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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Great post Ryan. I have a HBU story like yours. I appraised a small house on the waterfront in Benicia a long time ago and my best comp had been torn down shortly after purchase to make way for a new home, just like your example. This is why it’s a good idea for appraisers to drive their comparables….
Thanks Joe. Oh, that’s a great example and it could be easy to miss without driving by the comp.
Almost every day I bid on appraisal jobs with potential for “splitting” where the person on the phone says to me that they do not want to subdivide the property, they just want a value on the property. I tell them that just because they do not plan to subdivide, does not mean that I do not need to analyze the potential influence on value. Properties with potential to divide are difficult assignments and cost a lot to appraise.
Thanks Gary. Yeah, there is often a disconnect between what a client wants and what an appraiser has to do. On a related note I find sometimes prospective clients will say, “I don’t need a full appraisal. I just need the value.” Or I might hear, “If you can inspect today, let me know what the value is, and then give me the report in a couple weeks…” It doesn’t always work like that.
Hi Ryan! I really enjoyed your post. This is a great example of highest and best use. I appreciate the point that you made that we have to differentiate what is technically possible with what is actually going on in the market. Nice thoughts as always! I also enjoyed your interview on Facebook today. Way to represent!
Thank you so much Jamie. I really appreciate it. Thanks for listening to some of the conversation today on Facebook. It’s interesting to do a Facebook Live. You never know where conversation is going to go.
Great post as usual Ryan.
Your comparisons between seller an buyers is spot on. Too bad Letterman isn’t on anymore. This woud be a great ‘Top Eleven’ list!
I hear, “This land can be split” at least once a month. Interesting where the sellers get these ideas…sometimes from the Realtor, but I just did a pre-listing appraisal primarily at the request of the Realtor to bring some reality to their client.
Thanks Jeff. I appreciate it. Yeah, I tend to have this conversation about once a month also. 🙂
Hi Ryan. Great post. When we bought our house we offered what we thought was a fair offer, and we thought of if there’s and issue with anything the seller would fix it or lower the price. The seller didn’t end of doing either. They acted as if we were being demanding. Their real estate agent said, “Look. The market is hot and you can’t ask for this stuff”. In the end we got maximum credits which only covered about 1/3 cost of repairs.
Thanks for sharing TJ. Yeah, it can be a struggle to obtain a lower price and/or credits for repairs and such depending on what the market is doing. It’s always nice when a seller is reasonable, though that doesn’t always happen.