What’s a building lot worth today?

Less than it was, that’s for sure. I viewed a friend’s potential listing yesterday to give a price opinion and I was stumped. The street, never one of Greenwich’s premier addresses, saw a couple of new homes built on it a few years ago but that transformation has stopped, at least for now, leaving mostly small, modest little capes that are just fine for living in but aren’t going to attract IBers – well, those bankers who are still employed.

But this particualar house is a wreck. Both concrete porches have split from the foundation, the foundation itself is “challenged” and the interior matches the condition of the foundation. It’s land value, only. My friend was thinking in the range $600-$650,000 which, a few years ago, would have seemed realistic. I drove away with numbers like $175,000 – $250,000 in my head and even then, I wondered who’d want to build there. It’s a toughie.

And then there’s a building lot for sale at 131 Cat Rock Road, for sale since 2005 with a current price of $1.450, down from an original price of $1,795,000. Two acres, in Cos Cob, on Cat Rock. That’s tough, too. We know that it wasn’t worth it’s original price four years ago in a great market, what’s it worth today? I have a feeling we won’t find out for a while. If I were bidding on it, I think I’d start in numbers that started with a 9, not a 1.

16 Comments

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16 responses to “What’s a building lot worth today?

  1. CEA

    This is the same “mark to market” problem the banks are having. If there is no market for a building lot, then what is the value of one?

    The only buyers would be 1. someone who can afford to wait a long time to build, or 2. someone who wants that particular spot to build right now.

    Right now, there are no buyers like #2. So you have to attract #1, and give him the “time value of money” part of the equation.

    So let’s say it will be 3 years before the lot area is financially “build-able” and “sell-able”. Chris, what is the kind of price this neighborhood will bear? $2 mil?

    SO:

    Construction costs of $300/sq ft for a 3,000 sq ft house = $900,000.

    That leaves you $1.1 for land and some small profit. So, say a 10% ($200,000) profit: the land can cost, at most, $900,000.

    Construction: $300 x 3,000 = -$900,000
    Profit: 10% x $2,000,000 = -$200,000
    House Value (in 3 years) = +$2,000,000
    = Land Value: $900,000 (in 3 years)

    Then take the present value of the land (since the house value is predicated on a house selling in 3 years):

    PV of $900,000, out 3 years, at 6% discount rate: $755,657. Ta-da! That is today’s value.

    You can change any of the numbers (construction costs, house value, etc.) to derive land values if you want to change the assumptions.

    CEA

  2. Stanwich

    Chris, you know the drill. Figure out what FAR you can fit on the lot, multiply by new construction cost psf (maybe $375 on the low end), then subtract that amount from the most similar comp on the street and, ta-dah!, you have your land cost.

    Now, the part about Cat Rock just smacks of your OG-Riverside South of the tracks elitism. Is this site across from the “challenged” spec house with the port cochere and just down from Pecora’s razzy new $5m spec house? You might not like the area but the area obviously supports some very expensive homes.

    I wish I knew where you lived so I could call you challenged (I mean your neighborhood).

    • christopherfountain

      Stan, I live in beautiful, spacious Riverside, on a ten-acre spread, 18,000 sf house with servants quarters down on the lower 40. It’s quite nice – come visit for coffee sometime (but please use the entrance marked “Cos Cob and service only”)

    • christopherfountain

      But following up, Stan, one of the houses I was writing about was on a street that might, I say might, support a new house sale at $1.250, but I suspect $950 is more like it. Even at $200 sf for the maximum allowed 3,000 sf, that’s $600,000 for the house and $350,000 for land, profit, overhead and commissions. I don’t see any room in there to pay anything for the land. That would hurt.

  3. Anonymous

    What is land value of a teardown on .17ac in town?

    • christopherfountain

      Depends where it is, naturally, but there are some areas of town where I don’t think it’s worth anything. Would never have said that a few years ago.

  4. Kim Gesell

    Are you familiar with 1 Cat Rock that is for sale? It is a clear lot that is for sale with a new 5000 sf house (to be built in 6 mos) for $1.995MM. Have you ever seen a transaction like this? Any thoughts?

    • christopherfountain

      It’s up on that rock, isn’t it? But I understand the builder’s idea – he’ll build but not on spec. I like the one across the street, number 10, I think. It’s already done, beautifully, and I think it’s the same price.

  5. anonymous

    Another part of equation is which part of town becomes more fashionable or desirable…and how much land/privacy/perceived safety is desirable in a deep recession, esp w/likely higher crime rates and a negative view of conspicuous consumption…

    After all, building a new, bespoke house in this economy is a long-cycle, lifestyle decision

    Also, would guess economic fortitude and/or irrationality of sellers of desirable land plays a role in price discovery….many sellers may be >>65yo, longstanding owners of land who can afford to stay delusional re: valuation until late ’09 and beyond…but economic distress and/or rationality eventually kicks in…

  6. ff

    Huge problem with the otherwise sound “time value of money” assumption. You are assuming that someone wants to pay 2009 money for a 2012 profit of 10%. You need to discount that off the top right away. Then you need to give me the phone number of a builder who was happy with a 10% profit projection in 2006. If you go up to a very reasonable 20%, plus account for the profit number, then the lot you discussed is worth closer to $400,000.

  7. ff

    Oh yes, you forgot to account for the brokers and the tax. Subtract that 7% and your lot is worth closer to $300,000

  8. CEA

    ff: I completely and totally agree with you. In the past I have been criticized for being too negative, so I try to give a more “positive” downside. I don’t think the lot is worth even the $300K, because 10% profit is too low (as you noted), the discount rate is too low, and I did not take brokers, tax, or the all-important financing costs into account.

    It’s the same mark-to-market problem. If you have an asset no one wants now, what is it worth? Today, 0. Tomorrow, maybe a few hundred K.

    It’s one thing to have something that was once worth $50K, and now it’s worth $150K. But it seems like today, people had something worth $50K, it went up to $500K, and then down to $150K, but people still want to pretend that their asset is worth “peak” valuation.

    • christopherfountain

      Oh, Frank’s about as negative guy as you’ll find, CEA. He’s only a Democrat because he wants to see the world end even sooner than it would otherwise!

  9. CEA

    CF: $1.25!! Then that lot is worth $100K or less, and that would be in a good market.

    Kim Gesell: are you kidding? Look at Sotheby’s, or Raveis’, web site. Lots of builders with lovely pastel-drawn renditions of homes they could build for you. How about North Street – right on the Merritt entrance? Just came on last week. Or the Antares’ can tell you all about those beautifully-rendered drawings on Langhorne Lane that got them nowhere.

  10. anonymous

    CEA,
    At this point, Net Present Value isn’t the issue. It’s supply and demand. There is a large supply of unsold new homes. The traditional buyers of these large homes have disappeared due to some recent events at the office (!). Banks have tightened lending requirements so there are fewer qualified buyers. If the developer borrowed from a bank, you will see prices drop when the bank says “no mas” and the cash buyers will appear from nowhere when the bank forces a sale. If the developer can afford to ride out the storm, he still may lose money. If not, these homes must be absorbed, at wonderful prices for those who are sitting pretty with lots of cash or credit lines to purchase. Prices will be established for this excess inventory. There will be bargains for those who have the means to take advantage of them. Some properties will sell for less than the cost of the house and you will get the land for free.

  11. CEA

    anonymous@2:46: I am very well aware of supply & demand, hence my “mark-to-market” analogy of saying:

    “This is the same “mark to market” problem the banks are having. If there is no market for a building lot, then what is the value of one?”

    Chris was pondering in his post how he could put a value on this lot for a friend. I tried to give him a metric or methodology. That’s all.