Four things to remember about the value of a larger lot

The lot is huge, so it must be worth more, right? But how much is it really worth? Let’s look at four quick points to consider when it comes to lot size. Don’t miss the two images at the bottom of the post too. I’d love to hear your take in the comments.

larger lot size in real estate - sacramento appraisal blog - image purchased from 123rf and used with permission

Four things to remember about the value of a larger lot:

  1. It’s about what the market will pay: The best way to know what a larger lot size is worth is to start comparing similar homes with and without larger lots. What is the price difference? If we can line up a few examples, we’ll probably begin to see a reasonable range of value emerge. Keep in mind there might not be any recent larger lot sales, but you can easily look at the past few years of neighborhood sales as well as sales in a competitive market. Value could be exponentially higher for the larger size, but then again it might be less than we’d think. At the end of the day we have to look to the market for the answer though since it all comes down to what buyers are actually willing to pay for the difference in size.
  2. Usefulness: When dealing with a larger lot we have to consider the usefulness of the extra space. What if the larger lot size was located in the front yard? Could there be a difference in value between a huge backyard and a large front yard? What if the lot had a funky shape that made most if it unusable? What if the larger lot was located right next to the highway compared to the interior of the neighborhood? What if there was an easement running through the lot that essentially cut the usable space in half? From a value standpoint we have to consider the effective usable lot size and make sure we are choosing comps with similar utility.
  3. New construction: Remember, builders tend to charge more for a “lot size premium” or “lot elevation premium” when a house initially sells, but this premium may or may not exist in the resale market years down the road. The owner might expect to sell for more, but what are homes with similar features actually selling for in the resale market? That’s what our focus needs to be.
  4. The temptation to give an adjustment: It’s tempting to give a lot size value adjustment any time we see a difference in size. Thus when we see a lot that is 6534 sq ft and a lot that is 8000 sq ft, we automatically apply an adjustment. Or if we see something that is 4356 sq ft and a lot that is 6500 sq ft, we’re tempted to use a price figure we think makes sense. But we have to ask ourselves, would buyers really make the adjustment? (adjustments are supposed to be based on the behavior of the market (buyers)). It’s easy to be trigger-happy about giving adjustments like this, but we have to remember there is no such thing as an adjustment that is going to work for every single neighborhood, price range, or market. In short, if the adjustment is incredibly minor, maybe it’s better to just not give it in the first place.

I hope this was helpful. Now two quick images.

lot utility - sacramento appraisal blog

Example of Finding an Adjustment: Assume these two model match sales have a similar location, upgrades, and condition. Now how much is the extra lot size worth based on actual sales? Remember, it’s ideal to find a few examples instead of just one so our results are more meaningful.

lot size example - by sacramento appraisal blog

Questions: Anything else to add? What is #5? Did I miss something? I’d love to hear your take.

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  1. says

    You are so right on the money. I have found lot sales in my area to be somewhat irrational in sales price even after reviewing all of the elements of location, view, utilities, etc, etc. I tend to isolate in a general way when possible to provide locational adjustments on the grid. Size adjustments tend to be in the highest and best use area more than strictly size alone. Thanks for the review.

    • says

      Fantastic comment, Mark. I appreciate it. I think you’re right about being irrational too. Sometimes we are looking for such an exact adjustment, but when we line up the sales it doesn’t seem like we can really extract one. It would be nice if it always worked out like the example I showed above, but sometimes it doesn’t. I think you’re smart to really consider the location. After all, a smaller lot in a stronger location might be worth way more than a larger lot on a weaker street (strong and weak in terms of the price the location can command).

  2. says

    Great blog post Ryan. I’m glad that you pointed out that a builder premium in a new development might not match the market reaction later. Another thing to watch for on larger lots is highest and best use. When appraisers have a very large difference in opinions of value, it often comes down to subdivision potential. I did an appraisal for an estate recently where the owner had another appraiser value the property. The other appraiser had a value based on a house with a big lot and concluded that, although legal, the market would not subdivide. The owner then placed the home on the market and received fifteen offers for more than $150k over asking price on the first day. All of the offers were from developers to subdivide the property. The owner of the estate then came to me for a new appraisal because it was obvious that the other appraisal was way off with the value and the owner did not want to pay taxes on the gains (because there was no gains, just a wrong value conclusion).

    • says

      Thank you Gary. I really appreciate your example and the reality of highest and best use. It sounds like there was a huge market for subdividing for this property. I’m glad you were there to consider that for the owner.

  3. says

    Good questions Ryan. In regard to #3, I find that more times than not the premium a builder put on something disappears whenever a property is resold. Of course this is not the rule and may be different in you area but I bring it up to remember than just because a builder said something in pre-development it may not hold true in the future.

    • says

      Very well stated, Tom. To go along with what you say, buyers tend to pay a premium for that “new house smell” (just like a car). This premium fades over time indeed.

  4. says

    The larger lot may actually have more of an adjustment in this case as the sales are almost a month apart. Ive seen prices swing 10-20k within a month during the spring/beginning of summer season when everyone is in a price war and multiple offers

    Great post!

    • says

      Thanks so much Max. I always appreciate your take. Your comment underscores the importance of looking at the contract date for the comps. These properties may have closed one month apart, but when did they get into contract? We could have three sales that all close on the same day, but if the contract dates are far apart, we could have different values – especially in a market like today. While the market is not quite as aggressive as it was in 2013, it’s getting up there for sure. I just read an article on interest rates going down again this week. It’s like more fuel on the fire, and that means we must strive all the more to see the current market in the midst of the sales. After all, there could be a value difference. Thanks again.

  5. says

    It’s not too much of an exaggeration to say that almost every lot in a new home development has a lot premium. Only the worst lots in a development don’t have a lot premium. It’s just a way for builders to raise prices.

    The only problem comes in when the owner actually believes their lot was premium when the bought it and now they think their house should sell for a premium above the neighborhood comps.

    • says

      Nail on head there, John. Well stated. Often in new construction the model homes tend to have the worst locations too. The idea is to sell the entire development and then sell the model at the end once higher prices have been achieved. It’s fantastic marketing really, but we always have to consider the location of a model home that is decked out with upgrades too. It’s not inherently valuable because it is a model home. As always, there are many factors to consider.

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