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?
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