When I started my appraisal blog part of my mission statement was that I wanted to inform and educate consumers and anyone else who wanted to learn about how and why appraisers do what they do. As is the case almost on a weekly basis I had the opportunity recently to speak with a person who wanted to understand how land is valued with a residence within an appraisal.
To be more specific they were curious about how a house with a larger than typical lot would be handled in the appraisal. Would it add more value because of its larger size and if so how much?
It turns out that this is a fairly common question so I thought I would share it this week to help others understand that may have the same question. A larger than typical lot will be either considered excess land or surplus land depending on several factors.
If your question isn’t answered with what is discussed here feel free to leave a comment below or connect with me offline and I’ll help you any way I can.
A larger than typical lot will be classified as Excess Land or Surplus Land. We’ll take a look at each and see how they differ.
Excess Land refers to the land that is not needed to serve or support the existing improvement. The highest and best use of the Excess Land may be different than the improved parcel. It may be possible to sell off the excess land from the main parcel.
An example of Excess Land would be an adjacent vacant parcel that fronts a roadway and has easy access to the lot from the road.
On the other hand, Surplus Land is not needed to serve or support the existing improvement, however, it cannot be separated and sold off. Surplus Land does not have a different highest and best use and it may or may not contribute to the value of the overall parcel.
An example of Surplus Land would be a home situated on a larger than typical parcel with no direct access other than traveling over the main parcel. The home or other improvements may be situated on the site such that no division of the property is possible without negatively affecting the functional and legal use of the property.
The difference between these two scenarios is significant. In one situation the additional land has the potential to have a different highest and best use and there is the potential to legally separate them and sell off the additional land.
The second scenario does not allow the additional land to be sold off. The potential value of Surplus Land is much less than that of Excess Land.
In both situations, it is necessary to consider what is legally permissible considering the current zoning regulations. A certain zoning designation may allow parcels to be subdivided into smaller parcels with minimum size requirements.
In addition to size considerations, the zoning may have certain setback requirements for the front, back, and sides. If these guidelines cannot be met then it may not be possible to legally subdivide the parcel without possible zoning variances.
Within the appraisal report, the appraiser must consider the highest and best use of the parcel as if vacant. The four requirements for highest and best use consider whether it is legally permissible, physically possible, financially feasible, or maximally productive.
Here is what this looks like for the additional land:
By applying the Highest and Best Use test to the land we are able to determine whether the land would be considered Excess or Surplus. By knowing which it is the appraiser will then know how to address it in the appraisal assignment.
Because excess land may have a different highest and best use and has the potential to be sold off it typically adds more value than surplus land. Surplus land does not have a separate value, as it cannot be sold off separately. It is “extra” land that may or may not contribute value to the overall property.
As you see there is a definite difference in how the land is handled and how it contributes to the value depending on its orientation. I hope this was helpful in understanding differences that exist when there is additional land.
Question
Do you have any other questions about Excess or Surplus Land? If so, please leave a comment below, and as always thanks for reading.
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