Valuing Undeveloped Property Containing SFH

[Charles Molluzzo]

Hi everyone,

After a death, my family will have to sell a property containing a single family home, but the property may be worth more as a commercial property.  The road on which it is located is a major street (3 lanes each way) that has become more and more commercial with each year.  In fact, the properties on either side of the house are commercial - one a house that was converted to a nursery school some years ago, and on the other side, a former gas station that is now major wireless carrier's cell phone store.  The property is zoned both for residential (semi-detached and detached), and for light commercial use (e.g., neighborhood grocery store, medical office, etc.).

While I have not yet conducted the analysis, I know how to value the property if it were sold as a single-family home (comps, though direct comps will be difficult), but I am inexperienced with commercial properties.  How would you begin to analyze the value of the property for a future commercial use?  The future commercial use could be the modification of the house (e.g., use as a doctor's office), or an entirely new structure (a medical building, for example). 

I appreciate any feedback. Thanks.

Best,

Charles

[Joel Owens]

Hi Charles,

Typically what you are selling is the allowed highest and best use which likely Is the LAND in the case. If you can do commercial then a developer might can pay a decent price for it.

The parcel size makes a big difference with zoning laws and restrictions what can go on it along with parcel shape. You could have say 1 acre but half of it is un-useable. If it's not buildable and rentable space there is no return typically on that part of the dirt for a developer. The other part is timeline to sell. As a developer for instance when I look at a piece of land  basically I have 2 prices. if a seller wants me to take all the risk then the price I will pay for the dirt will be really low. If the seller wants a premium then I will want to lock up the property for a long time and get a tenant commitment and zoning approvals with site plans before closing on the dirt. There is a difference between land that has been cleared, land that is cleared and entitled ready to go, versus here is the land and we have done nothing with it and you have to tear down the structure and do everything to get it ready to go. If you get it rezoned commercial then property taxes can be high while you wait to sell it. If you are trying to sell commercial then a local commercial land sale broker could be helpful. The residential agents selling houses are typically clueless about development. The slope of the land and how much dirt to be moved also comes into play as it can get expensive to level for site work.

Additionally inventory levels of similar locations with vacant buildings where developers or tenants can go in cheaper and faster might be competition unless you have one of the best locations in the area.

Basically what I am saying is that there is a lot to this and you need a specialist to help if you are trying to extract any additional value out of the property versus it's current use. With commercial land brokers commission agreements typically run about 8 to 10% total depending on the project size.