How to analyze land values in the luxury market.
Maximum Density May Not Mean Maximum Value
Zoning, as it translates to highest and best use, is the area where we often see some of the major errors made by appraisers. When you have a diminishing asset (i.e., the availability of direct oceanfront properties), having a "multifamily" zoning designation may not translate automatically into the development at allowable density as the highest and best use.
A few years ago we had an ad valorem tax appeal filed on an existing eight-unit building located on 100 feet of oceanfront. The property consisted of four one-bedroom units and four studio apartments. The position of the tax representative was that the building only generated enough income to support a market value of $450,000. Therefore, the assessment of $846,500 was out of line.
Our position was that the existing improvements were not the highest and best use of the property. Although the site would allow three units if vacant, the highest and best use would be to tear down the building and build one single-family luxury residence on the site. We thought the site as vacant was worth $1 million as a single-family lot. Indeed, two weeks after the appeal was heard, the property was sold and demolished in order to build a single-family home. The sale price was $1 million.
When municipalities use zoning to restrict the utility of a single-family site, thereby limiting the size of the home that can be built on the site, there may be a subsequent negative impact on value. In general the market pays more money for larger rather than smaller homes.
In most markets a $300,000,10,000-square-foot land sale would have a ratio of 25% land value to 75% building value. Simply put, a $300,000 lot translates into a $1.2 million total package. Market expectations for a home in this price range is for a home with 4,000 square feet of air-conditioned space, a three-car garage, a covered porch, and a 15-foot-by-30-foot pool. In one municipality the problem was the current zoning restriction requirement of a side entrance garage and a maximum cubic content. This translated to a two-car garage you could not easily get into, a house less than 4,000 square feet, no porch, and a pool nine feet wide. If you build a smaller house in the $850,000-$900,000 range, you either have to pay less for the lot or cut the quality of the home's construction.
In a luxury market restricted by zoning, an appraiser must throw his or her "economy of scale" out the window. For example, the following sales from 1996 are located in the same area.
Sale 1: $337,500 13,440 square feet $25.11 per square foot Sale 2: $650,000 20,280 square feet $32.05 per square foot
However, the smaller lot sold for much less than the larger lot on a price-per-square-foot basis. On a price-per-square-foot basis, sale 1 sold for 22% less than sale 2.
The only differences in the lots are their size. In zoning, the size of the lot in the same zoning category can dictate the size of the house allowable. The market has clearly increased the demand on the larger lots where a more substantial home meeting current market tastes can be built and still meet floor area ratio, cubic content, and setback requirements.
The lot value also dictates the size of the house. Typically the market would not purchase a $320,000, 1,200-square-foot home, demolish it, and build a 2,400-square-foot home. What really happens is the buyer pays $320,000 for a lot he wants, demolishes the existing house he does not want and builds a 4,000-square-foot home he does want.
Initially the market has a negative reaction to zoning restrictions that impede market tastes. Eventually the market usually accepts the "cheapest" location in town and land values tend to flatten out with minimal appreciation. In other words, if all the other larger lots keep increasing in value due to superior demand, this will begin to have a positive effect on less desirable sites. Although there will be some appreciation, it will not be at the same rate as the more desirable larger sites. Zoning in the residential market does impact value. The question you must ask is, what kind of a home can be built on the property you are appraising?
THE POINT LOT PHENOMENON
In Palm Beach County and indeed along much of the Eastern Seaboard of the United States, we have an interior coastal waterway called the Intracoastal Waterway. There are many finger canals off this waterway. The most desired lots are called point lots. You may also discover this "point lot phenomenon" in other areas of the country that have lake frontage, mountain views, or golf courses.
In general, point lot locations are created because of cul-de-sacs. Intracoastal point lots have significant frontage along the Intracoastal Waterway and some side canal frontage. Their advantages include a great view, protected boat dockage, and back yard privacy.
The most desired point lots are pie-shaped with a view of the Intracoastal Waterway, boat activity at the rear, and protected boat dockage along the side. Because the Intracoastal Waterway is a "road" for boat traffic, the wakes created can cause damage to a boat docked along the Intracoastal side of the property.
In 1988, we were given an assignment to appraise a point lot location along the New River in Fort Lauderdale, Florida. The appraisal from the lender was less than $170,000 on a purchase price of $230,000. The purchaser was a gentleman who had lived in the neighborhood for five years and was waiting for a point lot location to become available. His plan was to eventually demolish the existing 1,400-square-foot home and build a new home. Individuals had placed written bids on the property; his bid won. This is an area of 1950s homes on 60-foot lots selling in the $80,000-$90,000 price range. There were no land sales and the area was fully developed.
We spent a week researching the relationship between interior and canal point lots. In fact, we went to the next county north and researched vacant lot sales in subdivisions where waterfront lots were still available. These lot sales were researched going back several years. We found that the value of a point lot ranged between 1.8-2.75 times the value of the average interior canal lot. The size and shape of the lot determined value. Obviously a 75-foot-by-153-foot point lot and a 75-foot-by-115-foot interior canal lot would have a closer relationship; yet this type of point lot would not command a premium that a pie-shaped lot would command [ILLUSTRATION FOR FIGURE 1 OMITTED].
An illustration of the Tropic Isle subdivision is shown in figure 2. Research here and in at least two other subdivisions revealed a pattern.
In another subdivision called Royal Palm Yacht and Country Club, a point lot sold with a 4,416-square-foot home for $2.2 million. The home had some modernization to the interior but had a very dated exterior. This home happened to be located on a large intracoastal/canal point lot with a southeast exposure and an outstanding view down the length of the Intracoastal Waterway. Ninety-foot canal lots nearby sold in the $850,000 range at this time [ILLUSTRATION FOR FIGURE 3 OMITTED]. The point lot is 2.59 times more valuable than the standard interior lot ($2.2 million + $850,000 = $2.59). The standard lot was 13,500 square feet while the point lot was approximately 25,000 square feet.
It should be noted that interior point lots at the juncture of interior canals without Intracoastal views will carry a lesser premium. These lots tended to have a premium of 1.31.8 times the value of a standard lot (see lot 40 in [ILLUSTRATION FOR FIGURE 3 OMITTED]).
If an area is entirely developed and market demand changes to that of larger newer homes, the homes on point lots will be the first to be demolished. Next will come the lots in close proximity. The last lots to experience demolition of their improvements are those lots at the end of the canal where the shape of the lot is actually a reverse of the pie-shaped point lot. These lots will have most of their frontage on the street and the point of the pie will be on the water.
PROPER ANALYSES IN DETERMINING LUXURY MARKET LAND VALUES
In the luxury market in general and the waterfront market in particular we are dealing in price per square foot as a unit of measurement. Everything emanates from the price per square foot as a unit of measurement whether you use a "lot" value or a price per "waterfront" foot. "Price per lot" is really based on the "total" square footage of the lot.
Because of the desirability of a lot in high-demand areas, the larger lots usually sold at almost the same price per square foot or carried a premium. Lots at the ends of canals provided the one exception to this rule. Although these lots generally were much larger on a square foot basis or a front foot street side, the reality in the marketplace was: (1) people paid less for them; (2) they were the last lots to sell; (3) boat dockage was more limited and therefore more difficult; and (4) the water depth was also more limited.
A standard 90-foot-by-110-foot rectangular lot sold for more than the pie-shaped larger lot with 50 feet of frontage on the water and more than 200 feet on the street [ILLUSTRATION FOR FIGURE 4 OMITTED].
Here, economy of scale does apply as the less desired lot with lesser frontage sells at a higher price per waterfront foot. This property, however, does sell for a lower price per square foot. We believe that price per square foot in most instances is the best unit of comparison. To illustrate the price-per-square-foot method of analysis, we will use a problem-solving example.
The following sales are all located along the deep-water portion of the Intracoastal Waterway in Palm Beach [ILLUSTRATION FOR FIGURE 5 OMITTED]. Let us say that the subject is an older home located on a 130-foot-by-209-foot lot located directly on the Intracoastal Waterway. The home is large enough and has enough ceiling height to fit in today's market. It does, however, need extensive remodeling. The home is under contract for $3.3 million. Given these three sales, what is the value of the subject site?
If you do what most appraisers do, you would multiply the 130 front feet of the subject lot times the price per front foot of the lot with most similar frontage. In this case it would be sale 2:
130 feet x $27,000 = $3.51 million
If that is your method, you would be wrong! Multiplying the price per front foot of sale 2 would give you a higher value than the actual sales price of $3.3 million.
Step 1. Pick Your Closest Unit of Comparison
Keep your land sales on some kind of lotus grid that contains all units of comparison. Do not be afraid to go back several years when vacant land sales were available. Market demand for specific locations changes little in these types of locations and eventually with adequate sales you may see a pattern emerge.
Price per Waterfront Foot
Price per waterfront foot ranges from a low of $12,432 to a high of $27,378:
$27,378 - $12,432 = $14,946 x $14,946/$27,378 = 55% differential
Price per square Foot
Price per square foot ranges from a low of $81.12 to
$101.33 - $81.12 = $20.21 x $20.21/$101.33 = 20% differential
Clearly the closest unit of comparison would be price per square foot with a 20% spread from high to low.
Step 2. Analyze the Data
You will notice that the total square footage of sale 1 is almost double the size of sale 2 and that sale 2 is almost double the size of sale 3. Sale 3 sold for 17% more than sale 2 on a price-per-square-foot basis (rounded to approximately 20%). We know from our data bank that when lots with similar overall size are compared and one has significantly more frontage, that lot will have an increased price per square foot of approximately 10% to account for the excess waterfront footage. Since our closest comparable (sale 2) is twice the size of the subject and has similar front footage, we will add 10% to the overall price per square foot value of the smaller subject. There is some economy of scale here when you have this major size differential. Use a 10% higher price per square foot for the smaller lot, such as:
$86.91 x 1.1 = $95.60 per square foot for the subject or $96 (rounded)
$96 per square foot x the rounded lot size of 27,000 square feet = $2,592 million or $2.6 million (rounded)
To arrive at the price per waterfront foot, use your total valuation arrived at by price per square foot and divide by the amount of waterfront footage:
$2.6 million + 130 feet = $20,000 per waterfront foot
Use the waterfront foot measure if you must, but know where it comes from. The $20,000 per waterfront foot is now well supported and is also well within the range of $12,432-$27,438.
The total purchase price of $3.3 million less the land value of $2.6 million leaves a residual of $700,000 attributable to the improvements. Of the overall sales price, that gives a ratio of approximately 80% to the land value and 20% to the building.
The purchaser of the property gutted the structure and put on a small addition. We have found that when the improvements remain, they usually account for 10%-20% of the purchase price. This was the case in the example.
Using a price-per-square-foot method allows you to account for the depth of the property. One would think that a lot with large footage like sale 3 would have sold for a higher price per front foot. On a front-foot basis it makes no sense as it is a lower price per front foot than sale 1 with almost twice the waterfront footage (360 feet). In theory sale 1 with $17,500 per waterfront foot and 360 feet of water frontage should have sold for less than sale 2's - $12,432 per waterfront foot (183 feet). Rather than deal with why sale 2 sold for less per front foot, appraisers in the area just leave it out of their analyses.
Sale 2 at $2.275 million and 183 feet of water frontage when analyzed on a square-foot basis fits right into the analysis. Although it had a large amount of waterfront footage, the depth limited the desirability of the lot. The house had a difficult ingress and egress and sat very close to the public bicycle path along the waterway. It was, however, the "cheapest" lot on the Intracoastal Waterway.
Our experience in the waterfront market has also been that given the same square foot lot, the lot with adequate depth (200 feet) and more than 50 feet more frontage area (when compared with another lot), will sell for 10% higher on a price-per-square-foot basis. For example, sale 1 is priced at $5.6 million, and its dimensions are 250 front feet x 290 feet deep = 72,500 square feet or $77.29 per square foot. Sale 2 is priced at $4.9 million, and its dimensions are 167 front feet x 415 feet deep = 69,305 square feet or $70.70 per square foot. (These lot sales are actual sales of oceanfront lots; [ILLUSTRATION FOR FIGURE 6 OMITTED].)
Sale 1 with excess front footage but less depth sold for a little more than 10% higher on a price-per-square-foot basis than sale 2, which had less frontage but more depth. There is a point in this market where depending on the amount of excess footage, excess depth may have equal desirability.
DESIRABILITY OF DEEP LOTS
An appraiser needs to know what the most desired lot size in his or her area is. In our area a 100-foot-by-175-foot lot is most desired. Most lots in a town like Palm Beach are 100 feet by 125 feet. Sale 1 on Southland Road is 106 feet by 110.5 feet. Sale 2 in Tangier Avenue is 100 feet by 172 feet. The sales figures are from 1997 [ILLUSTRATION FOR FIGURE 7 OMITTED].
Typically the larger lot would sell at a somewhat lesser price per square foot than the smaller lot. Here the reverse is true. As previously mentioned, zoning restrictions can have an impact on value. Here, however, we believe that due to the excess depth of the lot, the market is paying somewhat of a premium for these larger lots. These lots do allow more privacy to the rear because of the length of the lot and the distance from the house to the rear. Although sale 2 backs up to a home on another deep lot, sales across the street on Tangier that back up to homes on 100-foot-by-125-foot lots also carry a similar premium. Clearly, the market is paying for the excess depth.
It is clear that large deep lots are desirable in the luxury market. Larger lots allow larger homes. Deep lots allow for privacy to the rear of the lot and in many cases sell for a higher price per square foot than a smaller lot.
We have discussed the "point" lot phenomenon and why they sell for so much more than the standard canal lot. Other than view amenity, there are just fewer point lots available.
We also discussed a method of determining the site value of an improved or vacant lot by determining the closest unit of measurement. It is our conclusion that all analyses should be based on price per square foot. The subsequent conclusion may be illustrated in the format of price per waterfront foot or price per lot.
There are several major errors that appraisers make in analyzing land values in the luxury market. We have a number of case studies that can illustrate how not to analyze site values, but that is another article.
Joy Hearn, SRA, received her BA in sociology from the University of Akron in Ohio. She specializes in the luxury residential market and has prepared numerous marketing studies for residential projects in southeast Florida. She works with the Palm Beach County Property Appraiser's Office where she is responsible for the assessment of all oceanfront single-family residential properties, as well as those residential properties located east of the Intracoastal Waterway within the county, including Palm Beach. Contact: Governmental Center; 301 N. Olive Ave., Fifth Floor; West Palm Beach, FL 33401. (561) 355-2546. Fax 355-3963.
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|Date:||Jul 1, 1999|
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