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lot split

Teardowns, lot splits, & highest and best use

August 1, 2018 By Ryan Lundquist 11 Comments

A few weeks ago I took a vacation. And like many working in real estate, my mind doesn’t quite shut off all the way – at least at first. So I’m constantly thinking about trends and value. Anyway, I knew I had a post in me when spotting this.

Teardown: This is Sunset Beach in Southern California. Can you spot the “teardown” house? Yep. It’s the one in the middle. We know this because there are two “McMansion” homes on either side that were built in recent years. Just by this photo alone we get a glimpse into market trends, don’t we?

This vacant lot is a couple blocks away. A house was purchased, razed, and now something big is likely to be built. This is further insight into the market, right?

Highest & best use: Sometimes we don’t think much about highest and best use, but let’s revisit the concept. Highest and best use is that use which is legally permissible, physically and reasonably possible, economically and financially feasible, and which results in the most profitable of the alternatives.

YES: When we look at the house above we can say the highest and best use is very likely for it to be razed and a larger home to be built. Why? Because it’s legal to tear down and rebuild, it’s something that is regularly happening on the street, it’s definitely occurring in the current economy, and we’d see a much higher value for a larger property.

NO: In contrast, if we looked around and nobody was tearing down homes because the city was not allowing it, then the highest and best use couldn’t be building a McMansion because it’s not legally possible. Or if the economy was terrible and building was at a standstill, then we might say it’s not economically feasible to rebuild right now, so the highest and best use might be to keep the house as it is and wait until the economy improves.

A “splitting” example from sellers lately: On a related note I’ve heard a number of sellers lately say things like, “Dude, somebody’s going to buy my lot and split it.” Okay, but is that really the highest and best use for the lot and location? Here’s a few things to think about:

1) Basic truth: Just because it’s technically possible to split a lot doesn’t mean it’s realistic to see that happen at the location or in the current market.

2) Look around: Are people splitting lots in the local market and developing them? Sometimes the proof of value is found in the market just like we see above. It’s not always easy to separate ourselves from what is technically possible and what is actually happening in the market, but we have to do that. If you don’t see anyone splitting lots or building new homes, then your lot might not be a good candidate for a split.

3) Disconnected: Lately I’ve noticed quite a few sellers being disconnected from buyers, so I created this image. My advice? Sellers, be in tune with reasonable prices and also be careful about expecting buyers to do something like a lot split if that’s not realistic for the current market.

Anyway, that’s my quick post inspired by vacation. I hope it was interesting.

Questions: What examples have you seen lately where sellers are disconnected from buyers? Any highest and best use stories too?

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Filed Under: Appraisal Stuff Tagged With: appraisals in Sacramento, disconnected sellers, highest and best use, Home Appraiser, House Appraiser, lot split, overpricing, sacramento appraisers, sellers vs buyers, tear-down, teardown

Is it okay to compare two detached units with two attached units?

March 1, 2016 By Ryan Lundquist 26 Comments

Is it okay to compare two detached units with two attached units? Or in other words, can we compare a traditional attached duplex with 2 detached houses on one lot? I find sometimes the answer is YES, but other times NO. Let’s consider a few ideas together. I’d love to hear your take in the comments below.

attached duplex vs detached duplex - sacramento appraisal blog

Four things to consider about detached vs. attached:

  1. Two  Units: This sounds basic, but let’s remember an attached duplex (sometimes called a “duet” in other parts of the country) is two units, which is the same number of units as two houses on one lot. This naturally helps us lump both types of properties into a similar pile, though we still have to ask a few questions when it comes to value.
  2. Difference in Rent: One of the questions I ask is whether the attached units and detached units are commanding the same rent (assuming the locations are equal). This could be a clue whether there is a value difference or not. If all units are attracting the same rent and the lot cannot be split, we could be looking at properties with a similar value. On the other hand, if the detached units are commanding higher rents, that might be a clue of a value premium. Of course the only way to discover a value difference is to study the market (this is one reason why there is no such thing as a quick “comp check”). As an example, I recall a “fourplex” where there were four detached tiny single family homes on one lot in Sacramento. While the owner’s property was special, the lot could not be split and the rents were exactly the same as other traditional attached fourplexes. Moreover, the property sold previously on the open market and did not command a price premium during its previous sale, which also helped show there was no value premium for being detached.
  3. Lot Split: One of the big issues to consider when making comparisons is whether the lot can be split. If there are two detached homes on one lot, an investor might purchase the property to split the lot and sell the individual properties. I saw this happen recently in Midtown where there were two houses on one lot that were side-by-side on the street. The owner purchased these units a few years ago as a duplex (technically that’s what it is since we are talking about two units), but after the lot was split the owner sold off one unit and kept one for himself. In many cases it’s common to see one house in front and the other in back, so a lot split might not be possible with that set-up (or maybe it is possible, but awkward). However, if the possibility of a lot split exists, it could be worth something in the market, right?
  4. The Buyer Pool: There are some duplexes that are best for investors because they simply look and feel like rentals. It’s hard to describe this without sounding pompous, but you probably know what I’m talking about. On the other hand, some multi-unit properties might attract more owner occupant buyers than investors. When this happens, the units might actually command a price premium because of the larger pool of buyers. This underscores the importance of considering who the potential buyer might be and researching the market. What have buyers actually paid for similar properties in the past? What are current listings doing?

duplex comparison by sacramento appraisal blog

Conclusion: In short, it is technically okay to compare two attached units with two detached units, but for reasons listed above we ought to be cautious to be sure we are making an “apples to apples” comparison. What I mean is we need to give strong weight to the properties that are most similar and let the market speak to us instead of our assumptions.

surfer on my cup - photo by ryan lundquist

By the way, I just got back from visiting family this weekend in Southern California. I snapped this shot at Sunset Beach. It’s called “Surfer on my Cup.”  🙂

Questions: Any stories, insight, or ideas to share? Did I miss anything?

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Filed Under: Appraisal Stuff, Resources Tagged With: appraisals multi-unit properties, appraisers in Sacramento, attached duplex, detached duplex, Duplex, duplex market sacramento, lot split, multi-units, rent, two units

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