The thought experiment goes something like this: “Which came first, the chicken or the egg?”
Some people decide to go around that circle a few times and then give up. Others will go to Charles Darwin’s “Origin of Species” and argue that the Chicken evolved from a prehistoric bird dating back to the time of the dinosaurs. Others will tell you that the Chicken, like all living things are creatures of God and it was God that gave life to the Chicken.
But if we put that philosophical argument aside for the moment, we can safely say that if we have an egg, there’s a good chance that once it hatches, we will have a full grown chicken in a few months. It’s also pretty clear that if you go to your local farmer and buy an egg, you’re going to pay less for the egg than you would pay for a full grown chicken. Yes, I know, the egg will become a chicken, but it’s not a chicken now.
The discount for an egg compared with a chicken is much more than simply the time value of money over a few months. This is such an important idea that I’m going to say it again. The discount for an egg compared with a chicken is much more than simply the time value of money over a few months.
When we’re talking about an egg and a chicken, it’s pretty clear that an egg is not a chicken, a chicken is not an egg, and they’re priced differently for a very good reason. They’re not the same thing, even though the egg might become a chicken in the near future. Once the egg hatches, it becomes a chick. You might pay a little more for a chick than an egg, and you would pay an even higher price for a full grown chicken.
So why are we talking about chickens on a real estate podcast?
Because when we find undeveloped land for sale that has not been approved for development, you are finding the land equivalent of an egg. Yes, you can go through the zoning approval process. You can have the site plan drawings completed. You can hold the community meetings and collect the feedback from the community. You can develop the storm water management plan so that your newly developed property won’t cause flooding on your neighbour’s property. Once the property has been approved for development, and the site plan has been approved, and the building permit has been issued, the land is clearly worth more because it’s a large step closer to being a full grown chicken.
I was recently offered a property that was zoned DR. DR stands for development reserve. That means that it is land that the city has designated for development. But it’s not approved for development yet. You would have to go through the process to get the land rezoned. The city will eventually approve that land for development, when city council decides that its ready. Maybe that means when there is capacity in the local schools. Maybe they’re waiting for an upgrade to a water main, or a larger sewer pipe. There can be all kinds of reasons why a city might delay the approval of a particular land use.
This particular seller was valuing the land as if it had already been fully developed, and all the services were in place. But the truth is, this land was not a full grown chicken. It was still very much an egg. I’m not going to pay the same price for an egg that I would pay for a full grown chicken. Needless to say, I didn’t buy that property from her. She said that she was expecting another offer that very same day. I wished her the best of luck.
I’ve had so many conversations with land owners in the past week where the land owner is trying to sell a chicken, when in fact, all they have is an egg.
I don’t care whether you buy a chicken or an egg. Both are perfectly valid purchases. Just don’t pay the price for a chicken, when all you’re buying is an egg.
