The Lot Next Door

[wombat9]

We purchased a MFH in Seattle (lot A).
There is a chance our neighbor will sell his MFH (lot B) in the next 1-3 years.
Lot B will attract developers, but lot A is on the corner and blocks views so I think B has more value when considered together with A.  I mention this b/c I will have to compete and outbid developers.

Is there some standard multiplier to consider when accumulating adjacent lots?  Does that standard apply to red hot urban real estate markets?
If I buy 2 adjacent 5,000sf lots for $1M each, are they worth $2M as a 10,000sf lot?
Or because a developer can put more living space at one job site, is the 10,000sf lot worth >$2M?

I recognize that this is an oversimplification, but I'm sure other people have explored similar situations.

[Mr. Green]

You are going to have to compete with someone willing to pay for the highest and best use. If the zoning allows for more than just one home on the lot (either through subdivision, or multi-family uses) that may be what a developer would do as long as it's not so inconsistent with the areas existing homes that people would want to buy it. So if the lot was worth 100k as land for a single family home, it might be worth 60-75k per side for a duplex. Or if it's sub-dividable the smaller lots might as up to more money than the 100k as a single lot.

The problem with competing against a developer in this situation is that you will pay for highest and best use and it can be much more difficult to break even on a sale, barring great appreciation. A developer may have the tools needed to make multiple units happen, relationships with contractors and utility companies that you don't have that would make it much more difficult for you to consider doing the same if you were considering that angle as well. It can be done, it just takes a lot of work.

[elysianfields]

Consider approaching your neighbor now and making an offer for a private sale.  You could thereby avoid the 6% RE agent commissions and perhaps not have to bid so high.

[former player]

Alternatively, approach your neighbour with the idea of selling both plots together.  The development value of the two together might make it worth it for both of you. 

[SwordGuy]

Alternatively, approach your neighbour with the idea of selling both plots together.  The development value of the two together might make it worth it for both of you.

Two city blocks did that in Memphis, TN some decades ago.  They got together and signed a pact that they would all sell together as a single deal or not at all.

They waited a few years and then made a killing.

[Michael in ABQ]

The term you're looking for is "plottage". That's the increase in value created by assemblage.

In some cases this can be huge. Think of a city block in the middle of the city where 1 of 10 lots is left. Lets say each lot by itself is $100,000 but the block as a whole is worth $2 million. If a developer can buy the other 9 lots for $100,000 each the value of that final lot to complete their assemblage is now $1.1 million ($2,000,000 less the $900,000 they've already spent). If the developer can purchase it for any less than that they stand to make a profit. This is obviously an extreme example but I've seen small lots sell to neighboring owners for 2-3x what it would be worth by itself because it was an assemblage.

It would probably be worthwhile to find a good local appraiser who could help determine the value of the assembled lot. For a commercial appraiser you might pay a few thousand dollars but since this is still in the residential realm it should only cost $500-$1,000. Keep in mind that this would be a lot different assignment than the typical cookie cutter residential appraisal that is completed in a day or two. You'll want to make sure you find someone who will do the due diligence necessary to determine what is the highest and best use and how much of a premium is there for a larger site. A 10,000 square-foot lot that can be developed with 8 units will have a whole lot more value than one that can only be developed with 4 units. How likely is it that a more intensive use would be approved? Does the current zoning allow it or can it be rezoned without years of court battles? There's a whole lot of people that will come out of the woodwork in lower density neighborhoods as soon as a developer proposes replacing single-family homes or duplexes with something more dense.

Here's an article that illustrates this well. https://www.nytimes.com/2017/12/01/business/economy/single-family-home.html the city of Berkeley,CA denied a permit for a perfectly legal use that complied with zoning and the developer had to sue to exercise their property rights.