Excess and surplus land (and why the difference matters)

Is it excess or surplus land? And why does it even matter? Let’s talk about that today while looking at a real life example of a lot that is currently being divided.

Excess Land: This is when the lot is larger in size and the extra land (or excess) can be sold separately from the existing lot. In other words, a portion of the lot can be broken off from the rest, sold separately, and have a different highest and best use from the rest of the lot.

excess-land-sacramento-appraisal-blog

Surplus Land: This is when the lot is larger in size and the extra land (or surplus) cannot be sold off separately. This means the “surplus” doesn’t have a separate highest and best use. The larger size is simply extra land that still might have some value, but it can’t be used for a separate purpose from the rest of the lot.

surplus-land-sacramento-appraisal-blog

Why does this matter?

1) Real Estate Jeopardy: Next time you’re on Jeopardy you’re going to sound like an expert when the category is land.

2) Assuming Value: It’s easy to assume a larger lot is always more valuable, but we have to ask if we’re dealing with surplus or excess land because it could make a difference in the value. At times we see a large lot size and get distracted like we’ve seen a bright shiny object. But can the land be divided? What can it be used for? Does the parcel shape help the lot be useful for buyers? And what have comps with larger lot sizes actually sold for too? 

3) The Bottom Line: Here’s the big deal. A larger lot that can be divided might be worth far more than a larger lot that cannot be divided (thanks Captain Obvious). For instance, the lot in the example above is located in the Curtis Park neighborhood and the extra space in the backyard is considered excess land because it CAN be divided and have a separate highest and best use. This backyard is currently being split by Keith Klassen in order to build two new homes. Anyway, this reminds us how important it is to talk with the local planning department to see what possibilities exist for extra space on a lot. We might see something big and assume it can be divided, but can it really? What does zoning allow? Moreover, is it realistic for the property to be divided right now? Remember, just because a lot can be divided doesn’t necessarily mean its going to happen in the current market. For instance, imagine values are tanking and new construction has stopped in the area. In a market like that any excess land might not command much of a value premium. But in a market where values are up and construction is happening, there is a higher probability of the lot being worth far more because it might be split.

keith-klassen-new-construction-in-curtis-park-sacramento

I hope this was helpful. There are many other things we could discuss here, so let’s kick around some ideas in the comments.

Questions: Anything else to add? Any stories to share? Did I miss something? I’d love to hear your take.

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