Why is the sum of the parts often worth more than the whole in real estate?
It's my understanding that in real estate, the sum of the parts is often worth more than the whole. One can apparently make more money by parcelizing a piece of land and selling off the plots separately than by selling the whole. By the same token, there is apparently a lot of money in condo conversions. Why is this? If you sell something off in parts, your income may be taxed as regular income rather than at the cap gains rate, so shouldn't parcelization be if anything, disadvantageous? Also, wouldn't many buyers be willing to pay a premium for the diversification inherent in buying up a bunch of properties as opposed to just one?
[{"id": "dk6xv9m", "text": "I would think the type of buyer interested in a condo is an owner user and not as interested in it as an investment. ", "replies": [], "depth": 1}, {"id": "dk73nwq", "text": "Supply and demand for land controls. Large land, larger price tag, more investment, more risk. Besides, someone has to figure out its best use and develop or parcel it out which takes time (=money=risk) and expertise. Most regular folk, even those very successful in their own fields or in their own right, just don't have the time, desire, or expertise to mastermind and then ride the transaction out...so there must be a payoff for this. ", "replies": [{"id": "dk7f9kd", "text": "Thanks. What if the land has already been improved? If you owned a retail community made up of multiple separately parcelized stores, would there be any difference in the amount earned through the selling of the individual properties one by one vs. the selling the whole to large institutional investor?", "replies": [], "depth": 2}], "depth": 1}, {"id": "dk758ah", "text": "You're talking about several different things all at once. When you buy a large piece of land and sell it in smaller pieces for a profit there's more to it than that. Let's say you buy 50 acres and sell it in 1 acre lots. You have to improve the land to do that. At minimum you have to have each lot replatted and at least have roads brought in and usually much more than that or the municipality won't allow you to replat. The profit there comes from improving the land and the risk and capital it takes to do that. Similar with condo conversions, except the profit there may comes from the residential sales market being stronger than the rental market. The highest and best use in that market changed and you bought a property and converted it to it's highest and best use. To illustrate this: let's say you owned 10 acres of land in Manhattan. You use this land for raising goats. Someone buys your goat farm for how much goat farms cost them removed the goats and sells the land to a high rise developer. That guy will make some money. What you're saying about taxes is just not true at all. \n\nEdit: grammar", "replies": [{"id": "dk7eei9", "text": "So you're saying that the difference is a function of the risk inherent in developing and parcelizing the land? That make sense. What of the case where the work has already been done? If you owned, for example, a retail community, or something like that, made up of multiple parcels, the improvement of which had already been completed, would there be any difference in the amount earned through the selling of the individual properties one by one vs. the selling the whole to large institutional investor?\n \nRegarding the tax thing - don't you run the risk of being classified by the IRS as a dealer, as opposed to an investor, if they deem you to be purchasing real estate and selling it to customers \u201cin the ordinary course of his or her trade or business?\"\n\nThanks.", "replies": [{"id": "dk7ib03", "text": "What do you mean by retail community? Smaller land is worth more per square foot than larger land and different tracts are worth different amounts. In general, if you bought it big and sold it small you'd make some money with the caveat that you sold all of them and didn't get stuck with any of it, hence the risk. As far as taxes go: I'm not a CPA so don't rely on what I'm saying for your decision making, but as far as I know: what determines whether a realized gain is taxed as income or long term cap gains is whether the the property was held at least a year. If you're selling commercial land you'll likely be holding it years. Just for example: you and your twin buy two identical houses next door to each other. You both update the houses and he sells his for a profit the next month but you rent yours for 366 days then sell it. His profit on the sale would be taxed as income, yours as cap gains. So if the regular course of business including you buying something and holding it a year then selling it that would still be cap gains. There are more moving parts usually but those are the basics. ", "replies": [], "depth": 3}, {"id": "dk7ixon", "text": "I think from what you're asking, this ends up being a function of supply and demand.  The price of the larger developed property will of 1 million dollars excludes many investors because of the price.  However 5 properties at 200k each makes the property accessible to far more investors, and that demand would drive up the price of the property.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "dkdhllu", "text": "Check with your tax advisor regarding the tax issue there is bound to be a way to optimize your investment for the best ROI. Regarding the selling If I wasn't sure about demand or what was best to do and I had resources and time I would try to package it both ways and wait and see who comes along, ie what is in demand. A simple for sale as a whole or as individual lots, priced competitively and wait and see who comes along. If you know what is in demand in the area then focus on that to generate as much interest as poss by creating an optimized marketing package for that. It's not about paying less of any kind of tax it's about making more money ;)", "replies": [], "depth": 1}]