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January 22, 2007

Price Per Acre - Diminishing Prices for Diminishing Utility

Price_per_acre_graph Many of the people who find our site are looking for the price per acre of land in Placer County. In fact, we often get visitors from all over California and the United States looking for an answer to the question, "what is the price per acre for land in (insert city)?"

This has inspired me to show a graphical example for something I have known since I started selling land, but to many is not an immediately understood fact. The price per acre of a lot tends to decline the larger the size of that lot, holding all other things constant.

The graph above represents the price per acre of lots sold in Placer County during 2006, over the size of those lots. As you can see the price per acre decreases as the size of the lot increases.

There is some variance along the curve. This can be attributed to the lots being located in different areas of Placer County, being more or less developable when sold or in some cases being zoned for a split or for other uses, such as commercial or industrial use. Even with these other variables, an inverse correlation between lot size and price per acre is obvious when viewed on the graph.

Why would a smaller lot be more expensive per acre than a larger non splittable lot?

There are a few answers to that question. One has to do with the diminishing marginal utility of land and the other has to do with good old supply and demand.

The most expensive lots per acre will tend to be the smallest lots that will allow a single residence to be built. For example, a .10 acre lot being offered for $125,000 would have a price per acre of $1,250,000. While there may be many people willing to pay $125,000 for the initial ability to build a home, there are not many who would be willing to pay $1,250,000 for the luxury to build on a 1 acre lot at that same price per acre. This is because the initial utility, or benefit, of being able to build a home is the most valuable asset a parcel of land has to offer. Beyond that initial ability, each additional square foot of property has a diminishing utility, or benefit, and therefore has less value to a buyer.

It would be similar to asking what the value of a single hamburger would be to a starving man and then asking what the value would be for each additional hamburger. He would be willing to give a lot for the first hamburger and then a little less for the 2nd, 3rd and 4th hamburgers. There would come a point when he would either run out of money or simply be satiated and not be willing to exchange anything additional for another burger. The minimum buildable lot would be that 1st hamburger, each additional increase in lot size would be another hamburger. There comes a point when we can't afford more or simply don't need it enough to sacrifice something else.

The other reason why smaller lots tend to sell for a higher price per acre is the fact that there are more buyers capable of buying lower priced lots. While there may be a large number of people capable of buying a .10 acre lot for $125,000, there are nowhere near as many people capable of buying a 60 acre lot for $995,000, even though the smaller lot is $1,250,000 an acre and the larger lot is $16,600 an acre. At the end of the day, people have to deal with real budgets and while the larger lot may seem like a better value, the reality is that most people can only afford the smaller lot. So there is a higher demand for smaller more affordable lots and a lower demand for larger less affordable lots.

The average price per acre for a large regional area should be taken with a grain of salt. It can be used to measure general changes in the land market, but cannot be used as a multiplier to determine the value of a piece of property. If we were to multiply the $1,250,000 price per acre of the .10 acre property, times the 60 acres of the larger property, we would come to a property value of $75,000,000. This is obviously not correct.

When considering the value of a specific property, consult a competent Realtor who can provide you information on the recent sales of similar properties. Take into consideration the size of the property, but also the location , accessibility, ease of development and improvements on the property. The best estimate of the value of a property can be determined from comparing it to similar properties, not to every property in a county or city, which is what the average price per acre would provide.

If you are considering buying or selling land in Placer County, we would be happy to help you navigate the process. If you are considering buying or selling land in another part of the country we would be happy to refer you to an agent who specializes in land in your area. Either way, we can be reached by phone at 916-728-1981, by e-mail at [email protected] or by leaving a comment below.

(Oh, and for those who came here just to find the average price per acre for lots sold in Placer County during 2006, the average price per acre was $329,763 for residential lots. :)

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Eri Says:

Hi there. I want to thank you for offering this analysis to the public. I found it well done and very informative. So - well done! The thought behind it inspires me to analyze other properties in a similarly thoughtful manner.

Thanks again!
--Eri

Truett Neathery, Appraiser Says:

Thanks, this explains it well. Now we need to get owners to realize that a 10 ac. parcel is not worth twice what a 5 acre one is (all other things being equal)!!!

Patrick Hake Says:

Truett:

Unfortunately, economic concepts such as diminishing marginal utility and supply and demand are not common dinner table conversations for the average property owner.

I think the hamburger analogy helps. It was actually how an economics professor described it to me in Introductory Microeconomics.

ClubPenguin Says:

Now we need to get owners to realize that a 10 ac. parcel is not worth twice what a 5 acre one is (all other things being equal)!!!

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