Land Value: Surplus vs. Excess

I recently came across this interesting animated GIF from an article from RealtorMag regarding land values over the last 40 years.  It followed the overall housing market by peaking in 2006 and bottoming in 2011.  When thinking about land value it is important to understand a fundamental concept of surplus land vs. excess land.  Jonathan Montgomery also wrote an excellent post with some additional information on this topic you can read here.

EXCESS LAND is the portion of the lot that is not necessary to meet the existing zoning requirements AND could possibly be sub-divided and sold off as a separate parcel.  
SURPLUS LAND is not large enough to be separated from the existing parcel and therefore, does not have as much value as excess land.

The trick I was taught to remember this is excess land is excellent.  Let's look at the following two slides below from a recent class I took from the Hagar Institute (which I highly recommend for all appraisers).

Source: How to Support and Prove Your Adjustments by Richard Hagar 

Source: How to Support and Prove Your Adjustments by Richard Hagar 

In this example, a 3000 sq. ft. lot is valued at only $3 per sq. ft. as it is considered unbuildable and has minimal utility.  Once you get to 5000 sq. ft. the value per sq. ft. increases to $40 per sq. ft. Therefore, a 3000 sq. ft. lot would have a market value of around $9000, while a 5000 sq. ft. lot would have a market value of $200,000.  

Remember that when appraisers are analyzing land values, we are NOT making adjustments on the total size, but instead the incremental change in size.  This same theory can be applied to many other features of real estate as well (GLA, first bed or bath, first 50' of water frontage, etc.)  If you have any questions please feel free to call me at (847) 863-5776 or leave your question or comment below. 

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  • Tom Molinari

    Hi Paul,
    In my neck of the woods (Southern California) if that 3000 ft.² lot was actually a compliant lot that was created prior to the current zoning ordinance, then it is considered to be legal nonconforming and it is buildable. Therefore, when valuing vacant parcels, one needs to check with the local jurisdiction to determine when that lot was created. Chances are that it couldn’t have been created after the the zoning change as it would not comply. But if it existed prior to the implementation of the R – 5000 zoning ordinance then it can be built on.

    But one must also consider other factors such as maximum lot coverage ratios, maximum height limitations, required setbacks under the current zoning classification, etc., before valuing that lot. Can a home that is typical for the subject neighborhood in terms of gross building area, garage spaces, etc. fit onto this parcel? A very thorough highest and best use analysis is required when determining the value of vacant lots. Generally speaking, vacant land appraisals are more complex than most clients understand and require a significantly greater amount of work than improved properties to determine exactly what can be built and how that impacts the value of the vacant parcel. Consequently, the fee for valuing vacant parcels should be substantially higher than the fees for improved properties.

    Thanks for the great post. Most clients don’t know about excess land and surplus land and how that impacts property value.

  • Great article Paul and I love the graphic. Keep up the great appraisal work in Chicago.