What’s it Worth? Real Estate Values Part 1

How Real Estate Values Aren’t Created

It happens every year. People want to sell their home, building, or land and they get unrealistic with their prices. Most come up with super lofty prices and when their listing doesn’t get any bites, they wonder why.

 

This happens pretty much everywhere. When you’re located in a market that is hot, then obviously your reasoning is rational. But with any normal market, you’ll run the risk of your listing going stale.

 

The problem with that is that when it goes stale with no or hardly any bites, you’ll have to take it off the market then wait a few weeks and list it again at a lower price.

 

You’ll waste time this way, but all this hassle can be eliminated from the start if you’re more realistic with your price.

 

You’re thinking about selling your house that’s sitting on three acres and want to know what you could get for it.

 

But the real question is which value are you talking about – is it market, as is where is, highest and best use, quick sale or what if value?

 

Real estate appraisers define “market value” as the most probable price at which a property will sell in an arm’s-length transaction in a competitive market where both parties are motivated, and are acting knowledgeably and without duress.

 

property value real estate

Market value assumes that: the transaction is arm’s-length and that parties are acting in what they believe to be their own best interests the property is exposed on the open market for a reasonable period of time payment is made in cash or cash equivalent (such as by a loan from a mortgage company) the price is not affected by special terms, conditions, financing or concessions

 

“As is where is” value is what the property is worth in its current state and without any changes, and it takes into account the current property zoning, conditions and physical or other limitations. Buyers purchasing a property as is take it as they find it.

The purchase isn’t contingent on, for instance, satisfactory results of inspections or use and other types of development approvals.

 

The risk in an as-is scenario can be substantial. Buyers have to commit to purchasing the parcel before having development approvals in hand and without knowing all of the conditions that would limit or prevent them from using the property as they wanted. Consequently, as-is value is deeply discounted to reflect the amount of risk assumed by the buyer.

 

The highest and best use is the most profitable use that’s legal, physically possible and economically feasible. An 18-hole golf course wouldn’t be the highest and best use because it’s physically impossible to fit a golf course on just 20 acres.

 

Likewise, if a parcel were zoned for agricultural or low density residential, appraisers wouldn’t estimate value based on a use for apartments because that use wasn’t legal under the current zoning.

 

 

A quick sale value is similar to as is where is in that the buyer agrees to forego contingencies and assumes all of the risk. The difference is that the term “quick sale” usually describes a sale that’s forced by events like foreclosure, court order, bankruptcy or divorce.

 

Potential buyers can go to HUD for more info on housing.

The “what if” value is predicated on the occurrence of some future change to the property. This could be some type of zoning approval (e.g., variance), a different zoning classification, accessibility of public utilities, or subdivision approval.

 

What if value is predicated on the highest and best use of the property but it assumes there will be a change in the status quo. This value recognizes that something would have to be done to transform the property from its current state so that it could achieve its highest and best use.

 

Buyers of development property typically use the what if value in estimating what the property’s worth, but they also take into account the expenses they will have to incur in order to effect that transformation.
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What’s it Worth Part 2

Real Estate Investing Article Zoning

Without a doubt, the single most important thing to know about a development property you’re thinking of buying is its zoning. That’s the starting point for your evaluation because it tells you how you can use the property.

 

By enacting land use laws, state legislatures delegate to local governments the power to regulate development within their borders.

 

This regulation takes the form of local and county zoning, subdivision and other ordinances that implement the municipality’s overall land use plans and objectives.

 

Land development laws vary not only from state to state but also among municipalities within each state, so there’s no “one size fits all.”

 

The zoning ordinance contains classifications intended to cover different categories of residential, commercial, industrial, institutional, office, agricultural and conservation uses and the accompanying zoning map shows the geographic boundaries of the zoning districts.

 

To determine a parcel’s zoning, locate the property on the map and then review the ordinance (both of these documents are available at the municipal office).

You’ll find provisions for use, dimensional, area and other requirements listed under each of the zoning districts.

 

There are also general provisions that apply to every classification dealing with issues like non-conforming lots and uses, accessory structures, flag lots, fencing, signage and minimum lot frontage requirements. You should always read the chapter on definitions since it will help you understand the terminology that is used throughout the ordinance.

 

real estate zoning laws

 

Uses listed in zoning districts often include those that are permitted “by right” as well as conditionally. For example, single-family detached dwellings, agriculture and governmental recreation areas are permitted in one district.

 

These are listed as by-right uses so they don’t require any zoning approval. Privately-owned riding academies, public or private day schools, 18 hole golf courses and places of worship are also permitted in that district but only when authorized by the municipal zoning board as a special exception.

 

These “special” uses are not permitted automatically. To get the special exception, you would have to demonstrate that your use falls within those defined in the ordinance and that it complies with any use-specific requirements, such as minimum site area, building coverage, buffering and parking.

 

“Rezoning” and “variance” are often used interchangeably, but they are not at all the same. A change of zoning is just that – the zoning of a property is changed from one classification to a different one.

 

Municipalities are not required to change a property’s zoning (absent a law or court order), so rezoning a property is not a slam dunk. In fact, depending on the state’s laws, the governing body may not even have to grant a hearing on the rezoning petition or justify its decision to deny it.

 

A variance, on the other hand, is relief from some zoning requirement. It modifies an ordinance provision as it applies to a specific property for a specific reason, but it doesn’t change the underlying zoning classification of that property.

 

To get a variance you would have to show the municipal zoning board that an unreasonable hardship (one you didn’t create in the first place) would result if it weren’t granted. You won’t get it, however, if your only argument is that you’d lose money, because the hardship has to be something other than economic.

 

A classic example of a situation in which a variance would be granted is where the parcel has some physical characteristic that would make it impossible to satisfy zoning requirements. Suppose, for example, that you wanted to build on a 100’ x 200’ parcel and the zoning required front, side and rear yards of 60’, 20’ and 80’, respectively.

 

Below is a video by Yale Professor Wargo discussing Land Use Law and Property Rights.

 

 

This means that the structure would have to be located within the “building envelope” which is the area of the lot after measuring off those setbacks. But the right side of the parcel drops off sharply and the steep slopes cut the building area in half.

 

The back third of the lot is relatively level, but most of this area lies outside the building envelope. Reducing the rear yard not only would create a building area large enough to accommodate your structure, but it would also be the least intrusive solution to the problem. So in this situation, the municipal board would probably give you a variance to allow the structure to encroach slightly on the rear yard.

 

Finally, some words of caution. Zoning and other municipal codes are available online. Don’t rely exclusively on this information.

 

Go to the municipality and review the ordinance or zoning map to make sure you have the most current and accurate information. And always page through the entire ordinance. Amendments that have been enacted are often printed in the back of the book without cross-referencing the provisions that have been changed.