Assigning Value...

By
Real Estate Agent with KW Evolution - Topsfield, MA 92593-B

I ran across this great article by Boston Appraisal Services. I hope you all enjoy it as much as I did. I'd be interested in the thoughts of those appraisers here in AR. Appraisers are an integral part of all Real Estate transactions.

 

Real Estate Appraisal - The Hidden Value in Transitional Properties

The backbone of any real estate appraisal is the highest and best use analysis. All properties have a highest and best use – and this is not always the current use. There are four qualifiers that help to determine the highest and best use of a property. The use of a property must be…

  • Legally Permissible
  • Physically Possible
  • Financially Feasible
  • Most Productive

The goal of the real estate appraiser is to identify the use of the property that will be the absolutely most profitable use within legal, physical, and financial boundaries. Property owners are often blinded by the current use of the property, and they fail to see that a change in use could be more profitable. This is where a real estate appraiser can help.

Real estate that has a more valuable future use is called a transitional property. A transitional property may respond to an immediate use change or the most profitable use may come after the passage of some time, as would be the case with a future zoning change.

Traditional properties are like true diamonds in the rough.

Traditional properties are true diamonds in the rough. A savvy real estate investor often sees developmental value in grandma’s old farmhouse when the children only see stinky cows and chipped paint.

When a real estate appraiser is working for an owner/client, they will be able to help the owner to see the true developmental potential of their property to maximize a future sale price. When an appraiser is working for a purchase/developer/client, they can project the actual, or even future, market value of a property after its transition into a new use. This can justify a purchase price or be used as a basis to seek third-party funding for development.

Let’s examine each of these four highest and best use qualifiers to see how they can shift a property from their current use into a more valuable future use.

Legally Permissible

Transitional properties are commonly created when the zoning is changed. Properties that used to be strictly residential may now be approved for multi-family use. Land that was multi-family could be changed to office/service or retail/commercial. Once a new zoning designation is applied to the property, it becomes legally permissible to transition to another use.

In some cases, an existing zoning designation may allow for a change in use. For example, an R2 zoning may allow for two-to-four family dwellings. Could the existing single-family home be converted into a duplex? Could the storage warehouse be converted into a retail store?

In other cases, a change of zoning particular to that property could create a more profitable use. For example, a residential property may be located adjacent to an office/service zoning. It has been determined that the house could be easily converted into an office, so the property owner files with the local zoning authority requesting a change in zoning. Perhaps you have seen real estate offices, attorneys, counselors, or even dentists set up shop in what was clearly someone’s home in the past.

Physically Possible

Before any other qualifier can be analyzed, the legal uses of the property must be established. Once that is determined, the next step is to look at if a change of use is physically possible. In many instances, the existing structure could be converted to a new use. A home could be changed into apartments or an office, a warehouse into light industrial or retail. The changes to an existing building are almost endless – as long as they are physically possible.

Financially Feasible

But in the end, it does really come down to the cost. If it will cost $40,000 to convert a house into a duplex but the market value of the property will only increase $20,000, or in some cases may lower the value, then just because it is legally permissible and physically possible it is not financially feasible and thus not the best use of the property.

Transitional Properties - Financially Feasible

Now, on the other hand, there comes a time in a property’s life where the structure may create a negative drag on the value. For example, there was this 1,200 square foot quaint turn-of-the-century cottage with 150 feet of frontage on a very beautiful inland lake. The land was selling for $1,000 per front foot. The home had a depreciated value of about $40,000. A buyer would most likely tear down the house, remove any site improvements, and start over by building a multi-million-dollar home on the land. The demolition cost was estimated at $35,000. The appraiser estimated that if the property sold with the house, the market value would be $1,465,000, and if vacant, $1,500,000. The owner decided to sell first the house for $10,000 you-haul and then listed the now vacant property for $1,500,000 earning $45,000 more than if he listed the property “As Is” with the house.

Most Productive

The fourth qualifier is establishing all legal uses that would be physically possible and financially feasible the appraiser would need to make sure the use is also the most productive. In other words, what would be the most productive use of the land that would give the highest return.

In some cases, the best use of the land is in its division. This is often the case with smaller parcels of farmland that are just outside a residential area. Development into a subdivision rather than its continued single-family use is usually always more profitable.

Transitional Properties - Most Productive

In other cases, joining several adjacent smaller parcels together will create a higher value than if purchased individually. For example, an area near a highway was recently rezoned from multi-family to commercial. A developer, seeing the transitional use potential, bought three old run-down rentals all next to each other. After demolishing the buildings and assembling the land into one parcel, he sold the property to a commercial developer for 50% more than what he paid. While each of the three residential lots were originally valued at $15,000, as a commercially zoned larger vacant parcel it had a value of $125,000. A true diamond in the rough.

Transitional properties are what developers live for. There is money to be made if you can see past what is and envision what it could be. Your local appraiser would be more than happy to help you determine what would be the highest and best use if you ever discover one of these hidden gems.

Posted by

I pray that God our Father and the Lord Jesus Christ will be kind to you and bless you with peace

2 Thessalonians 1:2

 

Doug Dawes REALTOR®, AWREP, LMC

Broker Sales Associate

KELLER WILLIAMS REALTY - Topsfield/Newburyport

49 Main Street
Topsfield, MA 01983
 978-887-3995  ~ Office
 978-270-3037  ~ Cell
 DougDawes@KW.com

Comments (14)

Sham Reddy CRS
H E R Realty, Dayton, OH - Dayton, OH
CRS

Great blog on appraisals, thanks for sharing!

The goal of the real estate appraiser is to identify the use of the property that will be the absolutely most profitable use within legal, physical, and financial boundaries. Property owners are often blinded by the current use of the property, and they fail to see that a change in use could be more profitable

Sep 30, 2020 04:00 AM
Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Good morning Doug Dawes -  that is good information especially in the last example.  In our area a vacant property would be a buyers opportunity which would be clouded by and old dilapidated structure that needs to be removed.

Sep 30, 2020 04:37 AM
Roy Kelley
Realty Group Referrals - Gaithersburg, MD

This is very good information to share with prospective home sellers and home buyers.

Sep 30, 2020 04:39 AM
Rocky Dickerson
Realty One Group - Las Vegas, NV
Superior Service!

Great information Doug Dawes .  I love the story about the lakefront cottage.  Selling the structure to be moved away was brilliant.

Sep 30, 2020 06:01 AM
Wayne Martin
Wayne M Martin - Chicago, IL
Real Estate Broker - Retired

Good morning Doug. Ther is a lot of truth to your picture of "your home as seen by"! Enjoy your day!

Sep 30, 2020 06:15 AM
Barbara Todaro
RE/MAX Executive Realty - Retired - Franklin, MA
Previously Affiliated with The Todaro Team

Good morning, Doug Dawes that top graphic is precious.... tells the whole story.

Sep 30, 2020 06:44 AM
Dan Hopper
Dan Hopper - Gold Way RE - Westminster, CO
Denver Broker / Real Estate Advocate

Great information, .  Nothing is more true than the cost of updates or repairs to add space, then recognize it really does not add much more value.... maybe the wrong idea.

Sep 30, 2020 06:56 AM
Doug Dawes
KW Evolution - Topsfield, MA - Georgetown, MA
Your Personal Realtor®

Hi Sham Reddy CRS It was a longer article but well worth it.

Sep 30, 2020 03:12 PM
Doug Dawes
KW Evolution - Topsfield, MA - Georgetown, MA
Your Personal Realtor®

There are many savvy investors out there that look for properties like that Grant Schneider 

Sep 30, 2020 03:14 PM
Doug Dawes
KW Evolution - Topsfield, MA - Georgetown, MA
Your Personal Realtor®

I'm glad you found the article useful Roy Kelley 

Sep 30, 2020 03:15 PM
Doug Dawes
KW Evolution - Topsfield, MA - Georgetown, MA
Your Personal Realtor®

There are so many creative solutions to things that pop up in Real Estate Rocky Dickerson 

Sep 30, 2020 03:16 PM
Doug Dawes
KW Evolution - Topsfield, MA - Georgetown, MA
Your Personal Realtor®

I like that picture Wayne Martin every time I look at it, it resonates...lol

Sep 30, 2020 03:18 PM
Doug Dawes
KW Evolution - Topsfield, MA - Georgetown, MA
Your Personal Realtor®

It sure does Barbara Todaro. The view from each persons eyes can be so different

Sep 30, 2020 03:19 PM
Doug Dawes
KW Evolution - Topsfield, MA - Georgetown, MA
Your Personal Realtor®

That's why knowing the return on value is so important Dan Hopper 

Sep 30, 2020 03:20 PM