Often, someone calls A Quality Appraisal looking for an
appraisal on a residential home that has additional
development or subdivision potential. I usually explain to the caller that this
will be a time-consuming and expensive assignment because of the need to
explore the value of different potential uses.
Often, the response is, I do not plan to subdivide, I just need a value
“as is”, why does the potential uses matter?
When an appraiser appraises a home (for most intended uses),
the value is based on its highest
and best use. In
very basic terms, highest and best use is what the most likely educated buyer
would do with the property. The theory
suggests that if a property is worth more subdivided as two lots, then an
educated and well advised seller will market it that way. The offering will consequently attract an
educated and well advised buyer who will pay more for the property (and divide
it) than the buyer who just wants a large back yard.
Typically, there is only so much that a buyer is going to
pay for a large back yard. If that same
property can feasibly be split into two or more parcels, it might be worth much
more, even if it costs time and money to divide the property. The following is a list of all the
information that an appraiser might need to develop an opinion of value on a
property where there is subdivision potential.
is the value of the subject house with a large yard and not dividable? Answering this question helps the appraiser
determine highest and best use, or if dividing the lot is the most valuable
is the value of the subject house after the extra lot is divided? To value the whole, the appraiser usually
needs to know the value of the parts unless there are sufficient comparable
sales of similar homes with similar extra lots.
is the retail value (if sold individually) of the potential extra lot? Again, to value the whole, the appraiser
usually needs to know the value of the parts.
much will it cost to split off and prepare the extra lot for improvement? This amount can vary greatly from one
property to another, so an appraiser must understand how the subject relates to
the comparable sales in terms of development costs.
much profit will an investor expect when purchasing a lot with a house? This estimate is key to valuation of a house
with an extra lot. A well informed buyer
in typical conditions would usually want profit (appraisers say “entrepreneurial
incentive”) in exchange for the risk of purchasing a house with a lot that
later needs to be divided. Also, buyers
of a house with an extra lot will typically need to pay cash or bring more cash
to closing which is also a cost that requires incentive.
This example shows how many pieces of information and value
opinions that an appraiser needs just to determine the subject’s highest and
best use and to ultimately value a house with an extra lot. Each of the items listed above might require
several well researched comparable sales or a mini appraisal to answer. This shows why it can be costly to appraise
properties where highest and best use is questionable and when these individual
pieces of information are difficult to obtain.
Did I leave anything out or do you want to join in the
conversation? Let me know in the
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