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Highest And Best Use (sub-dividable Lot)

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DLAppraisals

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California
I am appraising a single family residence on a very unique lot in Ontario, CA , the lot size is 50,000 Sq.Ft. what makes the lot unique is it is a "street to street" lot, so the house and garage are located on a section facing one street, then its just vacant land extending all the way to the 2nd street, per the zoning requirements regarding lot dimensions and verified with the City this is a sub-dividable lot. Not many vacant land sales within this market but I did find one sale of a vacant lot of about 15k Sq.Ft. which sold for $200k, in my opinion the highest and best use of this property is to sub-divide the lot into 2 parcels or about 25k each, I have gone back 36 months and expanded search out to a 5 mile radius, couldn't find anything with a similar "street to street" sub-dividable lot.

Open to comments as to whether or not I am handling this the wrong way. thank you
 

residentialguy

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Minnesota
How does the lot conform to the neighborhood? Do you have 50k sf lots or are they all 25k and smaller? Just because it's possible doesn't mean it's HBU.
 

J Grant

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From info provided sounds like HBU but Res Guy above has a good point to explore as well. Are there any large homes built on double size lots, or is area mainly smaller homes on the smaller lots?
 

DLAppraisals

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in response, there are some properties with similar lots within this market, however, none that extend street to street and appear sub-dividable, they are lots much wider with over 150' of frontage and typically have horse facilities and large ranch style homes of about 3,000 sq.Ft. . This subject is a narrow lot 77.5' extending approximately 627 and features a home which is underbuilt for the area at 1,100 Sq.Ft. .
 

Terrel L. Shields

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this is a sub-dividable lot
If you are asked to value the property AS IS...then the fact it COULD BE (AT SOME FUTURE POINT) subdivided is a moot question. There is a cost to subdividing a lot. And approvals, etc. that you do not have here, now, today "as is"....

Do not construe HBU to mean what some future use could be. HBU as if vacant means if the lot "as if vacant" would it bring more than it will with the improvements then that is the HBU. That is, the lot is ready for its ideal improvement. The lands future utility is less a concern as is.

The value of the land is the value of a 50,000 SF lot...period, not 3 15,000 SF lots. Even if divisible, it is likely surplus to the property, but even if excess that could be divided it is still not divided so don't act like it is. Treating it as two or more tracts when it is only one is contrary to what exists therefore would require a hypothetical consideration. Unless you are asked to treat it that way, then "as is" it is the value of a large lot, not 2 or 3 smaller ones.

As for an undersized house, does it contribute value or not? And if it does, does it suffer additional functional obsolescence for being too small for the neighborhood.
 

DLAppraisals

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Terrel, thank you so much for the comment, much appreciated. I guess the question I have to ask is if there is a difference in value between the subject's 50k Sq.Ft lot which can be divided into 2 parcels in comparison to a 50k Sq.Ft. lot which is not sub-dividable and because I have no data on that as I cant any similar sales of a similar lot it cannot be determined due to lack of market data
 

Terrel L. Shields

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Arkansas
I have no data
Always an issue but you simply have to go back in time or space until you find something to hang your hat on. A looksee at the sales history might help. If you can find a sale from the past 10 years of the property, then find contemporary sales, you can see if a premium was paid for the extra land. That premium would reflect the value of the land less the defect of being an undersized house...which makes the analysis that much more difficult. But I would search land sales in an larger and larger circle and further back in time until I had some evidence that larger lots will bring more money (but probably less per unit SF)...

These are lot sales from one small (20,000 pop.) town here - notice the relationship between size and unit value.

Alot price.JPG
 

hastalavista

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I disagree with the thrust of Terrel's post.

Excess land can exist. Subdivision or any future action is not necessary for it to exist. Excess land exists when a section of a site has its own H&BU and is not needed for future expansion of the current use.
Let's apply some common sense here:
I have a 50,000sf site area and it is improved with a house. Half the site can be subdivided if I wanted to and, as it happens, if I do subdivide the site, the subdivided site will have its own street frontage.
I'm asked to appraise the property as-is. Does it make sense that my property, as-is, would have the same value as another that did not have the potential for subdivision? No. On the surface, that makes no sense. And, in order to conclude one-way or another, one must do a H&BU analysis.

H&BU as-vacant is the first step to solve this problem. If the site were vacant, what would someone do with it? Would they improve it with a single home? Would they not improve it at all but hold it for future development? Or, would they subdivide the existing site?
If they would subdivide the existing site, as-vacant, then as-vacant it has excess land. If, as-vacant, it has excess land, one must then analyze to see if the as-improved configuration has excess land as well.
(Let's assume that as-vacant, the H&BU of the site would be to subdivide).
This is why the as-vacant site analysis is necessary for almost every market-value assignment. Many times, the H&BU as-vacant (and the ideal improvement) will have significant consequences for the as-improved H&BU analysis.

Ok, as-improved: Does the existing improvement's location create an impairment to subdivision? It might. If the improvement was in the middle of the lot making it infeasible to subdivide, then the H&BU as-improved would be as-is, assuming that the improvements contribute more value than the site, as-vacant (with its excess land).
However, if the improvements are positioned in such a way that subdivision can occur, then you have met two of the four tests:
Legally permissible (presumed to be since it can be subdivided per your post).
Physically possible (there is nothing impairing the site from being split).

The next two questions are financially feasible and maximally productive.
Financially feasible: If I incur the costs to subdivide, would the value of the subdivided section exceed the cost to subdivide? Yes or no? If a vacant lot is worth $200k, I think it is fair to say that the costs to subdivide are less than that.
Maximally productive: If I subdivide, is the new site worth more... after the costs (which include entrepreneurial incentive and I would argue marketing costs)... then the area as surplus land (extra yard area)? If the answer is "yes", then you have excess land.

Another test to apply to excess (or any other development land) is this: Is anyone building homes now or would build homes now? That will tell you the timing of how quick such a site would sell and confirm if there is a market for such sites.

Excess land is real and it can exist. One does not need a hypothetical condition (assume that it will be subdivided) to value it as excess land. Excess land exists as-is (once subdivided, it isn't excess land anymore, right?).
Think of it like this:
  • Assume that the site is sitting on an oil reserve and owns the oil rights but that reserve has not been drilled and there is no well. Do you need a hypothetical condition to value the site as-if it were producing oil to value the site with its oil reserves? Of course not. The site's value includes the value of the oil reserve as-of the effective date regardless if it is tapped or not. The value of that site may be impacted by the cost of drilling to tap the reserves, but the site's value includes the value of the oil.
  • Assume that a site, as-improved, has been evaluated and it turns out that there is excess land which can be subdivided. Do you need a hypothetical condition to value the site as-if it had been subdivided? Of course not. The site's value includes the value of the excess land as-of the effective date regardless if it is subdivided or not. The value of that site may be impacted by the cost of subdivision, but the sites value includes the value of the excess land.

I do these types of assignments all the time in areas that are almost fully developed; I do them for residential properties where sometimes the intended use is a mortgage loan. These assignments are complex. But even in San Francisco (generally considered 100% developed), a residential excess-land valuation problem can be solved and I (and others) solve them.

If you believe there is excess land, I strongly suggest that you contact your client and inform them. It would also be a very valid reason to adjust the fee if excess land was not part of the original fee-consideration.

Good luck!
 
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Terrel L. Shields

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Arkansas
excess land

Excess or surplus. The "as is" value cannot pretend it is something it is not nor can I see how one would ever "divide" a property as part of the "as is" value. Obviously, if I divide my 80 acres into 5 acre parcels (which I can do legally) those individual parts will sum a greater value than if I value it against other equal 80 acre parcels. That is not the value "as is" as if vacant. The value "as is" is the value of the tract as if it were vacant 80 acres. What is the total value? Whether excess or surplus, it has one value "as is" and that value would relate to whether or not it can be divided...but just because it can be divided, that does not impart upon a single lot the value of two smaller lots. A buyer would be expecting to arbitrage the value of the tract perhaps, but its unitary value is still based upon what is there, not what may be there days, months, or years down the road. If the tract consists of 2 or more lots used as a single economic unit, then yes, the property would be excess with its own HBU and valued separately since the sum of the two lots would equal the whole in most cases.
 
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hastalavista

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May 16, 2005
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Certified General Appraiser
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California
I guess the question I have to ask is if there is a difference in value between the subject's 50k Sq.Ft lot which can be divided into 2 parcels in comparison to a 50k Sq.Ft. lot which is not sub-dividable and because I have no data on that as I cant any similar sales of a similar lot it cannot be determined due to lack of market data

I don't fully understand this question because it sounds like you do have enough information (unless I am reading your post incorrectly).

You can extract the site value of the comparables that have a 50k sf lot but without any rear street access. That doesn't mean excess land is present in those sites (a driveway easement or flag lot could access the rear portion).

But there is an easier way to do this assuming the 50k sf comparable sites (improved) do not have excess land.
(a) Value your subject's improvements as-if it were on a 25k sf site.
(b) Compare the value of your subject on the 25k sf site to those on the 50k sf site. Make adjustments for everything but the site area differences.
(c) If the 50k sf comparables (after adjustments for all other differences except site area) are worth $200k more than the value of your subject on its 25k site, you may not have excess land.
(d) if the 50k sf comparables (after adjustments for all other differences except site area)are worth $200k less than the value of your subject on its 25k site, you may have excess land.
You can probably see what we are doing in the above? We are trying to see how the contributory value of the 25k sf surplus land (in the comparables) compares with what we are using as a proxy for value of the excess land of the subject ($200k).

There is a lot more to it than this. But these are some simple tests you can do, very quickly, to determine how much further you should go down the analysis.

Again, good luck!
 
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