You’ll often hear excess land and surplus land discussed in the context of an appraisal.
Appraisers must determine if there is excess or surplus land in order for them to determine an accurate value.
If you’re gearing up to have your land appraised, or you’re beginning to look at plots to buy, knowing the difference between excess and surplus land can be helpful.
Here’s what you should know.
1. What is excess land?
Excess land is land that is not needed to serve or support the existing improvement.
Thus, the highest and best use of excess land may or may not be the same as the improved parcel.
Excess land is valued separately and may have the potential to be sold as a separate parcel if subdivided.
FHA defines excess land as “that which is larger than what is typically in the neighborhood and capable of a separate use.”
While an excess portion can often be subdivided and marketed as an individual parcel, sometimes in small communities and outlying areas, appraisers must use different criteria because the market may accept a wide variance in lot sizes.
If a lot contains excess land, the appraiser should describe it and address it in the highest and best analysis, but it should be treated separately in the valuation process.
Often, a legal description of the portion being appraised is required, and the lender may also require that the excess land be excluded from the mortgage security.
2. What is surplus land?
Surplus land is land that is not currently needed to support the existing improvement.
However, it cannot be separated from the property or sold off.
Surplus land does not have an independent highest and best use and may or may not contribute value to the improved parcel.
3. How to determine if your land has either excess or surplus land?
The first step is to determine whether the property in question has either excess or surplus land.
Here are the steps to do so:
Walk the entire site at the time of the inspection to verify that it is fully allocated to site and building usage
Check the subject’s land-to-building ratio against those of the comparable sales
If there are no abnormalities for any of these checks, then surplus land and excess land are probably not an issue for the valuation assessment.
If the survey, inspection, or land-to-building ratio check indicates that the subject land area is not fully utilized, then the appraiser should determine whether the unused land is excess or surplus.
Remember, excess land is land that is not needed to serve or support the existing improvement.
Excess land can be partitioned, sold separately, and valued separately.
Surplus land is land that is not needed to serve or support the existing improvement, but it cannot be separated from the property and sold off.
4. What does “highest and best use” mean?
Above, we’ve used “highest and best use” in the definitions of excess and surplus land.
“Highest and best use” can be defined as the “reasonable, probable, and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible and that results in the highest value.”
A “use” must meet the following four criteria:
Legally permissible (i.e. allowed under zoning requirements)
In this definition, it is implied that the determination of the highest and best use must be legally and practically possible.
The use must also benefit the individual property owners.
Given this definition, the highest and best use may be determined to be different from the existing use.
It’s also worth keeping in mind that the “highest and best” use will result from the appraiser’s judgment and analytical skills.
Thus, the use determined from analysis represents an opinion held by the appraiser, not a fact to be found.
The determination of highest and best use often includes identifying the motivations of probable purchasers, and these motivations are based on perceptions of benefits that accrue due to property ownership.
The different motivations that influence highest and best use are significant to an appraiser’s conclusion about the highest and best uses of any parcel of real estate.
This process can ultimately be complex.
The market value of the land or site and of an improved property are both estimated under the assumption that potential purchasers will pay prices that reflect their analysis of the most profitable use of both land, as vacant, and property, as improved.
Once the highest and best use has been determined, the appraiser is then able to apply the appropriate approaches to value the property in question.
5. How can you determine if an unused portion of a site is excess land?
The following three tests can be used to determine if a portion of a site is excess land.
The first test is if the land has sufficient size, shape, and accessibility to be partitioned into a marketable parcel.
The second test is whether there are legal or government barriers to such partitioning.
If there are no legal/governmental barriers, then that checks the second box of whether the site is excess land.
The cost and time associated with this portioning should also be considered in the valuation process, but most appraisers do not do this when appraising.
The third test is regarding the market for the unused land if it’s separately partitioned.
If it’s a depressed or declined market, then the vacant land is the first property type to lose its marketability altogether.
As a result, there can be times when excess land becomes surplus land due to low demand.
6. Why does the difference between excess land and surplus land matter?
There are a few reasons why this difference is relevant.
The first is just general real estate knowledge.
These two concepts are distinct, and if you’re delving into the real estate world, then it’s important to know the differences between these two concepts.
The second is assuming value.
Many buyers will assume that a larger lot is always more valuable.
Before getting distracted by the size, ask yourself,
- What can this lot be used for?
- Does the parcel shape allow it to be useful to buyers?
- What have similar lots actually sold for?
The bottom line is that a larger lot that can be divided is often worth more than a larger lot that cannot be divided.
This is why it’s important to talk to the local planning department to see what the possibilities are for additional space on your property.
Never assume that extra space on a lot can be divided.
Also, just because a lot can be divided doesn’t mean it’s going to be in the current market.
If values are tanking and new construction has halted in an area, then excess land may not command a value premium.
That said, if values are up and construction is occurring, then splitting the lot is probably worth it.
7. Which is better to have?
A quick trick to remember which is better is “excess” land is “excellent” and “surplus” land “stinks.”
This is because excess land is able to be partitioned and sold while surplus land cannot be separated from the property.
8. How do you handle excess land in an appraisal?
When appraising land, the value of excess land should be reported and calculated separately.
When doing so, be careful about adding the excess land to the value of the rest of the property as the sum of the parts may not equal the whole.
Keep in mind that surplus land doesn’t have a separate value and cannot be sold off.
9. What happens if an appraiser determines that there is excess land?
If an appraiser determines that there is excess land, then they must describe the land.
However, the excess land may have to be treated differently in the valuation process.
For example, if a house is situated on a 10-acre site, but most of the homes are placed on 4-acre parcels, 6 acres of the site would be considered excess land if there’s no reason why these additional acres couldn’t be subdivided.
Thus, the appraiser should appraise the lot on the assumption that the subject home is on 4-acres of land and would give no value to the 6-acres of excess land.
But remember, this is just for FHA appraisals, in other circumstances the excess land may be included in the appraisal if the excess land is seen as adding value to the overall parcel.
The appraiser would just need to be careful to ensure that the excess land is valued properly, including giving it a separate highest and best use if appropriate.
This article should have helped you understand how an appraiser analyzes land when it comes to the “highest and best use of a property.”
Both excess land and surplus land are a factor in determining an accurate value.
Keep in mind that what initially seems straightforward may end up being more complex when you start digging.
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.