How Do You Price Raw Land?

VacantBlock

Easier said than done.  It depends on a multitude of factors, and it’s not a question that can be answered in a sentence or two.

The primary factors would be location, size, and most importantly: highest and best use.

Of course, it also depends on the views and objectives of the potential buyer and potential seller in a transaction, so let me tell you what I’m currently spinning my wheels with, and perhaps you folks can offer some insight…

VacantBlock

Raising a family and living in Leaside for over twenty-five years, I’m sure my mother will be the first person to admit that she never thought she’d end up living in Scarborough.

But here we are, over thirteen years later, and my mother has planted some very deep roots out at Birchmount & St. Clair.

She has seen the area change, each and every day, over the past decade, and if only I had listened to her when she told me as I was getting into real estate in 2003, “This is going to be the next hot spot for single-family homes!”

“Sure, mom,” I said, as I shook my head, and focused more on neighbourhoods in the central core.

The truth is: everything has appreciated since 2003, and every neighbourhood has been “hot.”

But over the last 5-6 years, developers have been scooping up bungalows in Scarborough, sub-dividing the lots, building two homes, and making a fortune in the process.

I’ve witnessed the end of the “pre-construction condo investing boom,” since I am convinced that 99% of buyers at condo pre-sales will lose money if they walk into a sales centre today, and buy a condo that will be finished in 2018.

And I’ve seen some house builders in the central core spend too much on the build, and end up selling at a break-even point, or in some cases, a small loss.

Back in 2003, you could buy a bungalow in Leaside for $450,000, spend $300,000 building, and sell it with absolute ease for $1,000,000.

Today, projects in the midtown area are more expensive than ever, and only a handful of developers can: a) afford the cost of the land, the build, and the financing, b) successfully build what the market wants.  You’re really sticking your neck out when you buy a lot for $1.2M, and hope to build a house an sell it for $2.4M down the line.

I’ve seen “flips” throughout the east side that are among the worst work ever completed by man.  These properties are bound to sit on the market for months, until the “developer” sells at a break-even point at best.  Not everybody can just “buy a house, fix it up, and sell it for more money,” but that doesn’t stop people from trying.  I wish I could give you the addresses, but alas, I can not.  Just picture a plumbing waste stack running vertically through your kitchen cabinets, because the flipper/developer didn’t think buyers would mind if human refuse ran through a tube next to their can of Zoodles

Out in Scarborough, however, builders that know the area are making a fortune by building houses of lesser quality, and lesser finishes, but very good product on a relative basis to what already exists in the neighbourhood.

It’s not uncommon to drive down a street and see three dilapidated bungalows in a row, then a set of four brick semi-detached homes, then more crummy bungalows.

And if you fast-forward ten years, all those bungalows will be gone, just like we witnessed in Lawrence Park & Leaside in the early 2000’s.

On my mother’s street, she’s seen some wide bungalow’s get torn down, and two semi-detached, or even two detached (yet smaller) houses built in the bungalow’s place.

This is a classic example of what developers are doing:

AworthSemi

The house listed for sale is the stucco one on the right, but the one on the left represents the other half of the original lot.

Whether stucco or brick, whether 3-beds or 4-beds, these houses are being thrown up left, right and, centre.

The house next door to my mother is on a 45 x 139 foot lot, and it’s irregularly shaped, as it’s “L-shaped” and widens to 75 feet at the back:

AW2

It’s a very odd parcel of land, and I have no idea why the land is L-shaped.

But being 45-feet wide, it has always been ripe for development.

It differs by neighbourhood, but many “larger” lots can be severed into two by going to the Committee of Adjustments, and this is how many developers specialize in Toronto.

In Scarborough, I’ve seen 44-foot lots severed, so it goes without saying that there’s a precedent for this lot to be severed as well.

The property was sold back in 2012, and we figured, “Well, this is it,” but the property was never severed, and it never went to the COA.

The property went up for sale again this year, and interestingly enough, sold for $90,000 more than it had sold for back in 2012!  That owner had the property for 14 months, and made $90K.  Not a bad little pay day!

This time around, however, the buyer was a developer, and sure enough, they’re going to the COA to get not only a severance, but also several variances, as all developers ask for.

As you might assume, the developer plans to build two houses, like this:

AW3

My mom always figured, “it was just a matter of time,” so we’re not surprised by the move.

I am, however, interested in that L-shaped lot, and the portion of land that runs behind her house.

In fact, I’ve always been interested.  You might even say I’ve been salivating.

You see, my wife and I plan to raise a future NFL football player.  Jenna wants a quarterback, but I’ll settle for a punter…

I told my mom, when she moved into the house many years ago, “You should see about getting that little piece of land behind your house, one day.  It’s just sitting there, empty, and the owners of the house next door have no use for it.”

I always figured we could extend my mother’s backyard by another 30-feet, and create a small football field so my child can learn the game, become a star, and eventually join the lawsuit for head injuries…

It’s pretty simple, and once it’s done, you’d never even know the L-shaped lot was ever there:

AW4

The land was never used by any of the three previous owners.  It just sat there, empty.

Now that the land has been sold to a developer, and the developer is going to build two houses next door, I figured it’s a good time to inquire whether he could use an extra $10,000, $15,000, or $20,000.

Of course, we knew that any developer experienced enough to buy a bungalow, sub-divide the land, and get minor variances to build larger houses, wouldn’t let the land go easily.

So we set out to establish fair market value for the land, which was much, much easier said than done.

How do you value a small piece of land that has very little use?

If the developer kept the land, he would have one house with an L-shaped backyard, and one house with a regular backyard.  How much MORE could he get for the house with the L-shaped backyard?

So let me give you the numbers:

The lot is 45 x 139 feet, and 75 feet wide at the back.

My mother’s property is 30 x 110 feet.

That means the piece of land behind my mother’s house is 30 feet wide by 29 feet deep.

And it also means that the entire area of the L-shaped property next door is 7,125 square feet.

The developer paid $425,000 for that piece of land, or $59.65 per square foot.

So what then, is the piece of land behind my mother’s house worth?

The developer paid $59.65 per square foot for the entire property, regardless of what particular piece of land we’re looking at.

So is it then prudent to simply multiply the $59.65 acquisition cost by the 870 square foot parcel of land, and come up with a value of $51,895.50?

The developer would probably say “yes.”

I would absolutely, positively, say “no.”

You can accuse me of being biased, and furthering my own agenda, but it’s not that.

I believe that this piece of land cannot be valued in the same fashion as the rest of the land, where the developer is going to build two houses.

If the developer was to build a third house on that 870 square foot parcel of land, then absolutely – the land is worth $59.65 per square foot.

But the “highest and best use” of that 870 square feet isn’t the same as the other area of the property.

Let’s take a look at the diagram again:

AW3

Would the buyer of the new house on “Property A” pay $751,895, if the identical house next door at “Property B” was $700,000?

I don’t think so.  Not a chance.

Backyards are great, but I don’t believe they have that much of an affect on the value of a home.

I think if a buyer was looking at the two identical houses – one with an L-shaped backyard, and one with a normal backyard, and the former was priced $51,895 higher, the buyer would opt for the cheaper home, about 19 times out of 20.

It’s for this reason, that I don’t believe that parcel of land behind my mother’s house is worth $51,895.

I also believe in the inexact science of “gut feeling” when it comes to real estate (my buyer clients are familiar with this…), and while you can use numbers to come up with valuations, you can also go with your gut.

I hate being right when it works against my buyers’ interests, but in this red-hot real estate market, my “gut feeling” on a what a house is going to sell for, in multiple offers, always trumps what the “comparable sales” might lead you to believe.

“Gut feeling” sounds awful, so let me rephrase that as “opinion based on knowledge and experience, by one of Toronto’s top agents.”  There.  Now it sounds more official, albeit more cocky as well…

So my gut feeling based on knowledge and experience is that this little piece of land can’t be worth more than $25,000 – $30,000.

And that valuation is for both my mother, if she used the land to double the size of her backyard, and for the buyer next door, if he or she wanted an L-shaped backyard.

The highest and best use of that 870 square feet is NOT the same as the other 6,255 square feet (the 45 x 139 portion), and thus it cannot have the same valuation.

After my brief, and rather……….interesting Sunday night phone call with the developer, he doesn’t agree with either valuation.

He figures it’s worth $70,000, some way, some how.

Of course, he says that I’m foolish to base my (incorrect) calculations on the $422,000, since has to pay land transfer tax, legal fees, fees for zoning/variance/severance, and Realtor fees on the sale.  He would like me to use $500,000 on the price per square foot calculation.

I told him that if you went and got Subway’s “Sub of the Day” for $5.00, and you added cheese for $0.50, bacon for $2.00, and double meat for $2.00, you can’t complain that your sandwich cost you $9.50.

He didn’t see it that way.

And I guess my future son will have to go learn how to throw a football in the park…

But I’m curious to know – and don’t spare my feelings, if you agree with my sentiments.

Feel free to comment below.

11 Comments

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  3. Ticker says:

    Wouldn’t it be easier to purchase the land from eventual home owner. They’d have just spent a lot of money on the house, might be more in need of cash then the developer and you would be able to calculate price as A-B+2k-5k making it worth the new owners while?

    1. Chroscklh says:

      Ticker have the good idea. Smart to try with developer – never know, maybe in need of cash…But this guy sound smart and greedy – wait and try new homeowner. Risk is new buyer have vision for basketball court or bear breeding shack for corner of L already.

      1. Joe Q. says:

        The bears can protect the homeowners from the trains running behind their yard.

        1. moonbeam! says:

          I agree — and provide a buffer zone from the trains…

  4. Appraiser says:

    I’m afraid that “gut feeling” may be the only way to evaluate the subject property. There are few, if any comparables and the market for the property consists of two or possibly three parties in total. I say three, only because of the outside chance that the owner of the property at # 212 on the other side of your mom might also be desirous of the land.

    What are the chances that an ugly 3-car garage or secondary housing unit (granny-flat) can be built back there, or worse? And how much control does your mom have over those issues?

    To get the process started, I say make the developer an offer on paper for what you want to pay, plus all of the associated costs of severing and aquiring the land. In the end you may end up settling for a price that is higher than you’d like, but the peace of mind may well be worth it.

  5. Joe Q. says:

    What’s running behind those backyards? GO / CP / CN, or the B-D subway line?

    1. moonbeam! says:

      GO trains – 3 tracks.

  6. Kyle says:

    Sorry David, but i don’t think you’re really seeing it objectively. You’re only seeing it from what it cost him.

    Economically that land has a lot more value than $59.65. There’s no reason the Developer has to build two identical houses. Pretty sure the house on the lot with the extra land has the potential for additional coverage without having to go to COA. Someone please correct me if i am wrong, but assuming the coverage is 0.6 then the most he can build on Lot B without going to COA is 1,876 sq ft, but on Lot A he can build a 2,398 sq ft house (or 522 sq ft bigger). Assuming it cost him in the $200’s / sq ft to build and he can sell in the $400’s / sq ft, that’s easily 50-150K in potential profit, not to mention the finished house would also be worth more as it has an 870 sq ft larger backyard.

    But i think more important than this is the potential hassle and timing factor to the Developer. If severing that land means more headaches and delay, than he would certainly be looking for a sizable premium, not to mention re-covering the costs associated with severing, new surveys and new plans.

  7. devilsadvocate says:

    How about if the 870 sqft was used for an addition to your mother’s house? In that case, wouldn’t it be worth the 50K? I have to agree with the $59.65/sqft land value cost, and I’ll be the first to call you out on your bias 😉

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