Valuing the Cost of Land in Santa Cruz County

By: Seb Frey

Prices for single-family residences in Santa Cruz county reached a median of around $760,000 in June of 2005. If the value of the real estate is ultimately in the land (land cannot be depreciated on one's taxes, whereas buildings held as investments can), it follows that the land value of that $760,000 is very high. Typically, the Santa Cruz County assessor values the improvements as 60% of the value, with the land having 40% of the value. Therefore, the assessed value of that land is around $285,000 and the value of the improvements is about $428,000.

The County Assessor's estimation tends to be a bit divorced from market reality, however. You've heard the stories of people buying a $750,000 house and "scraping" it: the house is demolished and removed, with a new one built in its place. In this case, to the buyer, the land was worth $750,000 - 100% of the value - plus the demolition and disposal cost of the old structure(s).

Given any piece of improved property, how does one determine the value of the land beneath the improvements? As a very rough estimate, just take the square footage and multiply it by the replacement cost (say, $200 per square foot, your mileage may vary) to get its value. A 2,000 square foot house at $200 a square foot comes to $400,000. Next, depreciate the value of the improvements. The IRS allows property held for an investment to be depreciated over 27.5 years. Using this rate, subtract $14,545 per year for each year since the improvements were new. Assume the current economic age of the property is 20 years, that's $290,000 or so; deducting that from $400,000 leaves the value of the improvements in this case as $110,000.

If the $110,000 is considered to be the value of the improvements of a $750,000 property, that means the land is worth approximately 85% of that amount, or about $640,000. When that $750,000 house was scraped, really all that was lost was about $110,000 - again, plus demolition and disposal expenses.

The IRS depreciation schedule does not truly reflect the value of the improvements over time, but it's an interesting prism through which to look at the value of the improvements, and from that deduce the value of the land. In the early months of 2005, the market value of improvements was running around 33% on average. Using June 2005's median home price of $760,000 as an example, that would mean the land is worth, at the median, around $478,000.

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