Owning an Undeveloped Lot in a Subdivision

Post written by Chuck Braxton, REALTOR®, Roche Realty Group, Inc.

Just as a tree in the forest does not grow to the clouds, the value of an undeveloped lot in a residential subdivision does not rise indefinitely. Owners of vacant lots face a challenge–How long to hold this type of property?

Real estate professionals recognize that vacant subdivision lots can eventually be “priced out of the market.” The most important factor that creates this situation is time. The longer it takes for a subdivision to be built out, the greater chance that vacant lots will reach a ceiling on value or perhaps even decline. Lenders who finance developers also carefully evaluate how long developers expect to take to completely build a subdivision because lenders understand this risk.

This question is particularly important here in the Lakes Region of New Hampshire where a number of subdivisions begun 20-35 years ago combine amenities for second home owners such as beach rights or lake and mountain views with basic sites suitable for seasonal and year-round homes. These subdivisions have developed more slowly and, despite an increased interest in buildable land in recent months, have vacant lots that may soon reach limits to their value.

This article uses an example based on a financial model to show how undeveloped lots can be priced out of the market, then discusses other risks to further increases in value and factors for owners to consider in continuing to hold vacant land. This article is provided for information and education only and is not intended as a solicitation of other broker’s listings.

Example: To illustrate how vacant lots can be priced out of the market, take the hypothetical case of a subdivision begun in the late 1960s that has grown slowly. Table 1 illustrates the median prices of lots in each decade, the extent of building in each period, and the median cost of homes built in each decade. (Details on the model used to create this example are available from the author upon request.)

Property values did not increase consistently over this 35-year period. To be consistent with economic history, the example includes two periods of high demand for real estate of 2-3 years followed by 2-3 years of soft real estate demand in 15-17 year cycles that occurred in the early 70s and recurred in the late 1980s. During these periods, land was assumed to continue to appreciate though actual sales may have been few and far between, but home values were assumed to be flat. Outside of these periods, vacant land was assumed to appreciate at 10% per year; homes, at 7%. In each decade, the cost of a new home and its lot was assumed to be five times the cost of the land only. The assumed rate of build-out is shown in Table 1. As we reach the current decade or today, the price of vacant land is over $80,000 and the median land price for the current decade is expected to be $65,000.

Table 2 illustrates the median value of developed property in the subdivision weighted by the portion that was built in each decade and its appreciated value to today. This appreciation assumes that homes in all age groups have been well kept and reasonably modernized over the years.

Adding the values for each period we find a weighted value of homes is $264,500 and the price of vacant lots is now over $80,000. So a lot buyer would be contemplating a home with a value of $400,000 (land and building). Will buyers put a $400,000 home in a $264,500 neighborhood?

At some point, perhaps soon, buyers will answer, “No!” and then vacant lots have been priced out of the market. Given the scarcity of buildable lots today, it is unusual for buyers to purchase lots to build homes of lesser value in proportion to the land cost than assumed here. However, when such “down market development” does occur, the weighted value of the neighborhood is driven down as well further limiting the value of remaining vacant lots. Soft real estate markets can also cause lesser homes to spring up if lot owners are forced to sell at distressed prices by other financial factors.

Some lot owners’ answer to being priced out of the market is, “But I am going to build!” If that is your answer, recognize that regardless of what you originally paid for the lot you are, in effect, buying your lot at today’s value when you build on it. Building a lesser home may satisfy your needs, but it will cost you in the end and may hold down overall values. So, consider your alternatives.

If you have held the lot for some time, you probably have a large capital gain. While gains are typically taxed at federal rates of 20% or less, take a look at a tax-deferred exchange under Section 1031 of the Internal Revenue Code. (For more details go to www.apiexchange.com or contact the author). It may make sense to use an exchange to roll the gain over tax-free into another property better positioned in terms of its potential for appreciation rather than trying to build on your lot.

As the upside of holding a vacant lot becomes limited, keep in mind the risks of continuing to hold it. Risks include higher property taxes that increase your cost of ownership, more stringent development rules that increase your cost of building, and possible changes in real estate market conditions.

There are some exceptions to the illustration above. Where vacant land is appreciating very rapidly, the economics may justify redeveloping certain lots that have already been built on. This is the “teardown” phenomenon seen on waterfront parcels, but it is not common in other types of property.

The above case is for illustration purposes only. Your situation should be examined in a Comparative Market Analysis using this model tailored to your subdivision. To obtain a free Comparative Market Analysis based on this model and backed by facts, data and analysis please contact the author directly. Questions or comments? Please call the author.

About the Author: Chuck Braxton is a REALTOR® with the Meredith office of Roche Realty Group, Inc. He has applied his 25+ years of experience as a business executive to the challenges facing owners and buyers of real estate in the Lakes Region. Mr. Braxton has authored several articles and financial models on valuation for project development and real estate applications. In addition to this article, current works include: The Tax-Deferred Exchange: Is It Right for You?; What Is That View Worth?; and a series on values of waterfront, water access, and vintage properties in the Lakes & Mountains Region of New Hampshire. His website is at ww.ChuckBraxton.com. Mr. Braxton may be reached at his direct line: 603.677.2154, by email: cbraxton@metrocast.net or toll free any time of day or evening at 800/926.5253, extension 342.

Share on facebook
Share on twitter
Share on reddit
Share on pinterest

Roche Realty Group Reports Record of $170 Million in Sales

Meredith- Frank Roche, President of Roche Realty Group, Inc, with offices in Meredith and Laconia, has …

Read More →
Meredith NH

Gilford and Meredith NH – How Do They Compare?

There are 25 towns and cities comprising the Lakes Region. This week I thought I …

Read More →

EM Heath, LLC Acquires 1084 Union Ave in Laconia

The future of Ace Hardware EM Heath LLC in Laconia became solidified this past week …

Read More →
Roche Realty Group Sells Landmark Commercial Building in Gilford, NH

Roche Realty Group Sells Landmark Gilford Commercial Building

Gilford- One of the most visible, historic landmark commercial properties in New Hampshire’s Lakes Region …

Read More →
New Commercial Constructioin in Lakes Region

Commercial Sales Increasing in the Lakes Region

Recently I’ve been outlining the sales activity for residential, waterfront, and multi-family apartments in the …

Read More →
Laconia NH Commercial Building Sale

New Owner for 8,447 Sqft. Commercial Building in Laconia

Laconia— Exciting news for the downtown Laconia district. Another substantial commercial building, including approximately 8,447 …

Read More →

Strong Demand for Multi-Family Apartments in NH’s Lakes Region

Last week I was driving through Loudon Road in Concord in the busy heights area, …

Read More →
NH Lake

Area Lakes Show Considerable Appreciation

Below you will find data and insight into what’s happening in sales activity on 8 …

Read More →
inflation in shopping center / grocery store

More Inflation Concerns

More Inflation Concerns I submitted an article a while ago titled “Is Our Current Inflation …

Read More →
Alpenrose Village Retail Center located at Rte. 11 B / Rte. 3 in Weirs Beach, Laconia

Roche Realty Group Sells Alpenrose Village Retail Center

Laconia, NH – Tom Drouin of Roche Realty Group in Meredith represented both the seller and the …

Read More →
As the Real Estate Season Turns

As the Real Estate Season Turns

“There’s hope for buyers on the horizon, with more real estate opportunity to come.” This …

Read More →

10 Things to Consider if You’re Buying in a Seller’s Market

Anyone looking to buy a home today knows they are in a seller’s market, which …

Read More →

Third Quarter Update – Lakes Region Real Estate Activity

I’ve pulled up some data to provide all of you with some current insight on …

Read More →
Home Maintenance - Person repairing wall in house

Home maintenance the difference between sold and stuck

Be honest… is your home in need of some repairs? Because the truthful answer to …

Read More →
Coins stacked up indicting inflation

Is our Current Inflation “Transitory?”

The Federal Reserve officials have described the current period of high inflation as “transitory.” In …

Read More →
ABBA Tribute performing at the Lakeport Opera House

Meet you at the Lakeport Opera House

Last Saturday, Nancy and I were invited to the Lakeport Opera House to take in …

Read More →
Picture of

The New Hampshire Advantage

All of us who live in New Hampshire’s beautiful Lakes Region certainly have lots to …

Read More →

Just like vacation seasons, vacation homes come and go

When you think about it, all homes are actually seasonal properties. Whether it’s a primary …

Read More →

Hunt for lower prices like a lone wolf

If you ever watched Saturday morning cartoons back in the day, you may recall Looney …

Read More →
Birds eye view of Lakes Region New Hampshire

Lakes Region Real Estate Market 6-Month Comparison

We are halfway through 2021 already, and as we head down the second-half stretch, I’ve …

Read More →
The "Village Store" in Gilford, NH

The “Village Store” in Gilford Has New Owners

Gilford— The “Village Store” in scenic Gilford Village, a Lakes Region landmark since 1836, was …

Read More →
Lakes Region NH - aerial view of Lake Winnipesaukee NH

Lakes Region Waterfront Sales Comparisons

I thought I would look at the real estate activity on the Lakes Region’s four …

Read More →
Island Living on Lake Winnipesaukee in NH - aerial view of Welch Island, Lake Winnipesaukee

Island Living on Lake Winnipesaukee

The thunder of motorcycles has arrived in the Lakes Region. After a long year of …

Read More →
summer fun in nh - swimming in the river

Summertime Adventures Around the Lakes Region

Memorial Day weekend has arrived, and all of us are excited to kick off the …

Read More →
Are we in a real estate bubble?

Are We in A Real Estate Bubble?

Back in April, the red hot search on Google™ was “when is the housing market …

Read More →

Roche Realty Group Sells Artie’s Subs & Pizza

Moultonborough, NH – Brian and Kara Dillard of Barrington, New Hampshire, have recently purchased Artie’s …

Read More →
Laconia, NH - City on the Lakes

Laconia— City on the Lakes

The 17,000 resident, “City on the Lakes,” is nestled on the shores of three of …

Read More →
Housing Bubble

What if it’s not a bubble?

It’s a mad mad mad world of real estate right now.  The frustrations of buyers …

Read More →
Alton, New Hampshire on Lake Winnipesaukee

Alton’s Treasures — Natural Resources

Alton, New Hampshire is a scenic community with wonderful natural resources. The town envelopes the …

Read More →
Moultonborough, New Hampshire

Moultonborough, NH — Low Taxes Attract!

Moultonborough, New Hampshire, is a scenic and idyllic community on the northern shores of Lake …

Read More →
Gilford, New Hampshire on Lake Winnipesaukee

Gilford Recognized For Its Quality of Life

Gilford, New Hampshire, has always been a popular destination and a great community to live …

Read More →
Meredith Village on Lake Winnipesaukee, New Hampshire

Meredith, NH—One of the Top 10 Best Small Towns on the East Coast

It’s always good to see our local towns highlighted in national publications, and recently Meredith …

Read More →

Economic Concerns for Real Estate

For the first time in decades, fiscal and monetary policy will likely remain easy during …

Read More →
The Ledges on Newfound Lake

The Ledges at Newfound Lake

     It is always with mixed emotions how we view the development of our natural areas. …

Read More →
Lakeview Golf Club in Belmont on 172 Acres Sold by Roche Realty Group

Lakeview Golf Club in Belmont on 172 Acres Sold

Belmont, NH- The beautiful 9-hole Lakeview Golf Club located at 89 Ladd Hill Road in …

Read More →
Nutmeg Inn in Meredith NH Sold

Nutmeg Inn in Meredith Sold

Meredith, NH- The historic country Nutmeg Inn located at 80 Pease Road in Meredith has …

Read More →
Housing Inventory Lacking - Lake Winnisquam, NH

New Hampshire’s Four Largest Lakes Lack Inventory

As we’re nearing the 1st quarter of sales activity in the Lakes Region, I thought …

Read More →
Lakes Region Real Estate Market - View of NH Lakes

Real Estate Tidbits in The Lakes Region

Here’s a quick update on the market and a few things I’ve observed that will …

Read More →

Roche Realty Group sells “The Anchorage at the Lake” Resort on Lake Winnisquam

Tilton, N.H. – “The Anchorage at the Lake” Resort located on Lake Winnisqaum and Route …

Read More →
New Construction in the Lakes Region

New Construction and Re-Sale Housing Dilemmas

I’ve seen a considerable amount of new construction and home remodeling taking place in my …

Read More →
Lakes Region NH

Lakes Region Market Competition is Fierce

We are now entering March, the unofficial beginning of our Spring Selling Season. We have …

Read More →
Home inspection report

Reasons Why You Should Not Waive a Home Inspection

We have a very competitive real estate market here in the Lakes Region due to …

Read More →
Photo of homes in New Hampshire's Lakes Region

NH’s Housing Inventory Needs One Thing — LISTINGS

This week I’d like to provide you with a summary of what New Hampshire’s Real …

Read More →
Wicwas Lodge and Lakeland School Property

Roche Realty Group sells the historic Wicwas Lodge / Lakeland School Property

Roche Realty Group, with offices in Meredith and Laconia, recently sold the Lakeland School property …

Read More →
Night picture of Laconia NH

Lakes Region—One of the Countries Hottest Neighborhoods in 2021

Imagine it’s Super Bowl weekend and there’s not a chicken wing or a pizza to …

Read More →
Hiking in New Hampshire

New Hampshire, Vermont, and Maine Peak Attractions

In my younger years in school, I always loved geography as a subject. Living in …

Read More →
Moving day

How to hand your home over to its new owner

Remember your first home? Whether it was a freshly painted rental or your first investment …

Read More →

Roche Realty Group Reports Sales of $146.5 Million for 2020

Frank Roche, President of Roche Realty Group, Inc with offices in Meredith and Laconia, has …

Read More →
Lakes Region NH vs San Francisco, CA

“Lifestyle Finder” For Your Move to or From The Lakes Region

Some studies place moving to a new location as one of the top ten most …

Read More →
Lake Winnipesaukee, NH

Winnipesaukee, Newfound and Squam Lake Accolades

Winnipesaukee, Newfound and Squam Lake Accolades It’s always fun to read articles where Lake Winnipesaukee …

Read More →

Leave a Comment