An explanation of the method used to appraise the hidden potential of a property, paying specific attention to determining highest best use of the property and whether the property has excess or surplus acreage. 

By Anthony Salvitti, Appraiser

Recently I was engaged to do an appraisal on a property that offered hidden potential, which in my opinion, needed to be considered.

The property was an older farmhouse-type single family dwelling with several outbuildings, including a barn and a garage. The improvements were situated on a total of two parcels, under single ownership, that offered a total of 28+ acres. The home was located within a Philadelphia suburban market that has grown exponentially over the past ten years. The growth was primarily a result of the outward migration from the city to the outlining suburbs. While existing housing stock absorbed some of the demand, the majority of the housing was provided by the building of new subdivisions. These new subdivisions were primarily the result of the redevelopment of the existing “gentleman’s” farms that characterized the location. The subject was one of the few remaining gentleman farms that had yet to be redeveloped. [A gentleman’s farm is an extremely small or non-operative farm.]

We developed the primary appraisal question, which was; “what is the highest and best use of the subject; and is the acreage being offered by the subject “excess” or “surplus” land? The first step is to determine the highest and best use of the subject property.

Highest and best use is defined by the appraisal dictionary as:

“The reasonable and legal use of vacant land or an improved property which is physically possible, appropriately supported, financially feasibly and results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity.”

In regard to the subject property, the subject offers residential improvements on a total of some 28 acres. As mentioned, the subject’s total land area is contained on (2) separate parcels. In determining the highest and best use of the subject, consideration must at least be given to the potential existence of excess land or surplus land.

Excess land is defined as:

“In regard to an improved site, the land not needed to serve or support the existing improvement. In regard to a vacant site or a site considered as though vacant, the land not needed to accommodate the site’s primary highest and best use. Such land may be separated from the larger site and have its own highest and best use, or it may allow for the future expansion of the existing or anticipated improvement.

Surplus land is defined as:

“Land not necessary to support the highest and best use of the existing improvement but, because of physical limitations, building placement, or neighborhood norms, cannot be sold off separately. Such land may or may not contribute positively to value and may or may not accommodate future expansion of an existing or anticipated improvement.”

Other factors which would contribute to the existence of surplus land include the existence of deed restrictions or conservation easements which would prevent the further subdivision or development of a particular parcel of land.

In an attempt to determine if the subject property offered excess or surplus land, representatives from the township were contacted. According to a township representative, the subject property offers split zoning, with one lot providing for a minimum lot requirement of 60,000+sf. The other parcel was situated within an RA zoning district, which requires a minimum lot requirement of 75,000+sf.

The township representative also indicated that the township is receptive to residential subdivision of larger “farmette”-type properties such as the subject as per the township’s comprehensive plan. The only noted barrier to future subdivision within the township was the current market conditions; however it is considered highly probable that continued reasonable residential development will continue once market conditions become favorable.

The foregoing information indicates that ultimately the subject’s highest and best use would be for residential subdivision. The potential for subdivision does exists for the subject property and would need to at least be considered within our analysis as this characteristic would have a positive impact on the subject’s marketability and overall market value.

The next step is to research the market for competitive type properties with similar potential. We researched the subject’s surrounding market and found properties that were purchased, within a year from the date of our valuation, for their subdivision possibilities. Their sale price reflected a premium because of this condition. These properties were highly similar to the subject with minor adjustments required to reflect differences. From our investigation of these sales it was determined that the premium paid represented approximately 10-20% of the selling price; thereby providing the basis for an adjustment to our subject to reflect the “potential” for subdivision.

It was revealed in court that the other appraiser valued the subject as a “house with a big back yard.” Their lack of understanding of all factors affecting market value had a material impact on their opinion of value, which brought into question the competency of the appraiser and the court’s confidence in the value estimate. Ultimately it was found that our analysis was more reflective of the market.

In the end, a house with a “big back yard” might actually be something much more. It is necessary to think outside of the box, and investigate all angles. Failure could result in a disservice to your client.

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Anthony Salvitti is an associate appraiser at Benchmark Appraisal Group, LTD. Of Huntingdon Valley, PA. Their primary market area is in Philadelphia and surrounding 4 counties; Bucks, Montgomery, Delaware and Chester Counties. And southern N.J. from Burlington County to Cape May county.