Land Value To Improvement Value Ratio

[Willie]

Richard, the site value, in my area, dictates the maximum home which should be built. I have a close friend who is building a $400,000 home on a $150,000 piece of land. Very, very few homes/home & farms in my area sell for more than $500,000. I told him he's OK, because his land is almost 40% of the total. But Doctors around here buy a $60,000 lot and build a $1,200,000 home, and find themselves screwed, losing hundreds of thousands. However, smart doctors will build that Same $1,200,000 on a $240,000 or $540,000 piece of land, and be OK, suffering no overimprovement problems.

Richard said.

"Case in point: New construction in my sub. $165,000 estimated value on $6000 lot. Reason: 400+ lots for sale. Over supply of lots is the reason the site is worth only $6000."

I find that interesting. I see what you are saying. However, in my area, we too have 400 lot subs, here and there, some of which have $6,000 lots. If one builds a $160,000 home, one is taking a huge gamble, in this location, that the development will ever be completed. Therefore, around here, your home would be an overimprovement, and oftentimes the development ends up BK'd, because of oversupply and maybe some change in the economy, and you wind up with a bunch of single and doublewides, at $30,000 to $60,000. This has happened over and over, around here. Around here very few build on a $160,000 home on a $6,000 lot,


Richard said "Case in point: Sale on a high quality lake for $860,000. Site value is estimated at $800,000 with house contributing $60,000. Reason: 26 miles of shore line and 2 vacant land sales in the past 18 months. Shortage of available building sites drive value up to about $10,000/FF on the lake for typical 100 foot frontage lot."

Certainly an underimprovement, maybe something Verne would look for, as an investment, especially if the owner did not realize it was worth $860,000 and offered it a lower price.


Richard said "Case in point: Market accepted sub that is nearly full after 20 years. Land to value rations in 1993 were in the 15 to 18% range. Normal amount of listings and sales in the sub. Steadily rising prices. Land to value rations in 2005 are in the same 15 to 18% range. Reason: The market is essentially in balance and there are sufficient similar building site in the greater market to satisfy demand so that this 15 to 18% relationship is maintained."

Certainly a more well balanced area. Almost a perfect little market.

 

[Willie]

Originally posted by Tina Brumwell@Jul 22 2005, 06:58 PM
Tax value does NOT = the market....

Wasn't that in 101

TB

Tina, for me, of course it was. For the borrower, she never had 101. She was under the impression that the tax value is always low, and often, she would be right, in the subject county. However, in her case, the tax card was roughly right, on their final value, but I had to tell her that it wasn't smart to build a $50,000 garage, on a $16,000 lot, which also has a $210,000 home.

In the ideal world, the banker would have handled it. However, when they give me as much work as they do, I suppose they expect a certain amount of customer service, from me.

 

[Willie]

Originally posted by Verne J. Hebert@ MFLA,Jul 22 2005, 06:39 PM
This should be an interesting thread.  I am heading out the door to float and flyfish the Bitteroot River for a couple of days near Hamilton, but I'll post a little something.

This is a tool I use a lot.  Here most often there are no restrictions to the land owners desire to construct...and most are too cheap pass a little dough over to a good appraiser to perform some analysys on improvement ratio.

Here I have seen them go from 11 % to over 400 % (200 acres with a manufactured home).  The low end is normally large executive homes.  Waterfrontage here is nearly always high 60 to 90 %.

This is my tool for scooping up investment deals, and I always crunch the land to improvement ratio, then confirm zoning.  Just takes a few minutes, and I find a couple of deals a year that I buy.  I am looking for "underimproved" property,
transitional H&BU, and "appealing" zoning (when zoning is in place).

Have a good weekend.

Verne, this quite possibly is one of the more valuable things I've seen posted here. It is why appraisers who apply these things do well, while all the other folks here who buy stocks or mutual funds, not using their knowledge don't. A very interesting point, at least to me, being an appraiser first, and owner of real estate and small developer second. Ond day, I plan to reverse the order to developer first, then appraiser.

 

[Willie]

Originally posted by Richard Carlsen@Jul 22 2005, 06:42 PM
Site values have nothing to do with functional or external depreciation.

Site values are driven purely by market forces.

As are functional and external forces. They too would be market driven.

I disagree, in my area, and say, site value, will give you a real indication as to whether there are possibly functional or external problems, which require further investigation. A clue, of sorts. Again, at least in my area.

 

[John Hassler]

I watch land-to-value ratios too but generally for the opposite reason as you Will. I rarely see over improvements but I am seeing quite a few under improvement situations. Problem is these under improvements are not that obvious to spot.

I had a job last year in a well kept tract area of 1,000 sq ft 1940s homes on 5,000 sq ft lots ($800-875k price range). One of the comps down the street was undergoing a major renovation at the time of my drive-by inspection while the other comps just like it were not. The one under renovation sold for $850k ($799k ask) last year and was in OK condition and just resold, as remodeled and expanded to 1,800 sq ft, for $1,535k. Why? Why were the other comps purchased and not renovated/expanded even though they were purchased for less than $850k in some instances? Does this mean the land value for the area now about $800k ($850k minus $50k± for the building shell & existing water/sewer permits)? About one in five homes in this area are being purchased by contractors but that still means four out of five are purchased for owner occupancy (investor purchases are nil).

Land to values ratios are commonly 60-75% for many middle aged/older neighborhoods here and it seems like I'm more a land appraiser than a home appraiser at times since the main criteria in comp selection is often the site value (usually location and utility) with the improvements taking a back seat. And it's moving more and more in this direction each year. Surprisingly, I haven't been getting any flack from underwriters but that could be do to the low loan to value ratios I've been seeing lately.

 

[Mike Garrett RAA]

IN MY MARKET, we have plenty of improved lots for sale to help the appraiser estimate site value. Of course these sales will vary from subdivision to subdivision but the general indication is site value (includes utility hook-up) is around 35 to 39% of the total value. That is an increase of about 10% over the past ten years.

Much of the increase has been a rise in tap fees. The Town of Fountain, located about 15 miles south of Colorado Springs recently raised their tap fees by $8,000 and the builders immediately increased the sales prices of all new homes including those already under contract. This created an immediate nightmare for the appraiser doing new construction appraisals.

I am working with some friends wanting to buy a new home. They are considering a new home here in Colorado Springs and like a particular builder; however, the wife is balking at the "lot premiums" ask by the builder. The particular site they favor has a $17,000 lot premium bringing the site cost to nearly $60,000. Actually this brings the site value in at only 29% which is really good...IN MY MARKET.

Back in the mid 1980s, Colorado Springs went through a huge decline as did much of the nation. We were known as the foreclosure capital of the United States. Demand for new homes fell to an all time low. Many developers were caught with thousands of residential lots in inventory. Astute buyers invested in those lots, many of which were sold at auction for 1/3rd of the market value, and tripled their money in less than five years. On the other hand, I have 3 five acre tracts located south of Colorado Springs in an area known as Midway Ranches (formally Rancho, Colorado) that are worth about what I acquired them for in 1969. Thirty five years of little or no appreciation. Maybe someday my grand kids will do something with them.