I often have discussions with other appraisers and property owners around Portland, Oregon about the difficulty of appraising vacant land. Many are surprised that it can be more difficult to appraise property without a home than with a home. There are several principal reasons for this.
When appraising vacant land, there are typically more feasible options to explore about, “What is the highest and best use of the land?” This is because, when there is already a house built (one that is in good condition) in an area of similar homes, it is usually easy for the appraiser to see that it would not be feasible to tear down the existing structure and build something different. However, with vacant land there may not be any homes around it, or the homes that are around the land are old and are no longer the ideal improvement for the current real estate market. The phrase “highest and best use” is important in appraising because it tells us what sales are comparable. A similar looking tract of land might be maximally productive to build a duplex, rather than a single-family residence. We would not want to compare that duplex site to property that it is more suited for a single-family residence.
Since the highest and best use question may not be obvious for vacant land, the market analysis tends to require more detail. This means that an appraiser might not only need to know the trends in vacant land sales, but also the trends in new construction sales. For example, the appraiser should know what builders are building, what prices builders are receiving, and how much competition there is with different types of improvements to help estimate the ideal improvement for the subject vacant land. This kind of detailed market analysis is important with vacant land because most buyers of residential land are looking to answer the question, “How much profit will I make if I build and sell a house that costs X on this property?”
Often there are unknowns for the subject vacant land and comparable sales of land when it comes to cost for septic, well, road improvements, legal cost of obtaining easements, special foundations, and so forth. For example, many times I come across land sales that outwardly appear to be the same as the subject property. However, after interviewing the parties to the transaction, I find that the comparable development required utilities and road improvements (including sidewalks) to be installed. These represent a cost that the buyer of the vacant land acquires that may not be precisely known at the time of purchase. Therefore, the buyer of the vacant land must factor a risk premium into the purchase price that accounts for time and unknown costs. Appraisers call that risk “entrepreneurial incentive.”
In addition to all of the above, land is particularly difficult to appraise in Portland, Oregon and many of the surrounding suburban and rural areas because there are fewer overall comparable sales. Vacant land does not tend to sell as often as homes and there is now very little vacant land available to build on around Portland. Therefore, where a typical home may have several similar properties within a one mile radius, a vacant piece of land might require searching Portland’s entire east side for similar sales. To make matters worse, many vacant land sales occur outside of the local multiple listing service as a result of builders approaching land owners or because of “across-the-fence” deals. Finding and verifying these sales through vague county records data can be extremely tedious and time consuming.
Did I leave anything out or do you want to join in the conversation? Let me know in the comments below.
If you find this information interesting or useful, please subscribe to our blog and like us on Facebook. Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos. If you need Portland, Oregon area residential real estate appraisal services for any reason, please request appraisal fee quote or book Gary F. Kristensen to speak at your next event. We will do everything possible to assist you.
Thanks for reading,
Residential appraisers in Portland, OR, and everywhere, often encounter properties that include a house with an additional lot that is available to be divided and used for its own purpose. This is referred to as excess land. There are many ways to handle excess land, depending on the client’s need, quantity and quality of comparable data, and intended use of the appraisal.
If the house and the extra lot are sold together as a package, the market typically reflects that “bulk sale” in a reduced price compared to selling individually after division. This is considered by appraisers to be a bulk discount and reflects the market reaction to the cost of officially dividing the properties, difficulties financing properties with excess land, future marketing costs, and investor profit that is expected for the risk of owning both. In other words, the value of the excess land, plus the value of the house, is not the value of the entire property.
If the client wants to know the value of the excess land and house sold together, the appraiser can use the Flat Discount and Bulk Value per Lot Sales Comparable Method. This methodology requires the appraiser to value both the house and the excess land individually (typically using sales comparables (comps) for each), then apply a market discount to the excess land to estimate a total value for the combined property sold in bulk. The appraiser also needs sales comparables of properties that sold with similarly developable excess land (Bulk Comps). Here is an example:
If you find this information interesting or useful, please subscribe to my blog. Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos. If you need Portland, OR area residential real estate appraisal services for any reason, please contact us. We will do everything possible to assist you.