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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What 6 photos tell us about the real estate market

I love how pictures can tell a story. Today I wanted to share some of the small but interesting things I’ve seen lately while out in the field during appraisal inspections. All of these images help tell a story about the real estate market.

Story 1:  Locks and Foreclosures

Changed lock on house - photo by Sacramento Appraisal Blog

Changed lock on house - photo by Sacramento Appraisal Blog

There are really two stories to tell here. First off, the locks were changed because the bank took possession of the property. While the number of foreclosures decreased by 20% last year in Sacramento County, still 1 out of every 10 sales on MLS is bank-owned. Secondly, someone broke into this house while it was vacant, which is why it has now been screwed shut from the outside and inside. Nice door, huh?

Story 2:  The Surge of New Construction

New construction in Sacramento market 2013 - photo by Sacramento Appraisal Blog

Have you been seeing new construction more lately? I’ve been seeing it all over the place in Sacramento, Folsom, Rancho Cordova, Elk Grove, Roseville, etc… This week alone I appraised two newly constructed homes. Since prices have seen an increase and housing inventory has been incredibly low, demand for new construction has been on the rise. Moreover, many new builders are working hard to not sell to investors, so this opens up opportunities for owner occupants to have more of a chance to get into contract (there is still major competition though).

Story 3:  “New” Graffiti

New construction in Sacramento market 2013 - graffiti - photo by Sacramento Appraisal Blog

Along with new construction comes graffiti. Most buyers probably don’t see stuff like this, but I see this quite a bit as an appraiser. A vacant house in almost any situation can be a target for theft and vandalism, and that’s certainly true with new construction. There was spray paint on almost every window upstairs.

Story 4:  Grandma’s Retro Flooring

Old vinyl flooring - photo by Sacramento Appraisal Blog

Did you have this pattern while growing up in the 60s or 70s? I came across this flooring recently in a duplex, and it made me smile since my Grandma had this exact pattern in her house when I was a kid. I’m always amazed how certain designs can bring back memories. Ultimately today’s buyers are not looking for flooring like this, but since sellers have more power than buyers right now in the market, buyers will tend to be less picky about certain outdated features when hunting for a home.

Story 5: Check the Details

new construction photo by Erin Stumpf

This photo was posted on Facebook by Erin Stumpf, a Realtor friend. I love her caption: “New construction final walk-through pop quiz: What’s wrong with this picture?” As you can see, the counter does not fit the cabinetry. What a great reminder to really look closely when buying a house. In a market that is saturated with investor flips, this is especially important because you want to buy a property that is remodeled well instead of a “lipstick on a pig” job so to speak. And remember, duct tape solves most problems in the world, but it’s not a good solution in real estate (I saw a duct tape “fix” recently to cover up shards of broken glass on one pane in a window). Thanks Erin for letting me use this photo.

Question: What else do these photos tell you about real estate or the market?

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The smell of new construction in Sacramento & Placer County

It’s too early in 2011 to see what this year will hold for new construction, but I’ll admit I feel cautiously optimistic to at least begin to witness some sparks of home building in the Sacramento area. Whether a few new houses in Anatolia, Empire Ranch, Ironworks, The Islands at Riverlake (Pocket Area) or Serenity Cove in West Sacramento, it’s been nice to personally spot new houses being built or planned. After construction nearly dropped off the face of the earth in the Sacramento area over the past few years, it would be warmly welcome to see that trend turn around. 

The graph is based on data from the United States Census Bureau for the number of permits pulled for new construction of single family residential properties.

Unpacking the Comparison of Building Permits:

  • It’s easy to see the very significant decline in building permits for both Sacramento County and Placer County over the past several years.
  • The history of permits in both counties seems to follow the same pattern in terms of an increase from 2000-2005 and then a major decrease from 2005 onward.
  • Sacramento County did have a much larger spike in production during the peak years. This makes sense when considering how many new subdivisions were built in Elk Grove, Rancho Cordova and pockets throughout the county.
  • While Sacramento County had more building permits pulled than Placer County from 1994-2008, Placer County narrowly surpassed Sacramento County in both 2009 and 2010 in total number of permits. 

Where have you seen new construction lately in the Sacramento area? Where would you like to see it? What stands out to you about the graph? Will we see more permits pulled in 2011 than 2010?

If you have any real estate appraisal, consulting, or property tax appeal needs in the Greater Sacramento Region, contact me at 916.595.3735, by email, on our appraiser website or via Facebook.