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Lot Splits

For the seller, the ability to split a lot is the Holy Grail of selling land. A 10 acre lot that can't be split may be worth $500,000, but the value may go up to $1m if it can be split into three separate lots.

Lot splits cost money. One mistake that sellers make is to try to sell a single lot for the projected value of the lots after a split. This does not factor in the:

1. Cost of splitting. In San Diego County this will cost about $50,000, even for a simple split of one parcel into two lots.

2. Time. A split may take 2-4 years, and who will predict land values at that future time? A developer/buyer may not want to tie up his or her money for the time it takes to split the lot.

3. Unforseen circumstances. Maybe there are reasons that a lot split will turn out to be impossible at some point during the splitting process.

The best solution is for the seller to do the lot split before selling. That will maximize the profit on the sale of the lots.

The second-best solution is for the seller to hire an engineer to do a feasibility study for the lot split. Suggested boundaries can be drawn up, and this information can be provided to potential buyers. It takes money to make money, and a few thousand dollars invested in some PR to show how a lot split would look may be money well spent.

How do you appraise the value of a lot that can be split at some time in the future?
Here is a rough formula.

(Value of each of the split lots if they were sold today - $50,000) * 0.8

Where 0.8 is an arbitrary multiplier representing the loss in income of the buyer's capital over the next 2-4 years offset by the future value of the land. $50,000 is the cost of splitting the lots.

So a $500,000 lot may be splittable into three lots each of which would be worth $350,000 if saleable today. That puts the gross value today at $1,050,000. So the net value after spltting would be

($1,050,000 - $50,000) * 0.8 = $800,000

If the single lot could only be divided into two lots worth $400,000 each, the math is

($800,000-$50,000) * 0.8 = $600,000

This calculation is only a suggestion, but it may be useful when calculating the value of a 'splittable' lot.



This website has been written and developed by Rob Ransom, PhD. Rob has extensive experience working with buyers and sellers of vacant land in San Diego County, CA. Although Rob currently has a California real estate license he is retired from selling real estate.

If you have comments or suggestions regarding this web site, email Rob at the address below.


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