Some Ground Rules (and House Rules , Too)
by Nancy Chadwick
If you were to guess that buying a home is not like buying a parcel of land,
you’d be right – and you’d also be wrong. Although the house purchase is
different from the land transaction, it’s actually the same in certain key
respects. The reason is there are a couple of critical principles that apply to
all types of property – houses, land, retail centers or whatever – and they can
have a big impact on a property’s value and its market appeal.
Location (Location, Location)
We’ve all heard that location is the most important thing about a property, but
why is that true? You can demolish or add onto the house or maybe even pick it
up and move it (although that’s expensive and often not feasible), but you can’t
pick the land up and move it. It’s the land that gives the property its
location, and location is the only thing about a property that you can’t change.
It determines how the property can be used (zoning), visibility and
accessibility to public utilities, and it has a positive or negative effect on
value based on the surrounding properties.
Value Is Relative to Use
If the property matches most of your needs and wants, it will be more valuable
to you. How often have you walked into a store and bought something you couldn’t
use or didn’t really want only because you thought the price was ridiculously
low? Would you have paid a lot more for it? Probably not.
A corollary of this principle is that the property’s inherent value increases if
the property can be used by many potential buyers or categories of buyers.
Suppose you’re thinking about buying a building lot that has a stream running
through its front yard. Your builder tells you he’ll have to put the house on
the far side of the stream and the driveway (about 200’ long) will have to cross
the stream. The cost for all of this work will be about $30-40,000. That
driveway could cost you more than the initial $30,000 over time in maintenance,
repairs and resurfacing. However, something even more important should make you
hesitate. Someday when you try to sell the property, you could discover that
most buyers won’t want the property because of the stream and driveway or
they’ll offer you much less than you want for it. Now what’s this property worth
to you? When you sell, you’ll probably have to discount the price or wait a long
time for the “right” buyer to come along – or both.
Value = Price + Terms
Ultimately, buyers determine what a property is worth, but an offer is much more
than just price. It’s a set of scales with price on one side and terms and
conditions on the other. The real value of any property is the price a buyer is
willing to pay in exchange for terms and conditions. You want to buy that
building lot with the stream running through it. Public water and sewer aren’t
available and the seller hasn’t had the property tested to determine if some
type of sewage disposal system would be approved by the county health
department. You need to know if the lot is buildable. You don’t want to spend
the money for testing unless the seller accepts your offer and you don’t want to
have to buy the property if you can’t get a building permit. What you might do
here is give the seller an offer contingent on your being able to get the
property approved for a certain type of sewage system and anything else you’d
need in order to get a building permit. You’d be more likely to offer the seller
a higher price if the seller would agree to these conditions than if the seller
wanted to sell “as is.” Sellers who get the highest price usually have to give
the buyer favorable terms. Buyers who want the lowest price will have to forego
most if not all of their contingencies. The seller’s willingness to assume some
of the risk and give the buyer time to satisfy conditions is as important (and
sometimes even more important) as price in development property transactions.
Buyers Are Sellers
Before you decide to buy a property, you should evaluate it as objectively as
possible. Put it under the microscope and try to identify objections that buyers
in the future might have when you go to sell. In short, when buying, think like
a seller because some day you will be one. Whatever you buy should have appeal
to the widest segment of the buyer market, and remember that there’s no
substitute for a good location. A good location is one that enhances the
property’s value relative to the intended use. For instance, when builders
purchase development land, they take into account factors that will reduce the
property’s appeal in the eyes of the end users (homeowners), such as location on
a busy street. On the other hand, if they want to develop the property into
retail space, visibility and high traffic counts are critical.
Don’t Over Improve
The value of residential property is generally defined by the uses and sale
prices of neighboring “comparable” properties – those having the same
characteristics as your property. Investment property value (including land) is
tied to the income or profit that the property can produce, either immediately
or down the road. Value won’t increase in direct proportion to the cost of
additional improvements if surrounding property values are equal to or less than
the property’s value without the additional improvements. For example, you live
in a subdivision of homes that have two-car attached garages and sell for
$250,000. Four years ago, you had a three-car detached garage built in your back
yard because you wanted more garage space. Now you’ve got your property up for
sale for $300,000. Even if you find a buyer willing to pay your price, the
buyer’s lender will have an appraisal done to make sure that the property
appraises for the purchase price. The ideal buyer in this situation would be
someone who wants mega garage space and can either pay cash or doesn’t need a
mortgage for more than 80% of the purchase price.
Bio:
Nancy E. Chadwick, President and Broker of Chadwick Real Estate, Inc., is a PA
licensed real estate Broker and Instructor. She entered the real estate business
in 1982 following her career in the Philadelphia legal community as an
environmental and litigation paralegal. She has specialized in land development
for most of her real estate career, achieving top-producer status in several of
her past agency affiliations. Her services have been sought by a wide range of
clients, including builders and developers, non-profit organizations, estates,
REO departments of financial institutions, medical groups, consumers and other
real estate professionals.
Her book Land Buying & Selling is based on the state-of-the-art courses she
created that have been approved by the PA Real Estate Commission (for real
estate brokers and agents) and the PA Board of Certified Real Estate appraisers
(for certified appraisers and appraiser candidates). She also teaches courses
exclusively for consumers.