Re:A lot more market-rate construction helps low-income rent...
by brudgers on Tuesday March 24, 2015 @09:11PM
(#9260684)
Construction value to land value ratios are conventional not "functional".
So you can bypass convention and build $100k worth of improvements. But once the property hits the market again, the economic odds favor a buyer coming along with $600k who puts in $1200k worth of additional improvements. And then the property is at $1.8 million. It's casino odds, so to speak.
The general term is "highest and best use" and that's where property heads over time. The real estate business naturally accelerates that process because there's usually more net revenue on $1.8million properties than $600k properties, but the amount of work required to develop and sell a property is roughly constant regardless of price, e.g. it's about as hard to get a building permit, secure financing, or close a sale for a $600k project as a $1.8million project.
So you can bypass convention and build $100k worth of improvements. But once the property hits the market again, the economic odds favor a buyer coming along with $600k who puts in $1200k worth of additional improvements. And then the property is at $1.8 million. It's casino odds, so to speak.
The general term is "highest and best use" and that's where property heads over time. The real estate business naturally accelerates that process because there's usually more net revenue on $1.8million properties than $600k properties, but the amount of work required to develop and sell a property is roughly constant regardless of price, e.g. it's about as hard to get a building permit, secure financing, or close a sale for a $600k project as a $1.8million project.