Why Land Value To Purchase Price Ratios Are Important When Buying A Home

When I am looking at investments for my clients I am always thinking about the value of the land the house is sitting on. This is important because typically the more expensive the land the more valuable the area is. I think it is a good idea to look for homes to buy were the land value to purchase price ratio is very high. For example in Kenny neighborhood in south Minneapolis most of the land is worth around 180–200k on a 40 feet by 128 lot, If there is an average 1950s home that is not super big the land and the house is worth around 210–225k. So in this case the land value is worth about 85% of the total purchase price. In contrast, lets look at a home in a different neighborhood such as Standish in south Minneapolis. A similar home to the one in Kenny in this neighborhood would be worth about 180–210k, with the land making up about 80–100k of that total. So the land is worth about 50% of the purchase price. Why is this number important?

Well, lets reverse engineer it. If the land in Kenny is worth more then the land in Standish then more people must like Kenny. They must see it as more desirable, probably better schools, safer neighborhood etc. So what one is a better value? They are basically the same price, same house, but I would choose the one were you are paying a lot for the land and a little for the house. I think doing this is a safer bet because that neighborhood is probably going to do better in the long term, plus you are getting a discount on the structure, compared to the other home. You are only paying 15% of the total purchase price for the structure

The funny thing is most people end up choosing the house with low land value and high home value. Why? Because they want a “nice” house. They want an open floor plan, a bigger kitchen, they want the home they perceive as the Lexus instead of a Ford. Really though the Lexus is the one with the high land value. To each there own, it doesn’t matter to me, but seriously think about these things when you are purchasing a home.