10 Spots Where Tear-downs Could Be Profitable | Think Realty | A Real Estate of Mind
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10 Spots Where Tear-downs Could Be Profitable

If you’ve ever thought about purchasing a property just so you could tear it down and build something better, then you would feel right at home in a number of America’s hottest housing markets these days. According to recent data released by the Lincoln Institute of Land Policy, there are 10 housing markets in the United States right now where land comprises more than half of a home’s total value.

Analysts at the institute credit extreme population growth for this trend, noting that when large volumes of residents move into an area, the value of land grows because builders can create more residences by building up but cannot manufacture new land upon which to build those residences. In extreme examples of this type of environment, the value of any physical structure may depreciate relative to the value of the land upon which it is built.

For example, average home values in San Francisco, California, where land value makes up 81 percent of total property value, is $1.35 million. However, the value of the property on that land might be only about $250,000 since the cost of the land itself in that scenario is $1.09 million. This means that in San Francisco, just about any property is a good property by investment standards, if you can get your hands on it, because the structures on the property can be torn down and replaced either with multiple residences or with a luxurious single-family property for which a wealthy homeowner will pay top dollar.

“It’s not about the 1,100-square-foot home [currently on the property], but the 4,000-square-foot home investors can build there after tearing down the old one,” observed Paragon Real Estate group’s chief market analyst, Patrick Carlisle.

As of mid-January 2017, there were 10 major markets where land costs exceed the value of physical property values:

  1. San Francisco, California (81 percent)
  2. San Jose, California (77 percent)
  3. Santa Ana, California (76 percent)
  4. Oakland, California (71 percent)
  5. Los Angeles, California (71 percent)
  6. San Diego, California (66 percent)
  7. Boston, Massachusetts (60 percent)
  8. Miami, Florida (54 percent)
  9. Seattle, Washington (53 percent)
  • Portland, Oregon (51 percent)

Realtor.com analyst Yuqing Pan noted that with the exception of Portland, all of the cities on the list are on the eastern or western coasts of the country, where the supply of buildable land is more limited than in inland cities. “In landlocked St. Louis, by contrast, land is only 10 percent of a home’s total value,” he observed.

Investors hoping to take advantage of the high value of land in order to turn a profit should look not only at the numbers associated with the general area in their target market, but do some research to identify areas that are primed for this scenario. Areas that are fully developed but that already have or soon will support attractive destinations for health, education, recreation or entertainment may be good bets, as are areas in “technology corridors.”

Many states are presently trying to artificially stimulate the creation of these corridors and, in the process, landowners may be able to demand top dollar from corporations and developers participating in early development or, several years down the road, from homebuyers themselves.

This strategy can be a bit of a gamble, however, especially because the technology-corridor planning process often hinges on the use and development of relatively undeveloped areas of a state.

About the Author

Carole VanSickle Ellis is the host of Real Estate Investing Today, a daily nine-minute investing podcast, and the editor of the Bryan Ellis Investing Letter. Contact her at editor@bryanellis.com or visit www.selfdirectedinvestor.org.