Excess Land??

[Rumrunner]

In summary how do you determine if excess land exists and then how do you handle in within the report?
Thanks to the best dang appraiser's in the country!

I sincerely appreciate your help.

This is Residential.

 

[CindyR]

I've had this explanation taped to my wall for a long time

I wish I knew how to add an image. I wonder if it worked.....

 

[hastalavista]

In summary how do you determine if excess land exists and then how do you handle in within the report?
Thanks to the best dang appraiser's in the country!

I sincerely appreciate your help.

You might have to provide a little more detail to get an assignment-meaningful answer, but I'll tell you how I do it:
A. Does the area in question qualify (it appears to have its own H&BU; going through all the 4-tests)?
B. Is there strong evidence supporting that someone would actually pay a excess-land premium for the property?

If yes to A & B, you likely have excess land.

"A" is the easier of the two analyses (IMO). Keep in mind that sometimes, the physical location of the existing improvements might result in a determination that splitting the existing lot is not really feasible.

"B" is a little tougher: If there is evidence that other properties in that market with a similar site-configuration as the subject have been "split", or evidence that there is a demand for sites that can be developed, then splitting the site may be the maximally productive decision and the value of that excess lot would reflect its H&BU potential (after accounting for the market reaction... if any... for the costs involved in the split).

I think excess land H&BU analysis should be broken down into 2-parts:
The first involves determining if it is legally permissible, physically possible, and financially feasible.
The second is, if the site in question passes the above tests, then is it maximally productive to actual split it out? Because as-is, that area in question has a use that is an alternative to it being developed on its own. The maximally productive question has to be convincing (not a certainty, but a likelihood) of happening for me to make that call. What I am saying is that the value, less costs, of what is carved out has to be convincingly higher than the value of that site area as yard space, or whatever else it is being used as now.

Keep this in mind: When we make a decision that a site is excess (usually that means it has a separate H&BU and is not needed to support the existing use), we are not telling the current owner to "split the lot". What we are saying is,
"If this property were put up for sale, the likely buyer would pay a higher price for the excess land over the buyer who just wants a house on a large lot. A buyer who just wants a house on a large lot will pay for a house and a larger lot. But in this case, a buyer of the subject would purchase the house and split the lot; the value of the existing home with the site area necessary to support it + the value of the excess land is not only higher than the value of the subject with its existing improvement on the larger (not split) lot, but it is high enough to motivate a buyer to pay more than the buyer who is just looking for the house and large lot."
The higher price is paid because there exists the ability to carve-out the excess land and sell it separately at a price that is higher than the value of that area being used as part of a larger site (yard area, or whatever it might be). Not all buyers want to go through this rigamarole, but if the site-area-in-question is truly excess, then a buyer who would go through the rigamarole is always going to pay more than the buyer who isn't willing to do it. One buyer (in our case, the likely buyer) is paying a premium for the value of the excess land and the other buyer (who just wants a house and a larger lot) isn't going to pay that premium.

The value of the excess land is usually not what it would be if it were actually split (because it isn't actually split yet).
The value of the excess land is the value it would be if split less the costs of the split and the EI a likely buyer would require to take on the project.
Scenario A: Assume the subject property is a house on a large site with no ability to split: it is worth $100.
Scenario B: Assume the subject property is a house on a smaller lot worth $90, and a vacant site (the area of the excess land) if already split is worth $30.
The value of Scenario A is $100 and the value of Scenario B is $120. That is a spread of $20. That is probably not what the excess land is worth.
The excess land is likely worth less than $20 but obviously more than zero (otherwise it wouldn't be excess). The difference between what it is worth as-if it were split and what it is not split but waiting to be split is the cost to split it and EI (Entrepreneurial Incentive; think of it as the payment needed by the buyer to offset the rigamarole of actually carving out the excess land).
The likely buyer, when valuing the additional price she/he is willing to pay for that excess land, is thinking
"As a house with a large lot, this place is worth $100. If I split it, the lot with the house and now smaller lot is worth $90 and that vacant site would be worth $30 for a net difference of $20 vs. the $100. But that vacant site isn't created yet; I have to pay some fees and it is going to take some time (and I may have other risks); so I'm not going to pay $20 for something that is going to cost me money and will be worth $20 afterward.
But I will pay $105 for everything; that means I'm paying $15 for the excess land ($15, because the value of the house and the now-smaller lot is $90; so I paid $90 for it and $15 for the excess land... total of $105) and once I split it; I'll get $30 for that excess land; I'll gross $15 (paid a total of $105, split and have a a house & site worth $90 and a vacant parcel I sold for $30: $120 - $105 = $15) and that will be enough to pay for the splitting fees and reward me for going through all this hassle to begin with."

That's what I say!
Good luck!

 

[hastalavista]

You asked how do I handle it in my report; my prior answer was focused on the analysis to determine if it is excess or not.

In the report, I value the improvement and that site-area which remains to support it. That value may be $90.

Then I value the excess land; I provide the necessary support for my conclusion (It is a different animal than the improved property; so I include a market analysis for sites and development potential), I provide my comps, I adjust for the market reaction (it is excess; not split yet), and then I conclude a value; let's say it is $15.

The subject's value is $90 + $15, or $105. Recall that I've analyzed the necessary discounts to the excess land (if it were already separated, it would be worth $30 per my prior post; but as excess land, it is worth $15). So this isn't like adding two separate market values together.

The excess land analysis and valuation component is its own section in my reports.

 

[Terrel L. Shields]

First step in the HBU is to determine the land value. At that point you find its value "as if vacant and available for its highest and best use" (whether its current use is "best" or not). Once you have that, then you can decide if the land value exceeds the improvement value (then it is a land appraisal) or if the improvements are the dominant estate.

So. Can the property be divided? That is the tricky question. In my mind, if it does not have a survey, then any "division" is a future event and to assume so would suggest you are evoking an EA (it is likely to be surveyed) or an HC (it is contrary to what exists)....OK. So I fault FHA for not being clear. And to ignore the excess land assumes a different HBU...doesn't it? If 40 acre parcels are common, then trust me, I am going to aver that a house and 40 acres is the HBU and the site may not be either surplus nor excess. It may be "just right" for the property as something a little more complex than SFR...It can be a rural acreage estate.

 

[Michigan CG]

You guys are too long winded.

Sucky Surplus; Excellent Excess.

 

[CANative]

Sometimes excess land does not need to be valued separately.

Remember this one Denis?

Highest and Best Use Analysis:
The subject is located in an unincorporated area of Santa Clara County and subject to county zoning ordinances. The zoning district is RR-5, Rural Residential 5 Acre minimum lot size. The purpose of the Rural Residential district, also known as the RR district, is to permit rural residential development in certain limited unincorporated areas of the county designated by the general plan. Residential, agricultural and open space uses are the primary uses intended within the district. Agriculture-related uses that are not permitted by right may also be permitted through the applicable discretionary review process if deemed compatible with residential uses. Commercial, industrial and institutional uses may be established only where they serve the needs of the resident rural population and result in a net overall reduction in travel demand for rural residents. This district is meant to apply to all parcels designated Rural Residential in the general plan.

The current uses for the subject land include a single family residence, a small secondary dwelling (accessory dwelling unit) and a metal outbuilding. These uses meet the description of uses Permited by Right and thus are legal, conforming uses. The owner of the subject property leases about 15 acres to a tenant farmer for agricultural use (row crops, corn, etc.) The owner states that the lease terms are $6,000 per year. The 17.9± acre lot size exceeds the minimum 5 acre requirement and can be further subdivided. The process of subdividing the subject land was started some years ago but was never finalized. I have examed the tenantive map which shows the proposed lot split as two 5 acre tracts and a larger 7.9 acre tract which contains the primary residence. The permit is apparently still active per County Planning staff. The approval is conditional and there is a list of many requirements needed before finalization.

Based on my research and analysis of sales of similar tracts of land it is my opinon that there is no signficant difference in price per acre between smaller parcels of about 5 acres and larger tracts of 20 or more acres. Pricing is within a range of $43,000 to $46,000 acres. Given the time and expense involved in finalizing the lot split my conclusion is that it is not financially feasible as of the effective date of value. Of the uses permitted by right, a single family home would produce the highest value. Therefore, highest and best use, as though vacant, would be to build a good quality, single family residence.

One-unit residential properties within this market are typically purchased for owner-use (owner-occupant) amenties rather than for commercial income from agricultural uses; although some one-unit homes are non-owner occupied/rentals, the typical buyer is typically purchasing for utility (residence). The property, as improved, is more valuable than if vacant, ready for development. Based on my inspection of the site and improvements there were no obvious adverse property conditions and no indications that alterations, modifications or demoltion for a new use were imminent and therefore the the Highest and Best Use, as improved, is to continue the current use.

 

[hastalavista]

Sometimes excess land does not need to be valued separately.

Remember this one Denis?

Yes, I remember it well; it is a great example. The subdivision process had actually started but not completed; and despite that it still wasn't worth more as excess than what it was as-is (supplemental to the primary use).

And that is what prompted me to suggest, when excess land may be present, that the alternative use to consider is the actual use as-is. In the assignment you did, the alternative use was to keep as-is and not do anything at this time.
I think there should be more emphasis put on the "is the excess land conclusion really (a) viable financially and (b) clearly beats out what the site area is being used as now?"
Too much emphasis on the numbers, not enough emphasis on analyzing what the most probable activity (split or leave as-is) would be by the likely buyer.

BTW, some of those outbuildings may not have been permitted: did you check "illegal" for the use?

 

[Terrel L. Shields]

In assessment work, I see folks value a 40 ac. parcel as 39 acres agri and 1 acre as a "house lot". That is a completely artificial division. In Agri forms, and predominately in farmland, you often see the same sort of divisions, with the 40 acres divided into the various soils categories. 10 ac. Captina, 20 acres Jay-Taloka, 9 acres Nixa, and 1 acre House lot. The idea being you found comps of "pure" land sales with only one type of soil (a basically impossible task in many areas). This is a method known as "summation" akin to the cost approach, once also called summation. The FSA in Oklahoma was adamant that you do the "Cost Approach" on every appraisal, even bare land. They were referring to this summation process. That seems nonsensical to me, but whatever...

In rural property, I find that segregating the improvements and land seems more logical. Valuing the whole site as vacant, then the buildings provides a better sense of what these properties tend to sell for, imho.