What is your Home worth? Land value + Building Value

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  • What is your Home worth? Land value + Building Value

The value of a home is made up of two parts:

  • The value of the land (the dirt) PLUS the value of the physical structure that’s on top of it = Property Value

People tend to discount/ignore the value of the actual dirt and it’s overall contribution to a property’s value. This could be a mistake.

In great locations, think oceanfront, an area with a great view or proximity to the best schools and restaurants, the land value is tremendous.

You could build damn near anything on the land and the property value will still be high because of how valuable that location is. Remember: location, location, location is everything in real estate.

Pay attention to the ratio between the land value and the value of the physical structure itself: the masonry, wood, permits, labor cost for construction etc…everything except the land.

credit: constrofacilitator.com

For example, you see a home online with a $500,000 price. If you dug deeper, you might learn that the land is estimated to be worth $100,000. This means the structure is worth around $400,000: 100K + 400K = 500K.

In some areas, the land value might be 20% of the total property value. In other areas, it might be as high as 40-50%.

Again, location is everything. The worst house in a great area could be worth more than a mansion in a terrible location. Why? Again, it’s all because of the value of the land.

What is My Land Worth vs the Physical House?

How much time do you have and how important is accuracy?

Say you just want a rough idea of how much of your property’s value is made of the land (dirt) vs the physical structure itself.

Here’s a quick way to get an estimate – a very rough estimate.

Go to realtor.com, type in the address–>scroll down and click on Property History, you’ll see something like this:

See that? Based on property taxes, in 2021, the Land is estimated at 40K, the “Additions” (the physical structure) is estimated at 179K = $219,800.

This example used 6828 Van De Rohe Dr, Charlotte NC. As you can see, it sold for way more than the Assessed Value.

As a rule of thumb, market value (what a home sells for) is usually way higher than the assessed value (what the county taxes on).

Do you want something more official? Get an Appraisal.

Advanced Stuff – Cost Segregation: Land vs Structure

Consult a CPA. This is not tax advice. Ok, disclaimer over.

Once you start making alot of money, rich people try to figure out ways to reduce their tax burden. One of the most tax-advantaged asset classes is real estate.

There is a housing shortage and the government wants private citizens to build and buy houses to shelter people. To help incentivize this, they offer tax breaks: writing off interest on your mortgage for example.

But one huge tax savings is through a cost segregation study. Although buildings go up in value/appreciate, through normal wear and tear, they actually depreciate over time. Crazy talk, right?

You can pay lower taxes on an investment property because you can say that the building has depreciated. BUT, you can only depreciate the physical structure – not the land.

cost segregation pie chart - land value vs building value

Therefore, you should pay very close attention to the percent of the property value that is made up of land value vs the physical structure.

The higher percentage of physical structure means you’ll be able to save more in taxes. Again, outside the scope of this article but talk to a cost segregation professional for details.

How Accurate Are Online Estimates?

Say you just want a rough idea of how much of your property’s value is made of the land (dirt) vs the physical structure itself.

You’ve probably heard of Zillow estimates, Redfin estimates etc…You go online, type in your address, what is my home worth, and it spits out a range or a number itself.

So many people make the mistake of thinking this number is precise. It isn’t. Take this number with a grain of salt. It is a very rough estimate.

Directionally, these estimates will give you a sense of whether property values are going up, down, sideways etc…but again, you’ll get a ballpark range.

None of these website have been inside the house. They don’t know if the kitchens and bathrooms have all been newly renovated, including amazing hardwood floors. The estimate would be much higher.

Conversely, they don’t know that the plumbing is outdated, there’s a hole in the roof and that there’s costly termite damage in the basement. The estimate would be much lower.

Bottom Line

The stuff you see online is just a way for us real estate agents to get leads and call you to talk about selling your house. We can give you a much more accurate number once we run comps, but again, it’s less “official.”

If an agent quotes you a number that’s too good to be true, don’t be a sucker.

It’s because they want your business and will tell you anything to sell your home and get the commission. Most of us are ethical and won’t do that. Seriously.

You want an even more accurate number that the professionals, like mortgage lenders use? Pay a few hundred buck and get a home appraisal. That number is much closer to what your home is actually worth.