I was asked a great question the other day about how much a larger lot is worth, and I wanted to share the conversation in case it’s helpful. Any thoughts?
Question: Does lot size play a big part when you determine a home’s value? Say for example the subject home is exactly the same in size and floor plan as a comparable home, but the lot size is 5000 sq. ft. bigger on the subject home. Will that give the subject home a lot more value compared to the comparable home?
Answer: A larger lot can add substantially to the appraised value, but how much value is really based on what larger lots have sold for in the neighborhood compared to smaller lots. If you can find some homes with larger lots and compare them to homes with standard-sized lots, that will help give you a good sense of what the market is willing to pay. Sometimes you’ll notice a very large difference in price depending on the lot size, but other times the difference might not be that much, which is why it’s important to consider the following:
6 things to keep in mind about valuing a larger lot size:
Location of extra space: If the extra 5000 sq ft is in the front yard, that might not be too valuable. How many buyers want a really large front yard to mow? - Small dent in total lot size: In some neighborhoods an extra 5000 sq ft might make no difference at all because the extra space might only be a dent in the total lot size. For instance, an extra 5000 sq ft when considering three acres is only 4% of the total lot size, and that’s likely minimal in the eyes of most buyers.
- Adverse location of lot: If a lot is located on a busy street or has some other adverse location, this can definitely impact the marketability of the larger size since buyers might pay less of a premium for the larger site.
- New construction premium: Builders often charge a tremendous lot premium for larger lots, but the resale market might not recognize and pay for that same premium. An owner might say, “I paid $100,000 extra for this lot when I bought it,” but that does not mean the market is willing to pay an extra $100K when the house sells on MLS a few years later.
- Utility of lot: Remember if the additional lot size is not usable because of zoning, an easement, vernal pools or some other issue on the lot, the extra space might not add much value.
- Double the size double the value: Keep in mind lots do not typically double in value when they double in size. It’s similar to an XXL shirt not selling for twice as much as a small t-shirt despite being nearly twice the size. For example, if one acre sold for $100,000, you probably won’t see 5 acres sell for $500,000. Each additional acre will likely have a lower price than the initial $100,000 per acre. This is the law of diminishing returns.
As you can see, a simple real estate question can sometimes stir many issues. In fact, this post could easily be twice as long. Just remember when you are dealing with a lot that is larger in size for the neighborhood, pay attention to previous similar sales (be sure the lot has similar utility and zoning). You’ll need to crunch data and do research, but on top of that it will be important to get in the mind of potential buyers to understand how the market would respond to the larger lot size.
Question: Anything else you’d add? Comments are welcome below.
If you liked this post, subscribe by email (or RSS). Thanks for being here.
Your six points are spot on. I had a typical Arden Arcade house with 2/3 acre and zoned R20. Sparkles of splitting the lot and building on the back was dashed when I learned that our side driveway was too narrow for emergency vehicles to access the rear.
Someday, the stars will align and someone will combine that half lot with the neighbor;s half lot (with a wide access) to build.
Thanks Jeff. I really appreciate it. That’s a perfect example of how a lot seemingly has tremendous value because of a potential for new construction (or whatever), but in actuality it cannot be built out.
Great blog post. You beat me to it. I was scheduled to write on this same topic in an upcoming appraiser blog. I guess that’s why you have the best appraisal blog anywhere.
Thanks Gary. You are too kind. I’m a fan of your blog, which I why I subscribe. I look forward to reading your post and your take.
Hi Ryan,
Thanks for the blog, I agree with pretty much all you say but I think it is important to define the difference between the initial buildable lot cost and additional acreage. The underlying lot minimum, say 1 acre will have by far the most value and the acreage above that one buildable lot and additional acreage falls quickly. While I have not come up with a specific formula it’s clear a very large portion of the value is that initial size that enables someone to construct a home.
George Brown
Thanks George. I always appreciate your take and I definitely agree with you. If you do come up with a formula, keep me posted. 🙂
Sometimes I hear the sentiment from agents that a 5-acre residential lot is simply a glorified 2-acre lot. In other words, at times buyers are only looking for about two acres, so in some cases they are simply not willing to pay much more for a similar house on a 5-acre parcel. Part of me hesitates to mention this because obviously it is not a hard and fast rule or principle that will apply in every case. But the sentiment does help illustrate a phenomenon that happens here and there, and that additional acreage has a diminished value.
Another added value of a large lot is it could be subdivided.
You are so right, Vic. Thanks.
Hi Ryan.
Great info! I’d be interested in your thoughts as to when the “extra lot size” is EXCESS land. We’ve had many discussions amongst our organization about if and how this may impact overall value.
Thanks, Kelly
Hi Kelly. Technically it would be considered excess land when the extra land is not needed to support the highest and best use (and can therefore be sold off). Finding that out can be tricky and would involve lots of research and conversations with the planning department for starters. I recently had an assignment with a single family residence on acreage. After learning there was a planned lot split and addition of a gas station on the corner of the subject lot, it was becoming clear there was some excess land on the subject site. In this case the lender client cancelled the order after a series of conversations because the report would not read that the current use was the highest and best use. It sounds like your office has thought this through. When do you determine something is excess land?
Nice blog post, Ryan.
My questions is this, in your opinion, what would you consider the added value to be of a single lot, that could support a separate rear lot, over that of a comparable single lot, that could not support a separate rear lot (due to a lack of street frontage), – 25% more, 50% more or greater?
Hi Shane. Thank you so much for reaching out. Sorry for the slight delay in response as I’ve been away from my desk in light of the holidays. Honestly, I wish I could give you a specific answer, but I can’t. The thing is there isn’t any percentage answer that would make sense in all markets or neighborhoods. After all, in an incredibly hot area where land is extremely valuable, it would be worth quite a bit more. But in a depressed neighborhood in a downward market the lot might not be worth much more at all (if anything more) because it wouldn’t be a good market to split anything regardless of the potential to do so. Ultimately the proof is in the market (your local market, that is). As hokey as that sounds, it’s true. In your case I would hope there would be other examples of properties that have sold with a similar lot configuration. That might help you see the story of value in the neighborhood. Or you might consider what vacant lots have sold for recently in he market area and then be able to consider what that means for your lot.
great informative read!
How much would 4 20 foot lots cost
Hi D. Honestly it’s going to depend on the location and whether the land is usable or not. There isn’t any one-size-fits-all answer I can give.
It sounds like it would be helpful to do a study of home sale prices in the neighborhood comparing e.g. 2500 square foot homes with quarter acre lot to 2500 square foot homes with half acre lot.
Yep, that could be insightful. Thanks.