Value Added For Small Addition To Site Area

[Tom Woolford]

I,000 sf of land is similar to looking for a value difference between a 1,200 sf home and a 1,250 sf home, with all else being equal.

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Exactly. The Principle of Diminishing Returns generally is well demonstrated with vacant lands. Rarely will 2 attached lots sell for twice a single lot. I live in a subdivision with lots platted from 1-10 acres. A fairly simple price / acre analysis shows 18K for a 1 ac lot, 15K/ac for a 3 ac lot, and 12K / ac for a 5-10 ac lot. With that type analysis, your 1,000 s.f. wouldn't even make a blip in the data.

 

[Gobears81]

I agree when the site is commercial. Having a larger site, but no more functionality doesn't add value. For residential I have seen an increase in value for larger sites. One analysis I did was looking at 5-acre and 10-acre sites over time without potential for subdivision. My evidence showed that 10-acre sites were selling for higher prices than 5-acre sites. This would show me that there are incremental increases in value for a larger lot. The increase may not be substantial and certainly would be hard to test for a difference when looking at paired sales.

These assignments are tough. That is why I mentioned in my first post that market analysis and identification of the potential purchaser is such a massive issue in these cases. In the example you gave on 5 vs 10-acre lots, were you breaking it down on a unit price basis? I wasn't 100% sure on your post if you are referring to the total price of a 5-acre lot vs a 10-acre lot being different or a unit price. But at the end of the day, paired data is the most optimal method.
Unless other states do things differently (certainly a possibility), I wouldn't look to eminent domain appraising for your answer. In the example you gave, even if you decide the contributory value of the surplus 1,000 SF is $0, if the value of the whole (assembled tract) is $100,000, that would imply a unit value of $9.09 per square foot. Based on Illinois' interpretation of the unit rule (and I've heard review appraisers say that it is a poor interpretation), if the proposed right-of-way is that specific 1,000 SF in question, the implied compensation is roughly $9,100. That rule can clearly be advantageous to owners in some cases and not representative of the market's reaction to the contribution of that specific strip for your assignment. The above isn't meant as a slight or contradiction to JTip's example, I think he was simply elaborating more on methodology.

 

[NachoPerito]

Exactly. The Principle of Diminishing Returns generally is well demonstrated with vacant lands. Rarely will 2 attached lots sell for twice a single lot. I live in a subdivision with lots platted from 1-10 acres. A fairly simple price / acre analysis shows 18K for a 1 ac lot, 15K/ac for a 3 ac lot, and 12K / ac for a 5-10 ac lot. With that type analysis, your 1,000 s.f. wouldn't even make a blip in the data.

Unfortunately I can't conclude blip in the appraisal report

If we take your analysis it shows that The $/Acre is $18,000, but the 2nd and 3rd acre are $13,500/acre. This shows that the additional land is discounted 25%. In my case the initial site value is $10.00 per square foot. If we establish the same discount rate of 25% then the additional 1,000 SF would have a value of $7.50/SF or a total value of $7500. Seems like more of a blip to me.

 

[NachoPerito]

These assignments are tough. That is why I mentioned in my first post that market analysis and identification of the potential purchaser is such a massive issue in these cases. In the example you gave on 5 vs 10-acre lots, were you breaking it down on a unit price basis? I wasn't 100% sure on your post if you are referring to the total price of a 5-acre lot vs a 10-acre lot being different or a unit price. But at the end of the day, paired data is the most optimal method.
Unless other states do things differently (certainly a possibility), I wouldn't look to eminent domain appraising for your answer. In the example you gave, even if you decide the contributory value of the surplus 1,000 SF is $0, if the value of the whole (assembled tract) is $100,000, that would imply a unit value of $9.09 per square foot. Based on Illinois' interpretation of the unit rule (and I've heard review appraisers say that it is a poor interpretation), if the proposed right-of-way is that specific 1,000 SF in question, the implied compensation is roughly $9,100. That rule can clearly be advantageous to owners in some cases and not representative of the market's reaction to the contribution of that specific strip for your assignment. The above isn't meant as a slight or contradiction to JTip's example, I think he was simply elaborating more on methodology.

Ok, so it sounds like that is the methodology that accepted in the market even though it doesn't necessary reflect market value.

The five and 10-acre tracts I was talking about went something similar to this: The median price of 5 acre lots was $150,000 and the median price of 10-acre lots was $200,000. We can say that for the first 5 acres it was $150,000, but for the second five acres it was $50,000. This reflected a 67% discount on the surplus land because the first five acres was $30k/acre and the remaining was only $10k/acre. So then I could say that the initial site value of my lot is $10/SF and the additional 1,000 SF could be valued at a 67% discount or $3.33/SF or a total value of $3,333. Does that make sense?

 

[Gobears81]

Ok, so it sounds like that is the methodology that accepted in the market even though it doesn't necessary reflect market value.

The unit rule works in most scenarios-there are some cases where it doesn't accurately reflect the contribution of a portion as part of the whole, but it is nonetheless applied in almost all scenarios. I believe in it in as a general principle, but eminent domain regulations are often typically set up to protect the current owner, and rightfully so. Say that the owner paid thousands of dollars for that 1,000 SF strip of land but it is concluded to have a contributory value of $0. If the unit rule didn't exist, they might get some nominal compensation which would result in a net loss, even if the unit value of the entire property suggests an amount that is greater than what they purchased it for.

The five and 10-acre tracts I was talking about went something similar to this: The median price of 5 acre lots was $150,000 and the median price of 10-acre lots was $200,000. We can say that for the first 5 acres it was $150,000, but for the second five acres it was $50,000. This reflected a 67% discount on the surplus land because the first five acres was $30k/acre and the remaining was only $10k/acre. So then I could say that the initial site value of my lot is $10/SF and the additional 1,000 SF could be valued at a 67% discount or $3.33/SF or a total value of $3,333. Does that make sense?

Two thoughts - If surplus land, and without its own separate highest and best use, you might have more success just analyzing it as a single 10-acre tract in this case, rather than a 5 and 5. I appreciate this type of analysis also, but I think that it is more of a logic check than anything else. In your example, I am looking at it as a 5 acre tract at $30k/ acre and a 10 acre tract at $20k/ acre, thus implying a -33.33% downward adjustment for size. When everything is said and done, you can turn around and say that implies a 67% drop for the additional five acres, but I would venture that there would be less variance if you stick to keeping it as part of the assembled whole until the end, and it might be more representative of market analysis anyways.
Second thought-and this is probably unnecessary to say, but similar to what I alluded to in my first post, if you have a commercial lot (which doesn't sound like the case here), the unit value might go up with each incremental SF until reaching a half-acre or so, leveling off until 1.5-acres or so, then going back down, at least around here. That is why I keep paired data sales on land based on those specific sizes and am not really extracting a size adjustment from a 10 vs 20-acre tract when I am comparing a 1-acre tract vs a 2-acre sale. You know what you are doing so I probably didn't need to mention that, but couldn't help it

 

[Eli]

Hotels and restaurants are two prime examples where an appraiser needs to consider business value and realize it is separate from real property value. Highest and best use should be closely tied if the opinion of value is market value and very specific. Highest and best use would need detailed comment without deducting or adding business value. Business value is best derived with the assistance at least from an accountant imo. We could argue who business value is best derived from.