The Law of Diminishing Returns on Idaho Real Estate

Idaho Real Estate, is subject to a phenomenon called “The Law of Diminishing Returns.”  Actually, the law exists in Wyoming as well.  Okay.  Okay.  The law exists everywhere, but we are only concerned with Eastern Idaho real estate and Wyoming real estate on this blog.

The principle basically goes like this: the more you get of something, the less per unit it is worth.  Let’s first look at it with something other than real estate.  If you go to the bakery and order a donut, it might cost you $.75.  On the other hand, if you buy a dozen maple donuts with creamy pudding oozing out, the cost might be $3.99.  How can that be?  How can a donut be worth 75¢ alone, but only 33¢ when purchased in a box of twelve?  The answer is The Law of Diminishing Returns.

The same principle of economics applies to real estate.  As an appraiser, I hear comments like this one all the time; “My neighbor just sold his land for $15,000 per acre.  Since mine is 10 acres, the land alone ought to be worth $150,000, right?”  Well . . . wrong.  Actually, I am usually a bit more PC about how I answer, but this statement is just not correct.  Just because your neighbor sold his two acre tract of land for $30,000, does not mean land is worth $15,000 per acre.

With land, your initial building lot is always going to be worth more than the subsequent acres.  In other words, your neighbor’s property was probably worth about $25,000 for the first acre and another $5,000 for the additional acre.  Furthermore, as you sell more and more acreage together, the cost per acre diminishes .Usually.

Here is a recent study I conducted on land sales in the Island Park area.

Average Sale Price for Island Park Vacant Land Sales 2005-2014

 

0-.99 acres = $48,781                      Initial Building Lot           Difference          Additional Per Acre Difference

1-1.99 acres = $93,094                    -49,000                                 $44,000 $44,000

2-2.99 acres = $91,598                    -49,000                                 $43,000 $21,500

3-3.99 acres = $87,446                    -49,000                                 $38,000 $12,600

4-4.99 acres = $68,986                    -49,000                                 $20,000 $5,000

5-5.99 acres = $91,361                    -49,000                                 $42,000 $8,400

6-6.99 acres = 111,875                    -49,000                                 $63,000 $10,500

As you can see statistically, initial building lots in Island Park of less than an acre average an estimated $49,000. An additional acre may add approximately $44,000, but acreage beyond the initial two is subject to the law of diminishing returns and only averages $12,000 per acre.

Of course, the law does not just apply to land sales.  Typically, two decks are worth less per deck than just one.  Four fireplaces may be worth $10,000, while a single fireplace may be worth $3,500.  A 4,000 square foot home will sell for less per square foot (all other things being equal) than a 2,500 square foot home on the same street.

As you deal with buying, selling, or simply valuing real estate in Idaho, Wyoming, or across the country, remember the Law of Diminishing Returns.  It can greatly enhance your decision making abilities.