The value of real estate includes the value of the home, plus the value of the land that it is built on. If you have a larger lot does that mean that the house is worth more? Maybe, or maybe not. There is a complex set of factors that determines how much lot size impacts the value of a home, and it differs when the lot is improved (has a house on it) or unimproved (is just a vacant lot).
Value of a vacant lot
When a piece of land is vacant, it is called “unimproved land.” The value of such a lot is generally determined by what a developer would be willing to pay for it. That developer could be a home builder looking to make a profit or a private individual looking to build their own home there.
Zoning laws dictate what type of property can be built on a particular piece of land. A lot with residential zoning can have a home built on it, while one with commercial zoning may allow for a warehouse or strip mall to be built. The concept of land value says that the value is what someone would be willing to pay for the lot’s “highest and best use,” another way of saying its worth is determined by what you can build there.
Builders look at land based on the number of sq ft available, but also what they are able to build there. If a lot allows a single home to be built there, the builder will start with their land price, estimate the cost to build a home and then estimate the sale price of what they are planning to build. They are out to make a profit, so they need to build that into the equation as well. If homes in the neighborhood are selling for $500,000 and the builder thinks he can build a similar one for $250,000 and wants a $50,000 profit for the project, the most he would be willing to pay for the lot is $500,000 – $250,000 – $50,000 = $200,000. Obviously if a lot has special features like a larger size or spectacular view, the builder would be willing to pay more because the finished home will sell for more.
Builders are very keen on lots that can be subdivided. A 10,000 sq ft lot that can be divided into two 5,000 sq ft lots is potentially way more valuable to a builder, as they can build two homes instead of one, and the lot cost per home goes way down. The cost per buildable lot is more important to a developer than the raw price per sq ft. Let’s say there is a 50,000 sq ft parcel that can be divided into ten 5,000 sq ft lots. Compare that to a 60,000 sq ft parcel that can be divided into ten 6,000 sq ft lots. The number of homes that can be built is exactly the same, and chances are that the 6,000 sq ft lots aren’t going to bring a higher sale price than the 5,000 sq ft lots, so the value of both parcels is equal to a builder, despite the difference in size.
Value of an improved lot
Most land already has a home built on it. Does having more land automatically make the home worth more? Sometimes yes, but a lot of times no. It is all about utility of the lot for most home buyers.
Let’s take a simple example. Say there are two homes that are virtually identical inside. One sits on a 6,000 sq ft lot and the other is on an 8,000 sq ft lot. Will a buyer pay more for the 8,000 sq ft lot? It depends. If the smaller lot is superior because it is in a quieter location or has a better view, it will be worth more than the larger lot. The 8,000 sq ft lot might also be partially unusable with a steep slope or wooded area that makes the effective size to a buyer the same. Buyers also look at utility of the lot. If both homes have similar lots except for the size, is the smaller yard “big enough” to make no difference. Many buyers may see the usable areas of the 6,000 sq ft lot as sufficient, and place no additional value on the extra 2,000 sq ft.
Let’s look at another example. Say there are two homes that are virtually identical inside. One sits on a 2 acre lot and the other on a 4 acre lot. Will a buyer pay more for the 4 acre lot? Once again, it depends. Both lots are quite large, and you need to look at the characteristics of each lot. Does the larger lot offer more privacy? Or perhaps the larger lot allows you to have a horse pasture? The buyer who is looking for more privacy or wanting to keep horses will be willing to pay more. A different buyer may see the 2 acre lot as having sufficient privacy or have no interest in a pasture, so will place no value on the additional acreage. In fact, such a buyer may devalue the larger lot because the extra maintenance is a nuisance. It is also possible that the 2 acre lot is open and entirely usable, which the 4 acre lot has 3 acres of forest, making the effective lot size to a buyer actually smaller.
Subdivision also comes into play when there is a large lot with an existing home on it. If you have a 20,000 sq ft lot with a house on it and zoning law allows 10,000 sq ft lots to be created in your area, can the lot be divided in half and a second home built? If so the value of the extra 10,000 sq ft can be substantial. Obviously the existing home needs to be situated on the lot to allow it to be neatly divided for this to happen. You also need to account for any reduction in value to the existing home by building a second home close to it.
Certain characteristics of a lot can also make its value vary wildly. Waterfront and views can make a huge difference. A 5,000 sq ft lot that has 100′ of beach frontage may be worth tens of thousands more than the 20,000 sq ft lot behind it that doesn’t have water access. A tiny lot with an amazing view can have the same effect.
How do I price my home based on lot size?
If your lot is larger than your neighbors, it might be worth more and it might not. You need to focus on perceived utility of the lot to a buyer. I’d focus first on the characteristics of the lot. Is your lot a corner lot with more privacy on a quieter street? If so, it is probably worth more. If you have a larger than average lot that sits on a busy arterial street, it is worth less than your neighbors, despite its larger size.
If your neighbors have smaller lots but great usable back yards, chances are the extra 2,000 sq ft in your back yard isn’t going to make any difference to a buyer. If your neighbors all sit on tiny postage stamp-sized yards with little usable back yard, and you have an extra 2,000 sq ft, that could make a significant difference to a buyer.
Unless a lot is dividable, there is a limit to how much more a buyer will be willing to pay for extra acreage. If a home sits on a large 2 acre yard, many buyers will not pay more for an extra acre or two, unless there is additional utility to having 3-4 acres.
Estimating the value of real estate isn’t an exact science, and you need to account for the usability of your lot, not just look at it’s size.