Size Impropriety In Land Value Analysis-Land Valuation

A common public misconception is that “per unit” land values apply universally within a market locale. That is, a three acre site is sometimes thought to command the same “per acre” price as a one acre site. Similarly, a one acre retail site may be thought to carry the same “per acre” price as an adjoining ten acre parcel. Generally, sales that vary significantly in size will usually have a different “unit” value and different highest and best use.Regardless of size, the value of any parcel is predicated on highest and best use in the marketplace.

Many successful investors have proven this concept by: [1] successfully assembling multiple, smaller parcels into one larger parcel whereby the whole value is greater than the sum of the parts (based upon a differing use for the property) and/or, [2] splitting a larger parcel into parts that, collectively, exceed the value of the whole.

The value influences of plot size and plottage are important highest and best use considerations. The price “per square foot” or price “per acre” of a parcel can increase or decrease both above and below the optimum size configuration for a particular land use. If a site is larger than the market norm for a particular use, the value of the excess land tends to decline. Increased size decreases unit price although this decrease is not usually proportionate i.e., doubling size will not necessarily “halve” the unit price.

More accurately, unit values change in accordance with a hierarchy of differing highest and best use. In another words, a larger site cannot usually be applied profitably to the same uses as a small site and vice versa.

In larger plot sizes, land value can be influenced by; [1] higher unit building costs (in the case of very large buildings) resulting in greater speculation as to the potential absorption of space by the market, [2] higher carrying costs and, [3] increased capital investment requirements. Plottage can be a negative value factor if a land tract is larger than the normal configuration for a particular use type.

Potential use is another consideration. Certain property types, such as manufacturing or industrial use, may command a higher price per unit value because their use could be limited in a given market. Alternately, smaller sites might be discounted if they are unable to accommodate the required separation between well and septic placements while still providing adequate space for buildings, parking, and outside storage. The presumption of highest and best use usually precludes substituting differing size parcels from one class of property to another.

The impropriety of using different size comparable sale parcels is best apparent in direct sales comparison – the common technique used by real estate professionals to estimate land value. This technique, based upon the principal of substitution, holds that the value of a property replaceable in the market tends to be set by the cost of acquiring an equally desirable substitute property. But this approach can have limited use when site sales are limited and vary greatly in size. The use of larger size comparables can understate the value of a smaller property while smaller size comparables can overstate the value of a larger property.

When sales of similar sized vacant parcels are unavailable for comparison, an appraiser will usually supplement improved land sales where the improvements either have marginal value or, they impair the sites highest and best use and have negative value. Using this valuation method, the salvage value of improvements, less demolition expense, is deducted from the sale price to derive net land value. This extraction process is a reasonable methodology in determining land value when property sales have outmoded industrial buildings, dilapidated farm structures, or residential buildings on commercially zoned land.

In conclusion, as size variance increases, land prices tend to change inversely. The failure to adequately account for this size/price progression can distort the value estimate. Other valuation methods should be considered to support land value including supplementing comparable sales data with listings and/or applying residual techniques in income applications.