How to Price Residential Property and separate connected Lot ?

Question

Hello,

I was told by several real estate agents that we cannot price our property wrong as the market will correct itself, is this true ?

Meaning if we go too low, we will get higher bids. If too high, offers will be lower, etc.

This is the situation:

We have a vacant lot plus a separate residential property next to it. The county says we are zoned for mutli-family units. I believe a buyer could put 3 units on both lots. They said it could amount to 4 each lot because of the square foot. Not sure exatly how that works.

We are not sure how to price both properties based on the mutli-family zoning being the "highest and best use".

Pricing based on a single family residential and a vacant lot is much easier as we know of more examples to compare. The real estate agents we talked to are more familiar with pricing this type of property.

Will multi-family residential zoning does it likely bring more value to a property ?

What should we do to come up with a price ?

Thanks!

Shane Pearlman · Answer

@Steve Ford

In a strong seller market within a half mile of the railroad tracks (e.g. not the mountain towns), with a thoughtful and talented agent who gets proper exposure, your statement may be correct. It is likely the property(s) will find their natural price, should you gain enough interest.

MF Zoning. Proper zoning, with viable space setbacks and parking, access to utilities etc.. is definitely a value. There are local ordinances which affect opportunity, like live oak limiting the number of floors to two stories (although this could have changed). Would it be worth more to a developer than a single family, possibly, but not necessarily unless you subdivided. A family typically buys for lifestyle and vision. An investor / developer because there is an opportunity. I’ve often seen personal buyers pay far more for something they treasure than any investor would consider. The advantage is that you can market to both types of buyers. I have a number of multifamily properties in town, which are not worth all that much more than a high end house on the same lot would sell for. They are just a better source of rental income.

The House. The value of the SFR, if it is a good one in a good place, is likely to exceed the value of the land for a MF build. It will really depend on the property itself. It depends on what the zoning is and if someone can combine the parcels to build a bigger complex. While raw land has strong value in our constrained little piece of the world compared to many other places (as @andrew johnson mentioned), it probably doesn’t exceed the value of a solid house at the top of a market cycle. Same comment as above. Market to both audiences.

Market Timing. Don't wait. We are nearing, or are even past, the peak of the local market boom. Interest rates have begun to rise. While it is currently a sellers market, I have started to see slightly longer times on market for higher priced listings and less frenzied bidding in general. Land is not something a savvy builder / investor typically buys at a premium at the top of a market. It takes time to build and by the time they finish, the market will have begun to correct. The question comes down to your family’s goal. Is it getting very to dollar or having a quick painless sale? Do you have a 1031 lined up or is this a person home with a tax exemption? The impact of those questions should shape your selling strategy.

How to Find the Right Price. You probably looked at the current competition and reviewed active listings, but in case you haven’t start there. A good agent will get you comps from the last year. Probably already have and recommended a sale price. It won’t be perfect as the market has come up over the last year, but as I don’t see it rising much more, they will give you a strong basis for conversation. Make sure you get comps for land w/ MF zoning as well as SF comps. Analyze price per USABLE sq foot when looking at land. Consider what work has been done on the comps, because a raw piece of land vs. a prepped piece of land vs. a piece of land with an architectural plan and permits are not the same value. In addition to the agents, if you feel the need to do some of your own homework, try calling the office of a few of the major developers (Barry Swenson…) in town and ask them what they would consider a fair price per sq foot. I’m sure you’d get all kinds of wacky answers, but it should be educational.

At the end of the day, your agent should be able to guide you and if you don’t feel great about them, find another. I have two in town I have done over a dozen deals with and am happy to refer them if you DM me.

As a side note, there is a local meet up planned on Friday 23rd at Discretion Brewing (find it on meetup.com). You are welcome to come talk to some of the local investors to get their 2c. I think the San Jose meet up is even sooner and they have a solid group as well.

BTW - welcome to Bigger Pockets! Give a vote when you see a helpful answer as it keeps the more successful investors engaged and helping the new folks. Its good karma.

Andrew Johnson · Answer

@Steve Ford In many areas, likely not the Bay Area, there are plenty of undeveloped in-fill lots.  Plenty of lots zoned multifamily but with a single homes on them.  They don't get developed because the ROI isn't there or there are neighboring areas where the ROI is better.  Consequently, there isn't much premium for the lots' (potentially preferable) zoning.  Again, I can't imagine that's the case in the Bay Area.

If you truly want a premium, hire an architect and go through whatever process there is to get plans approved.  A "shovel ready" project usually has more value.

And if it is a common practice you'll see SFR -> triplex conversions going on.  Most likely it won't be done by owner occupants so I wouldn't take any plugged in realtor much time to figure out who are the 5-10 best suitors for a project like yours.

But your agent is right, it's not like the Bay Area has a ton of undeveloped space.  Price it low and you'll get competing offers.  Price it high and you'll probably still get an array of (lower) offers.  The more "in demand" (or active) a market is the easier it is for water to find its level.

Andrew Johnson · Answer

@Steve Ford I think what I'm failing to convey is that "not all MFR lots are created equal".  Parking requirements may be on a per-unit basis or on a per-bedroom basis in your area.  If your lot is bigger and can have 3 unit that are each 3 bedroom, 2 bath with 2 parking spaces while a smaller lot can only accommodate a 3 units that are each 1 bedroom, 1 bath then the value of the lots (to a developer) is different.  So if you look around the neighborhood in a quarter-mile radius and see that MFR lots (of your size) have been redeveloped into triplexes you can look on a county assessor's website to get an approximation of what will get approved to be built there.  Side note: any realtor should have done all of this already.  If the practice of this style of redevelopment/development is common you'll also have local developers with a playbook.  They know their costs, timelines, etc. as well as what they can sell for, rent for, etc.  Successful playbook means less risk, less risk means your property has a higher value.  If your property is such a unique gem that everything is a one-of then you narrow your pool of developers and your value (all things being equal) will lower because it just takes more time/effort to adjust plans for a unique property.  It's counterintuitive because a lot of SFR buyers (for their personal residence) hate tract homes and find value in the "unique".

The other reason you have to look at what is "common" is that it could really impact the value of the lot of with SFR home on it currently.  If people are tearing down homes to replace them with triplexes then the property with the SFR probably won't have too much added value (if any) because of the MFR designation.  If you sell to an owner occupant and want a premium for the lot designation then you're really narrowing your buyer pool to someone that wants to add a granny flat (or something similar).  And, even then, municipalities rarely just let you add anything because the lot has an MFR designation.  If you're selling to a developer, having the home on the lot may actually be a "cost" (detriment to the valuation) because they have to tear it down.  So based on what's happening in your market the home itself (condition also plays a factor) could either be an asset or a detriment to the sale of the properties.

Steve Ford · Answer

I don't see a lot of MFR. However the property next to us was developed into MFR. This was many years ago. There are apartments behind our lot. Those have been there a long time too.

Not sure what you mean by unique. It is a square lot. About the same size wide as deep. Bigger than most. So might be unique in the fact that not a lot of these are around. Is this unique ?

Since it is 2 lots together there are not a lot like this and maybe others would not be as good for building MFR. Most are 1 lot and smaller with a house on it.

Steve Ford · Answer

Regarding taxes, this is something we inherited recently, so the stepped up value would be the basis.

It is in Soquel so we are looking into the ordinances that may affect opportunity.

The agents have not mentioned anything about the zoning on the other properties they compared. There are not that many vacant lots in residential areas zoned MF to compare. One I saw close by was 4 times smaller. So I thought we should be 4 times more approx., give or take a bit for area. The agent says no because even though we are bigger they can only build 1 triplex on both lots so just because ours is 4 times bigger it does not calculate out like that.

Maybe this is what you are saying "price per useable square foot"?

If so, how do you figure the "useable square foot" ?

Thanks!

Steve Ford · Answer

This is in a good residential area in Santa Cruz County. A few miles from the beach and good schools if that matters.

I guess we are back to my original question, which is price. Don't know the price to ask for zoned  Multi-family residences.

Not sure why it has to be a "common practice". There is a shortage of affordable housing. Not sure if that matters. Lots of people make great investments in things that are not "common practice". What am I missing here ?

Steve Ford · Answer

Not sure I understand your response.

Could you be more specific as to what you don't understand about my pricing question ?

It is the Bay Area.

Regaring whether is it "common practice" not sure how this is relevant to what brings the most market value, can you explain that concept ?

How to Price Residential Property and separate connected Lot ?

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