300 sf, he didn’t change the look of it from the street and maintained the historic integrity. I have a friend in Goat Hill with the same situation.
At different periods of time, the assessments were downgraded as to improvements, to promote revitalization and to reward upgrades that were made by government desires of the time.
Government often promotes change with incentives. I know Kirkland a couple of years back was allowing subdivision of lots to smaller than area requirements, if the owner didn’t tear down a home built in the 20s in the process. Of course once they allow the subdivision, there likely is nothing to stop the future owner of the lot with the historic home on it from tearing it down.
I know Mayor Nickels is looking to promote more green building and certain asthetic aspects of condos, townhomes and multi-family dwellings in Seattle. Sometimes in order for Government to invoke changes that they desire, the offer incentives.
I have also seen very low assessments on homes that use the senior citizen tax discounts, though I haven’t understood how Seattle accommodates that. I think they may lower the assessment and not just the tax.
So just because the assessment value is low, does not mean it has a direct relationship to market value. When I say “trust the assessor” I also said do a lot of work to find out what the assessor is doing. He always has a reason, and that reason may or may not influence market value. But don’t just wave the difference away as not important.
Why would an assessor care if you have a granite counter in your house? In three years that granite counter may be obsolete and everyone will want something else. Cosmetic improvements can be a fad for a time, and generally the assessor doesn’t go into people’s homes to count the number of gold plated faucets.
Some stats regarding lot size and value. As I indicated in an earlier comment, homes on English Hill in Redmond and Woodinville are good examples of lot size not valuing out on a price per square foot basis. In fact too large often equals a subtraction vs. an addition to value. I will also post how much or how little the tax assessor adds for additional land size.
I am using recent solds (within 6 months) so that we are looking at real prices and not “asking” prices. I am pulling the search for property as I am typing this comment, so it will either prove me right or wrong in “real time”.
Highest priced sold was a house sold for $950,000 on a 24,000 sf lot with 4,430 sf. Just behind that in total sale price, we see a house of 3,720 sf built in the same year on a 71,000 sf lot.
Both were in the same neighborhood of Cascade Park. The home with the lot size that was basically 3X the size received $239 per square foot based on structure, vs. the home with the “smaller” lot that received $214 per square foot for the structure. Perhaps the $20 per square foot increase was about the 3X lot size, but still just a fraction more and not a full value for the addtional 50,000 square feet of extra land.
This example fits pretty well into the 10% for “extras” guideline of getting 10% more on a price per square foot (of structure only) basis for the 3X extra land.
Another home of 2,930 sf built in the same year on a 10,000 sf lot sold for $777,000 in the same timeframe at $265 per square foot. This home with the relatively small lot backed to a green belt. So you had the privacy and feel of lots of land, without the maintenace. If you use this as an example, then the large lots were actually sold at a discount vs. a plus.
Now lets see what the tax assessor does with land value on these three.
71,000 sf assessed at $194,000 for the lot and $602,000 for structure of 3,720 totalling 796,000 sold for $890,000.
24,000 sf assessed at $193,000 for the lot and $712,000 for the structure of 4,430 totalling $905,000 sold for $950,000
10,300 sf assessed at $157,000 for the land and $566,000 for the 2,930 sf structure totalling $723,000 assessed value sold for $777,000.
The first house sold for 1.2 times assessed value, and the additional land was given little or no value for tax purposes.
The second house sold for 1.05 times assessed value.
The third house sold for 1.07 times assessed value
So the first house of 71,000 sf lot was given little or no added value for the lot by the tax assessor, but the market allowed the 10% ” extra” value which would have been 1.155 X assessed value.
The other two houses valued out normally and balanced out at roughly the same relationship to value given by the tax assessor.
The 71,000 sf lot vs. the 24,000 sf lot are almost an identical example to Larry’s original question. While I answered his question without looking for proofs, the first search and with only looking for same year built and neigborhood, offered this almost identical proof of my position. I must say it amazes me when that happens.
So neither the tax assessor nor the market values the 3X extra lot at more than a 10% allowance for “extras”. Land is about “not enough” or “too much” or “just about right” for the most part unless the land can be subdivided. It’s more like Goldilocks and the Three Bears with minor additions and subtractions for too much or too little land.
And so I repeat…”Trust the Tax Assessor”. If the Assessor is giving extra value for that land, so does the market. Don’t vary in huge swings from the tax assessor’s valuations as to land, unless it is a separate, buildable lot.
Thanks, Ardell. Do all counties use pretty much the same methodology? I’m particularly looking at a couple of comparable properties in Pierce county:
Property #1:
Lot size: 16,687 sqft
Land assessment: $385,400
Structure assessment: $175,100
Listed price: $540,000
Property #2:
Lot size: 7500 sqft
Land assessment: $286,400
Structure assessment: $230,900
Listed price: $529,000
Both are view properties in the same neighborhood. Do those numbers seem right? FWIW, #1 is subdividable, though building a second house would be a messy proposition.
Larry,
How do you account for that first one selling for only $325,000 in May of 2006? How do you account for the current owner not subdividing the lot and selling the new lot and existing home separately?
There are 32 view houses on market within 1/2 mile, 3 pendings and only 7 sales in the last 6 months. 19 cancelled and expired listings during the same timeframe. Some are overlaps.
Are you going to live in it? How much would you take off the value of the existing home for having another house in close proximity and what do you deem the afterprice of the new house on the subdivided lot?
That doesn’t answer your question, but I can tell from your comment which two properties you are talking about, which limits me a bit as to commenting on a blog. So I thought I’d throw out a few questions you should consider.
Consider also that the house with the larger main floor footprint only has 2 bedrooms on the main level and one in the basement. The other has 126 sf less on the main floor, but 3 bedrooms on the same level…that being the main.
View houses cannot be valued by assessed value and these two houses are not apples to appels given the bedroom differences. The value of the view is determined by which rooms within the house offer the view, which I can’t see (especially on the subdividable lot)
Valuation of these two properties (3 with one built on the subdivided lot) has not much to do with price per square foot calculations or variances in assessed value as to home and lot. The bigger issue is what are you planning to do if you buy either of them? If you plan to sell in a short period of time, both are risky given the area sale stats. If you are planning to live in either of them, let me know and give me a rough idea of for how long.
Blogs are really for generic info. Once everyone can tell which houses you are talking about…the info gets too specific for “blogfodder” and has to be moved to private email.
These two homes have nothing to do with the example I gave involving English Hill. View property and subdividable lots are a much more complex valuation method, and can’t possible be done without walking the two lots and being inside the two houses.
But I do hope my questions have at least helped you in gathering more and possibly new information while making your decision.
I think the superflous indenting at the beginning of each comment has something to do with the fact that I cut and paste your comment into the original post. Apologies for the odd format, but I can’t seem to control the indenting of each comment. It’s “auto-formatting”.
Here’s what I find confusing. Ardell says [initial response to Larry] that “a good rule of thumb for builders is that the new house will sell for 3X the lot value.” LVTfan says [@22] “half the value is in the land,” and refers us to a Federal Reserve Study, which confirms that – at least in 2004. LVTfan [@27] says, “There seems to be a rule of thumb that says that a builder maximizes his profit by building a house that will sell for about 4-5 times whatever he paid for the land.” Can anyone sort this out?.
I would say “half the value is in the land” depends on how old the house is and in what condition the house is. The 3x, 4x, 5x theories are more about new construction.
On resale homes, you can see in the tax assessor records (Seattle Area) “% improved”. I went to a property the other day that was assessed at $403,000 with only $45,000 attributable to structure and a house down the street sold at $517,000 with only $10,000 of the assessed value attributable to structure. So “1/2 the value in the land” is clearly not universal.
As to 3X vs. 4X or 5X, a lot of that has to do with size of new construction and interior finishes…view considerations, lot size, etc…
My 3X is more of “a given” that the property will sell, and less of a gamble.
I have an acquaintance who bought 3 lots at $250,000 each and told him to build at resale price points of $750,000 to $850,000. He didn’t listen and put in mega square footage homes on less than 5,000 sf lots with top of the line finishes and priced them all over a million. They are not selling. So 4X and 5X lot value, depending on that for resale, is not a good move in this market, in my opinion.
3X is the more conservative approach and likely to be more successful. No one wants to pay that much more for upgraded finishes or expanded square footage on three levels vs. less square footage on two levels, unless you have extensive view considerations and “close to”/”walk to” amenities appeal plus privacy factor. A difficult combination to achieve.
I’m thinking of purchasing a bungelow. The land is owned by a group, so you only buy the bungelow. If the land is sold to a developer does the bungelow have any market value? Or only the land?
Lauren,
Sounds like a mobile home setup. Do you pay monthly rent for the land use? Are there many houses owned on the same basis on that piece of land? The cost of moving it may not be worth it.