A lot to be said for location when weighing a renovation

Friday, January 13, 2017, Vol. 41, No. 2

When is a lot not worth a lot? With apologies to the late Professor Brinley Rhys, the brilliant intellect who shared his vast knowledge with his students at Sewanee and a man who abhorred the use of “a lot” when it referred to many or much, I shall proceed.

There are times when a lot – here used as a parcel of land, sometimes referred to as real estate – has no value as a construction site. This is particularly the case on some infill lots, or lots that were overlooked when a raw piece of land was developed.

When developing a tract of land, developers purchase the property at a price that allows them to add the necessary infrastructure at costs low enough for the developers to either sell the lots to a builder at a profit or build on the property themselves.

For the past several years, zoning provided opportunities for builders to acquire single-family homes, demolish them, then construct two dwellings on the lot.

When the single lots could be subdivided into two parcels, the two-for-oneness made the numbers work.

In the recent past, there have been measures taken by the Council to reduce the number of homes that can be built in some areas.

A lot has no value, developmentally speaking, when it is in an area in which homes sell for less per square foot than it would cost to construct a new home.

For example, if the highest sale in a certain subdivision is $180 per square foot and most homes in the area were built with quality, upper-end finishes – true hardwood floors, marble and granite in wet areas, a bathroom for each bedroom, high ceilings, and is architecturally complex (meaning porches, alcoves, gables, interesting lines, etc.) and has extensive landscaping – it makes no sense to tear it down and rebuild.

In order to build homes that would compare to the neighboring properties in quality, a builder would have to spend $165 to $185 per square foot. If the highest sales price in the area was $582,750 for a 3,150-square-foot home, a lot would not be worth a lot.

If the builder could cut costs and build a 3,150-square-foot house for $165 per square foot, he would have $519,750 in construction costs, leaving the lot with a value of $63,000.

But the cost of demolition, removal of debris, six or seven months of interest and taxes and insurance on the property could quickly reach $30,000, meaning the lot value would be $33,000.

If however, the cost is $175 per square foot, the construction expense alone would be $551,250 and, after demolition, taxes, insurance, interest and other expenses, the cost would be $581,250 or more than the value of the property.

Consequently, the lot has no value if the cost to build a new dwelling is $175 per square foot.

For all the flippers flapping around, the situation is similar. If the existing house is 1,500 square feet and has not been touched since it was built in the 1930s, it would require new wiring, plumbing, HVAC, ductwork and probably some asbestos removal, along with new roof, flooring, paint, drywall repair and all the costs to remove the old and upgrade to the new.

There are those in the construction field who feel that renovating or remodeling is more difficult than starting over, as they never know what they will find as they remove systems.

For example, they could find mold, extensive termite damage or other expensive demons trapped behind the drywall.

Recently, a contractor stated renovating a house could be more costly than starting anew, but it could be as low as $135 per square foot if things went well.

That would push the cost of repairs for a 1,500-square-foot house to around $202,500.

In order to compare with other houses in the area, the house would need to have the 1,600 square feet added. Even at $175 per foot, that cost would be $280,000.

So the $280,000 for the addition and the $202,500 for repairs, plus $30,000 to carry the project, would push the cost to $512,500 for a project with a value of $582,750, if it warranted an offer as high as the highest price in the history of the neighborhood.

If selling the home has closing costs and real estate fees of even three percent ($15,862), it would cost the seller $528,362 to get out of the property, thereby netting $54,388.

So that is what the lot is worth.

That’s not a bad return for six months work, if everything goes well and the high price is met.

However, one surprise or a market downturn can send things South in a hurry.

Additionally, this example if from an area that commands $185 per square foot. The lot is not worth a lot – perhaps nothing – in any area with a lesser value per square foot.

Richard Courtney is a real estate broker with Christianson, Patterson, Courtney and Associates and can be reached at richard@richardcourtney.com.