2017-01-11

A home for sale last year in San Francisco’s Sunset District came perilously close to redefining the very concept of a “fixer-upper.” Fire damage had left gaping holes in the floors and ceiling, dust and mold covered every surface, and the exterior walls were crumbling. The place was not  inhabitable in any way. And yet it sold for just under $1 million last February after just a short time on the market.

That’s because in space-strapped San Francisco, the real value of real estate lies in the land. Just seven months later, the home was transformed into a contemporary four-bedroom, 4.5-bathroom home and was sold for $1.77 million.

“In San Francisco, you see some smaller investors who buy old, poorly maintained homes simply for what can be done to the lot, not the existing homes,” says Patrick Carlisle, chief market analyst of Paragon Real Estate Group. “It’s not about the 1,100-square-foot home, but the 4,000-square-foot home they can build there after tearing down the old one.”

Welcome to the realties of modern real estate math: While both physical structure and land contribute to the value of a home, those two components don’t hold their value equally, especially in the most desirable markets. Over time, the physical structure usually depreciates in value, while land appreciates. That’s because the property is in limited supply. Developers can stack more homes onto lots by building high-rises, but they can’t produce more land. And that’s why the value of land naturally goes up when population growth creates more demand.

But where in the U.S. has land value actually outstripped that of the houses that sit on it?

Using data from the Lincoln Institute of Land Policy, we pinpointed 10 housing markets where land accounts for more than half of a home’s total value. The institute obtained total home value from the Metropolitan American Housing Survey, and extrapolated structural value based on the age and square footage of the home, using construction cost indexes.

Notably, with the exception of Portland, OR, all the cities on the list are on the West or East Coasts (west, mostly), where buildable land is far scarcer compared with inland cities. In San Francisco, the average home value in 2016 was $1.35 million, and $1.09 million—or 81%—of that could be attributed to the land, according to the study. In landlocked St. Louis, by contrast, land is only 10% of a home’s total value.

If a home’s land value exceeds its structural value, it’s a good candidate not just for fixing up, but for tearing down—all the better to build anew. The determining factor is that the home is located in sought-after communities and near more valuable properties.



The post Not Dirt-Cheap: 10 Cities Where Land Is Worth More Than the Home on It appeared first on Real Estate News & Advice | realtor.com®.

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