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.
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.
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.
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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big Lots are great unless you push the mower…
Seller to include John Deere tractor mower in the purchase.
Thank you for the article Ryan. This is such a big issue for appraisals. The truth is that lenders often do not want to lend on the value of land that can be divided and often residential appraisers do not know how to deal with excess land (usually appraisers do a good job with surplus land). Lenders will typically have guidelines to follow for such a situation and sometimes it involves assumptions that the excess land is not there or is not dividable. I have an appraiser friend who did an appraisal on a home that definitely had a highest and best use to divide. The appraisal was for a lender. He did not consider the subdivision potential in the report. There was a complaint filed with the state relating to the appraisal and the appraiser ended up losing his license for five years because of ignoring the subdivision potential. The moral of the story is that appraisers cannot ignore excess land. They must analyze the highest and best use, come to a conclusion of highest and best use, disclose what they know and what they do not know, and make any assumptions necessary to move forward and deal with the situation. Also, an appraiser must be competent to take an assignment where the highest and best use is questionable (in other words, has excess land).
That’s sobering for your friend to have lost his license for 5 years. I agree with you excess land cannot be ignored. Thank you Gary. I appreciate your comments.
Appraisers, what have you done when appraising a property with excess land? if it was for a lender, what did the lender ask you to do? Please share.
Excellent article Ryan. This is a fairly frequent challenge for many appraisers. And it often triggers a follow-up issue with Highest & Best Use, when subdividing the site creates more value in that alternate use.
Thanks Mike. I appreciate it. Yeah, this can become a complicated assignment really where the appraiser may need to consider two values (the house with the smaller lot and then the value of the excess lot).
OMG Ryan!!
I didn’t even know what I didn’t know but I knew I was missing something that I needed to know!! ;))
This is so timely because I’m looking at two properties with almost twice as much land as normal and I’ve been struggling with comping them because of that!
And with one lot, I’ve been thinking I could actually build two houses on it…but now, thanks to your blog, I will avoid assuming that I can do that without making sure first!
I did’t know there was “Excess” land and “Surplus” land, I just thought it was all excess land!
You teach me something with every new blog post…THANK YOU!! 😉
Right on Bev. That makes my day to hear. I think we all don’t know what we don’t know in so many ways in life. 🙂
;)))))
Very timely for me Ryan. I am doing an an appraisal on a home that is around 70-80 years old. The developer at that time took 3 lots for himself to build his home and stuck his house right in the middle. I explained the difference to the owner between excess land and surplus land like you laid out here. Unfortunately because of the location of the house on the three lots and the setbacks it would not be possible to sell off any part of the site for another use. The extra land did provide value but not to the extent of another separate lot. Thanks for explaining this in an understandable way.
Wow Tom, that’s a great example. Thanks for sharing. It sounds like you did a solid job explaining this to the owner. This is where the rubber meets the road with this post and it’s important to explain the difference between surplus and excess. I realize it’s easy to mix up these two words also (like prostrate and prostate (okay, maybe that was a stretch)).
Hi Ryan! I found this older blog when searching for a means how to fully describe this situation to a lender and how to address it fully in the 1004 that they have requested. Would you be willing to give a brief view of how you handle these, in a typical lender 1004 refi? For example. I just received an order for a one story home in a typical suburban neighborhood that has an attached, jointly deeded/same tax ID buildable lot. Thank you very much!
Hi KK, thanks for reaching out. I’m sure there are many ways to “skin a cat” so to speak, so anyone can chime in with their thoughts. Here’s what I might consider:
1) Do research to find out if the lot truly is excess or surplus. Have a good idea what it is before approaching the client.
2) Ask the client how they would like for me to proceed. I’m not a big fan of surprising clients with big stuff. So if this was a deal-killer for some reason, then the client can decide. Or if the client has specific instructions for me, that’s great. I just don’t want to assume I know what is best for the client or assume the best direction to take.
3) Once I get some direction I’ll proceed and simply spell out the issue in a couple different places in the report. If it is surplus land then it’s not really much of an issue because it probably contributes very little to the value because it’s just extra land floating around that really doesn’t have a distinct highest and best use. If it’s excess land I may have to discuss that a bit more and support a value for it. Ideally I can find comps with excess land, but I may have to find a different way to give an adjustment and support that.
This is all pretty vague. Let me know if you have any pointed questions. I’m always glad to share ideas.
One more thing. Just in case it’s relevant, here’s a post on dealing with two separate lots for one property. I’m not sure if this relates at all to what you are talking about, but I figured I would share. sacramentoappraisalblog.com/2015/08/18/can-two-separate-lots-be-included-in-one-appraisal
Hi Ryan,
I encounter this a lot in semi-rural to rural areas I cover. There was first the circa 2008 stuff where, if the single parcel exceeded 5 acres, lenders requested you simply disregard the additional acreage. Ridiculous that some appraiser’s actually acquiesced.
But more to the point relative to the aforementioned response and linked blog port. First, trying to explain these situations to lenders and, especially through AMC’s is no joy. Secondly, to treat an additional legally buildable parcel as such, value that portion of the site as such and “sum the pieces” is an unquestionable direct violation of USPAP.
However, I propose (and have completed reports this way), that there is an alternative and legally permissible way to complete the “NOT GONNA HAPPEN” scenario. While it typically recommend a scenario of this nature be completed as 2 separate reports (with the client/lender determining if they want to sum the parts for financing purposes), this could also be completed under the hypothetical condition (as long as they’re contiguous and zoned the same) that the subject displays 1 individual site with an area identical to that of the 2 parcels, but is deemed to display excess as opposed to surplus land. This is obviously easier in suburban and rural areas where you have larger vacant site and improved site sales as opposed to support in urban markets, although I believe it’s another way to ethically complete a request of this nature within the confines of USPAP.
Of course, this would typically pay less than 2 separate assignments and there’s always that pesky part about trying to get a lender to understand what a “hypothetical condition” is.
My $0.02.
Thanks Mark. I appreciate your commentary. It’s tricky out there. I find lenders will ask appraisers to do just about anything, so we really have to discern what we should do and stick to our guns. If it’s a situation where there are two distinct parcels with different highest and best uses, what the client is requesting at times simply may not be realistic for an appraiser to do. Thus sometimes our best answer is NO. After all, we are the ones who need to develop the scope of work appropriate for the assignment rather than the client. Yet I still firmly believe in talking with the client (as hard as that may be at times with lenders).
On a side note that is somewhat related, I just finished an appraisal for a lot split in Midtown. It’s amazing that an owner can split off a portion of the rear yard at basically 2,000 sq ft and that a developer will build on it. In this situation the excess land clearly had tremendously more value alone. The appraisal was really designed for a lender to allow a lot split. Thus they wanted the value of the remaining parcel, the value of the split land alone, and then the value of everything together. Thankfully there are actually comps out there to show the value of each.
Thank you Ryan.
Every situation is different, and the relatively vague USPAP high wire isn’t an easy one to walk. I try to assist the client as best I can within those confines although, based upon the amount of reviews I do, you’re right; Some appraiser’s will do exactly what the client’s (or AMC’s) ask. Personally, the fact it’s my certification and signature on the line, discernment has kept me in business for 30 years.
Hopefully you charged accordingly on that last one. My appraisal associate (and wife) is shocked at how many residential appraisals I’ve completed this year in the $1,500 to $2,500 range on vacant land and complex and/or unique properties to include reviews. In our market area, many of our peers won’t (and likely shouldn’t) even quote these (wife included). Bring on the complex, but it’s always good to know what other knowledgeable appraiser’s such as yourself are thinking/would do.
I’ve completed a couple different assignments with excess land. One in particular was for a sale with two lots on separate deeds, contingent on same deed. After further review, I was able to confirm that the second lot was excess land with a different highest and best use, due to the zoning and location with busy road frontage. The other lot that was improved was set back and typical as SFR with no busy road frontage. I informed the client and requested the assignment only include the improved lot or I would have to cancel the assignment. They understood, and I was able to follow through.
Another example included a lot with a dwelling that was nearly rebuilt, with a contiguous vacant lot of identical size and zoning. I confirmed that it was excess land with separate parcel number on same deed. There were other sales with two lots on the same deed, so I included one to support the excess land value difference and marketability. Next, I equated the value of the second lot for sales with two contiguous parcels on one deed vs one of similar size but with only one parcel. I then adjusted for the excess land value of second lot size in a separate category in the grid, and accounted for the improved lot in the site category. After adjustments, the sale with the two lots supported the excess land adjustment. These are the recommendations I’ve received in the past for valuing excess land if the highest and best use is the same but separate parcels. If anyone recommends practicing different or has any recommendations/suggestions, then please share.
Thanks Nick. I appreciate you pitching in your experiences here.
I disagree with the basic premise because it is a hypothetical. It’s akin to an unfinished room over a garage. It only has value as it’s current use and perhaps potential future use – the full value of which could only be realized given certain circumstances occurring. For most owners, an extra lot is extra yard space, not an investment. Thus, whether you define it as excess or surplus, you only have a contributory value as of that effective date. Only if circumstances should hypothetically change would the separate lot realize its full value. And likewise, then it’s removal would tend to have limited impact on value to the original residence because it was always just a contributing factor.
Thanks Timothy. I suppose this is where we have to look to the comps. Hopefully we can find some sales with excess and surplus land to tell the story.