The Virtual Real Estate Market

Many people might be surprised to find out there is a virtual real estate market and have had a hard time understanding how someone could pay money for something that you can't physically touch like virtual land. Before visiting virtual worlds myself, I would not have believed people would pay money for something like that. It was only after spending time in places like Second Life that I began to see the value people found in having a virtual space and virtual objects. Over the years I've watched as this value increased to create a billion dollar virtual goods industry – reported by TechCrunch to have reached $2.3 billion by the end of 2011. 

Drafting Table in Second Life

But while the virtual goods market has increased, the virtual land market, at least in places like Second Life, has seemed to follow a trend similar to that of the physical real estate market in the U.S. In both places, land values have dropped and the amount of vacant and abandoned land has increased resulting in a surplus of properties. Because of the similarities I've seen in the offline and online markets and their affects on communities, I thought it would be interesting to look at a comparison of the physical and virtual markets and explore movements towards recovery.

To get an idea of the amount of land available for sale in Second Life, I took a screenshot showing the large number of parcels for sale in an area of Second Life. Each dollar sign indicates a parcel on the market. (The green dots represent people who are visiting a space.)


In most offline communities the number of vacant and abandoned parcels would not appear to be as large as what is seen in the virtual land market in Second Life. But there is one place where it does seem close – Detroit. Below is a screen shot of a website called Why Don't We Own This by Loveland Technologies showing the number of foreclosed or tax-distressed parcels in an area of Detroit.

Why Don't We Own This - Detroit

To better understand the performance of the virtual land market, we need to know how land is handled in a place like Second Life and what drives people to buy it. The world of Second Life is made up of many islands of virtual land also referred to as sims or regions. Each sim measures 256 m by 256 m. People enter the world in an avatar form which is a digital representation of themselves that they can use to explore the world. The basic land, sky, and ocean are provided by the company hosting the world of Second Life. Everything else that someone would see there was created by users. This can include plants, buildings, and other objects placed to enhance the user experience. People can also build upon or change the ground, water, and sky features with objects they create.

Typical customization of land, ocean, and sky in Second Life

However, all of these objects take up space in the world and use up computer resources. So Linden Lab, the company hosting Second Life, assesses a fee to users who want to leave their objects permanently displayed on a parcel of land. And because it would be chaos for people to just randomly leave things everywhere, they control where people can place their items by requiring people to own the land where their objects are displayed. At a basic level, you can think of it as renting storage space on a server where you are allowed to store your files. The only difference here is that in Second Life your files can be displayed as 3D objects and you and others can visit them in avatar form. I suppose it could also be compared to renting a storage unit where you can keep your physical possessions. Although one difference is that you are only allowed to take out objects or files in their entirety if you created them – you are not allowed to take something out of Second Life's system just because you purchased it.

Anyway, here's how the costs are assessed in the virtual world. Because the fees are dependent on the resources used, Linden Lab first sets a limit on the number of objects, which are called prims (a prim is a basic building unit), allowed on a full sim to 15,000. To get an idea of how prims are incorporated into objects you can look at the photo below taken inside of a building in Second Life. The highlighting outlines each prim used to make this building.

Prims highlighted in Second Life

Then Linden Lab offers users a choice between two different types of land for display of their items: Mainland and Private Islands. Mainland is a large group of islands or sims available to anyone to purchase and then subdivide and resell. Below is a detailed map showing parcels for sale in an area of mainland in Second Life. For reference, the large, yellow square is a full sim measuring 256 m by 256 m. Before the fall of the land market, mainland islands sold by Linden Lab through auction could cost about $1,000.

Second Life map showing land for sale

Back then, the lowest resale cost was a few dollars per square meter. Today the cheapest resale cost is $0.17 per square meter. This difference is simply a reflection of what happens when supply exceeds demand. It almost sounds exactly like what happened to many developers in the physical real estate market who had invested in subdividing land and were left with vacant lots and no buyers after the market fell. Many of those developers went bankrupt and lost the land to the bank. In Second Life, when owners abandon their parcels, they return to the ownership of Linden Lab. Below are a few statistics of the status of mainland in Second Life (these numbers come from Tyche Shepherd). Because of the amount of vacant and abandoned land, the amount of mainland has remained close to the same for some time at just over 7,000 regions with no new regions being added – there's just no demand to justify the creation of new land.

  • 46.5% of mainland is owned by Linden Lab
  • 10.6% to 11.6% of mainland is abandoned (assuming not yet returned to Linden Lab)
  • 7,121 Mainland sims in total (that's about 467 million square meters of land)

Total mainland regions in Second Life 2007 to 2013

The alternative land choice available to users is a private region or island. These are available in full sim size only and can be sold or subdivided, but ownership cannot be transferred at the parcel level. Private islands vary in cost based on how many objects you can place on the land because Linden Lab does offer full private regions with different resource allotments. A full island allowing 15,000 prims costs $1,000 to purchase, a "Homestead" island allowing 3750 prims costs $375, and an Openspace island allowing 750 prims costs $250. You also have to own a full island to be able to purchase a Homestead or Openspace sim. In 2008, there were almost 27,000 private regions. Today there are about 20,700, and the number seems to be decreasing at a steady rate.

Total private regions in Second Life 2007 to 2013

One question that some of you might be wondering, if you are not familiar with Second Life, is why would people abandon the land they bought? Why spend $1,000 for a private region then just let it go? The answer is in the fees Linden Lab charges for the use of the land you buy. These monthly costs, often referred to by users as "tier," can also be thought of as a type of rental charge for the resources used to store and display virtual objects. Tier varies depending on the size of the parcel. A full sim (65,536 sq meters) on mainland costs $195 a month while 512 sq meters costs $5 (512 sq meters of land is limited to 117 prims). A full private sim or region costs $295 a month. So just like in the offline world where you might have no mortgage yet still lose your property because you cannot afford the taxes so too in the virtual world. You might have been able to buy the land at one time, but usually it's the ongoing costs that cause you to give up your property. In the physical world it might be the real estate taxes, and in the virtual world it is the land use fees or tier.

For Sale sign on mainland in Second Life

People who have owned land in Second Life, including myself, have complained for many years that tier is too high. Many of us have said that people increasingly cannot afford land if tier is not reduced. And this seems to parallel exactly what happens in the offline world. People who cannot afford the taxes in a community complain and try to get them lowered. But while there is somewhat of a relationship in the physical world between the amount of taxes and the size of the parcel, other factors influence the rate. Real estate tax is set by government based on the school costs and cost to the government for providing services. It can only be reduced so much without cutting back on education or services or investment in assets. In the virtual world, the fees or tier are also needed to pay for services such as the hardware supporting the world, upgrading of software and features, and customer support. But a significant difference is that because the virtual world is owned and managed by a private company, fees also support profit – in the physical world, profit is never part of the equation for assessing taxes.


So for those of us facing high real estate taxes in our physical spaces, we can complain to our elected officials and demand taxes be reduced or frozen. But if they decide to cut or freeze our taxes, it will be by reducing services which we might not want to accept or which might cost us more in the long run. Of course we can move to a different community, but there are several down sides to this solution. Education and government services have a similar cost across the United States. Sure there might be some areas that save money because they don't have to deal with costs for handling winter weather or they have cheaper labor costs, but most people don't analyze city and school budgets and compare them to each other to figure out if the difference in tax rate is due to these factors which are actual cost savings or if they are due to a reduction in services. Uprooting your family and moving them across the country to find the most cost effective community in which to live is also a major challenge. This would require a significant investment of time and money along with the need to find a new job and perhaps if children are involved a search for a new school or daycare. Most of us just don't have that kind of mobility in our physical world so we are limited in our ability to move.

Wastelands in Second Life

Government has tried to explore other methods of reducing the cost to live in a community. There are assistance programs for those who qualify and freezing of taxes for senior citizens. Based on a comment from one of my Facebook friends, it appears the U.K. might be trying to encourage people to downsize to a home that might be more affordable for them by assessing a fee on unused bedrooms in a home. Affordability of housing is and probably will be an ongoing challenge for communities.

Living Space from 2012 SL Home Expo

In the virtual space, people have pointed out that some of the operation costs for hosting a virtual world have been reduced because of lower costs for the infrastructure so tier should be lowered to reflect this. But others have argued that fees cannot be lowered or profits will be lost. In the end, Linden Lab has not indicated in any way that tier will ever be reduced. So people who are upset with paying the level of "taxes" or tier have to make a decision between accepting the costs or moving to another virtual world. After all, Second Life is no longer the only virtual community out there.

But a downside to making that virtual move is that people can experience an "uprooting" similar to what they would feel from a move in the physical world because they are leaving their friends and community, but that is where the similarity ends. The time and investment needed to make a virtual move is significantly less than what it takes to move in the physical world. And there are usually no jobs or schools or other factors to have to worry about. People still risk the reduction in services by moving to a world with a lower cost, but it's much easier to research and explore what those reductions will be if any.

Fantasy Faire 2012

So let's finally look at what happens to a community when costs of land do not decrease, services decline, and the population becomes alienated from its caretakers. Again we will look at Detroit – in the last decade, this city has lost 25% of its population (see Wall Street Journal article). Some of the reasons cited for this loss are affordability (taxes and jobs) and a reduction in services. It almost becomes a viscious cycle because as people move out values fall, properties are abandoned, and taxes must be raised to offset losses. So many properties in Detroit were abandoned that some sections were even closed off. But as shocking as Detroit's current situation appears to be, it seems it has been steadily declining for decades. There's an interesting discussion about the causes here: The Reasons Behind Detroit’s Decline by Pete Saunders.

Population of Detroit, Michigan

Those who follow the virtual land market in Second Life might see some similarities in that declining graph. And while the elements within the virtual and physical communities might be different and the downward trend not as long, people believe Second Life's land decline is caused by management issues that sound a lot like Detroit's: a refusal to discuss or address the decline and the cost of maintaining land, a focus on meeting the needs of one or two primary groups, and a lack of investment in the community to the point where people sense a feeling of neglect. And when I say this, I don't mean the company managing Second Life is actually neglecting the world. As a person working in government I am well aware of the essential work and effort that goes into operating a community – work that no one knows about or wants to know about. And I believe Linden Lab is taking care of all those operational duties much like a public works department works in the background to make sure a city keeps functioning. The neglect comes about because in addition to keeping the gears turning, a community needs nurturing to be successful.

Old Packard Plant Detroit - from AcrylicArtist on morgueFile

Even if you think you are meeting the needs of the people, if the population thinks you are not, then you are not. For those of you who used to play Sim City it is kind of like the newsflash you would get telling you what the people in your city thought about the job you were doing. When they were unhappy, you would try to figure out what you could do next to change their opinion to one that was more positive. Well, unless you were the type who liked to inflict disasters and mayhem on your city just to see how bad it could get.

After 60 years, Detroit is now working hard to stop their decline. They are engaging the public and offering incentives to encourage people and business to move to their community knowing it can ultimately lead to lower costs for everyone as revenue increases. And they are no longer listening to only one industry – now everyone in the community has the potential to voice their ideas and opinions through online sites and public meetings and workshops like the one shown in the image below. The people who love and care about Detroit do not want it to slip into oblivion.

Detroit Can Do Camp

Those of us who love Second Life also do not want it to slip away, but we do not seem to have reached the point yet where the owners of the world have expressed any concern about the loss of land and investment. And we face a challenge somewhat different from people in places like Detroit. Those running our community do so to make a profit and they alone have ownership. In places like Detroit, the people own the community – in the end, they have the power to keep the lights on or turn them off and walk away. In Second Life, this decision is ultimately up to the company owning that world.

Waymount in Second Life

Perhaps the owners of Second Life are content to make as much money off the world as possible while allowing the decline to occur until expenditures exceed revenue. Then at that point, they just shut it all down and go on to their next thing. Or they might expect the decline to eventually stabilize and as long as they are still making an acceptable profit, they will be content to leave the world at that size. After all, not every community wants to become a metropolis. And some communities only want a demographic that can afford to "live" there.

Land company in Second Life

Finally the other option is what Detroit has chosen – address the decline and determine a path to turn it around. And just as Detroit is investing significant effort now to accomplish growth, this option would also be the most work for Linden Lab. There are some who have suggested Linden Lab is pursuing this option by launching other potential revenue streams. And some have suggested imposing new fees unrelated to land. If these steps were taken, the company could choose to use new revenues to help meet costs of operating Second Life and still ensure profit while allowing for a reduction in tier. This is somewhat similar to a city adding new taxes or service fees or a city that works to attract a heavy sales tax or industrial base and uses the additional revenues to offset a reduction in taxes for residents. But if the company chooses to build a new revenue base, the key will be to diversify, because history shows relying on one group or industry or revenue stream eventually leads to a collapse. The video below is a trailer for a documentary about communities and the aftermath of this type of collapse.

As the young man points out in this video the "The soul of the city . . .are the people." So if Linden Lab chooses to follow Detroit's path, they need to also follow their example of engaging and informing the community and embracing the people because the people really are Second Life. Without them, there is only water, ground, and sky. And people cannot be expected to invest time and money in a community without knowing its plan for the future or feeling like they have a say in that future. As decades of emigration and our example of Detroit have shown, when people have no clear path to the future and lose faith in leadership on top of facing high costs, they will eventually seek out a new world and opportunities.

Statue of Liberty









Home Buying Tips and Cheat Sheet

Southern HomeBuying a home is probably one of the biggest purchases we will make in our lives. It's also something that many of us end up living with for an extensive period of time. In my lifetime, I have been involved in the purchase of five homes, but the tips I am going to share with you were not gained through my home-buying experience. Nope, I picked up these tidbits of caution and information while working at different cities trying to help others who bought a home and were dealing with problems they either did not know about or anticipate. And because of this, the tips I'm giving are specifically focused on buying homes in a city, but could possibly apply to other jurisdictions.

Check your zoning and the rules for that zoning

This is not as much fun as checking out the pool in the backyard, but it can end up playing a critical part in your future happiness. Contrary to popular belief, we might live in America, but that does not mean we are free to do whatever we want on our own property. Everything you do on your property is subject to a set of rules determined by the zoning set for your property. If you buy the parcel with grand plans for new garages or a home business or a place to park all your cars and boats, you might want to first make sure all that will be allowed on your property. The other reason to check zoning is to make sure you don't get any surprise neighbors. That vacant parcel next door might look pretty good today, but if it is zoned other than single-family residential, be prepared to someday wake up and maybe find yourself staring at or hearing (or smelling?) a doggy daycare.

Check to see if the home is part of a homeowners' association

This can have positive and negative consequences. Some properties not only have to follow zoning rules, but also subdivision rules typically referred to as covenants. If a subdivision is built-out, covenants are regulated not by the city, but by the homeowners' association. (If it is not built out, the developer typically adminsters the covenants.) So prior to purchase read the covenants to make sure you are allowed to use the property as you would like to. Another issue to research is whether or not you will pay a homeowner association fee. Each subdivision can have a wide range of assets for which properties in that development are responsible. Some only pay for a sidewalk while others might pay for swimming pools or in the case of townhomes the repair of the structures. And if your developer didn't want to follow city subdivision rules and the infrastructure in your subdivision was never accepted by the city, you will most likely also be responsible for helping to pay for the maintenance and repair of roads, sewer, water, etc. The positive side of this is that a homeowners' association can provide benefits by ensuring uses in the development remain as intended, offering added amenities not available to others in the city, or providing maintenance for common areas.

Make sure there is good drainage on and away from the property

Not thinking about drainage prior to purchase can definitely lead to problems later. Whether it's a home that sits in a bowl because the ground does not drain away from the foundation or a home in an area with high groundwater, or a home lying close to quiet, serene waterways or drainage paths that turn to raging rivers during a storm, you'll want to make sure you know what you're getting into before you buy. To get an idea of how much of a problem water can be when it rains, take some time to check out these things:

  • Walk around the house and note the downspouts – are they hooked up, do they extend far enough away from the home, is it easy for the end to become blocked (you can't imagine how much water drains off a roof during a rain)?
  • Walk around the house and note if the ground drains away from the house or towards the home – particularly towards any windows, walkouts, or window wells in the foundation.
  • Walk around the property – does it look like the land around the property drains away or towards this home's property? Are there drainage basins near the property lines, and if so, does it look like they could easily become covered? If good drainage of this home's lot depends on that opening staying clear, will you have control over that or would you have to depend on a neighbor to keep it open because it is on their property or behind their fence?
  • Look at how the height of the home's foundation, the garage door, and other openings such as window wells compare to the road – is the road above these openings? If the road is above these openings, there is a very good chance water will drain from the road towards these openings.
  • Look in the basement for a sump pump – if the sump pump stops for any reason such as pump failure or electric outage, will your lower level flood? Will this be a problem because of a finished lower level or a need to store items there, or because of heating or other equipment or appliances? Check to see if the pump has a battery backup. If there is one, will that be sufficient to protect the lower level? If there are pumps in other areas of the home such as depressed patios, will failure of the pump cause damage in these areas? Is there something that can be done to protect or eliminate that problem?

Geneva Storm Sun May 29 2011It is also important to look at the subdivision plat and drainage plans for the property. These plats and plans can usually be found at the public works/engineering departments of the city. The plans will typically show drainage paths. Some subdivisions are designed to create overland flood routes where water is channeled during a major storm event. If the property lies next to one of these routes, are the openings into the home above the expected flood elevations in these routes? Typically homes next to these routes have restrictions on how low openings can be into the home, but if previous owners were not aware of these restrictions and made changes to the home, openings could have been created too low.

And while you are talking to the public works/engineering department, you can ask if they have any records showing drainage or flooding problems for that particular property. Another good place to check for potential flooding issues is the FEMA website. This site allows you to type in an address and pull up a map to see if a property lies in an area designated as a floodplain. Even if you discover the home and other structures are outside a floodplain, note if any other part of the property lies within one because this might prevent you from making improvements to the lot in the future in the portion of the property lying within the floodplain.

Adjacent improvements

As you walk around the property, note any infrastructure such as waterways or bike paths or sidewalks. Ask who maintains these. Some creeks and other improvements might naturally degrade causing a loss of soil or other changes to the property. If this occurs, is the homeowner responsible for the repair or will a homeowners' association or other entity make the repair?

Another item to note is the type of roadway. Some streets are constructed with curb and gutters while others have only ditches with no curbs or gutters. The cost of these improvements are reflected in the cost of the property so if you purchase a lot on a road with no curb/gutters or even sidewalks, it did not include a cost for these types of improvements. If after you purchase, you decide that you do not like that the edge of the road or the ditch is difficult to maintain, and you would like to change it, be aware that this change might not happen so easily. The city will not typically construct these improvements at no cost to the property owners along that street. The reasoning behind this is why should all the taxpayers in a city pay to improve specific properties other than their own, particularly if city revenues are so low that the city can barely keep up with just maintaining pavement? However, there could be some cities that have made the decision to make these types of improvements at no cost to the property owner. So it might be helpful to check with the city to find out their policy for upgrading roadways and streets if that would make a difference in your purchase.

Also keep in mind some roads are private and not maintained by the city. If the property is located on a private roadway, the homeowner could end up responsible for all costs related to maintenance of that roadway.


While you are checking out the subdivision plat for drainage issues, also look to see what easements are located on the property. It is very typical to have at least a five-foot easement or reservation along all side and rear property lines for utility placement. There can also be wider easements for water or sewer lines or for drainage ways. If a pipe or other utility has been placed in these easements, be aware that at some point, the utility company might need to get in there to make repairs. Improvements or landscaping are not supposed to be placed in these easement areas; however, many times property owners either ignore or are not aware of these easements so swimming pools, fences, and gardens end up in these locations. If the utility company damages these improvements while making necessary repairs, the property owner might not be reimbursed for any damages. So it is helpful to find out the policy from the specific utility companies on how they handle entry and damage to improvements made in their easements. Also if there is a drainage easement, it is important for these to remain completely clear or flooding can occur. Note any potential blockages that have been placed in these areas. And be aware of their locations and how they might affect any planned improvements to the site.


I know no one wants to think of sewers when they are shopping for a new home, but I think it is pretty safe to say no one likes sewage flowing into their home. So a little bit of research up front can go a long way to minimizing problems later on. One of the most important things to remember is that if a home has a sewer, and most in a city do, there is always a chance that something can happen to cause sewage to back up into a home. The key is to understand why and what can be done to minimize the chances of a backup. Most of the time, backups are due to something that is wrong with the private sewer from the home to the main. These problems can be caused by blockages from roots, dirt or other debris from failed pipes, or just faulty pipe construction. Cities usually keep track of backups so you can find out if a home has had regular backups by contacting the city keeping in mind that one backup is not an indication there is a problem. What you are looking for is a record of constant and regular backups. You can also televise a private sewer to make sure there are no problems.

ACE 2010 - AWWA Water ExpoThe other reason a home might experience sewer back ups is due to overloading of the city sewers during a rain event. Some cities still have what is known as combined sewers. These are pipes that normally carry only sewage, but during a rainfall, might also carry stormwater. Unfortunately, these combined sewers were not sized to carry a very large storm so when they fill up, the water can back up into homes. The EPA is working with cities to eliminate this problem, but it is very costly and might not have been addressed yet in some communities. And most insurance companies for cities will not pay property owners for sewer backups so you might need your own insurance to cover backups if they occur. You can find out if a property is hooked up to a combined sewer by calling the city's public works/engineering department. That department can also tell you if that particular line experiences backups during a storm. Also keep in mind, there are things that can be done to help prevent backups in a home from a combined system, and a home might already have these in place, or they could be installed after purchase.

Neighboring properties

As you are walking around the property to check out the drainage, also note any landscaping in adjacent properties. Look for trees or shrubs that might already encroach over the line or might be close enough to encroach in the future. This encroachment might not be a problem for everyone, but sometimes it is so be aware of how you might have to handle cutting trees or bushes back to the line.


Another item to notice as you walk around outside are any potential nuisances. These can be just about anything depending on what types of property uses might deter you from enjoying your property. They seem to be different for everyone, so I am going to list a few I've had people complain about, but keep in mind these do not bother everyone so my intention is not to present them as actual nuisances because some people view these as benefits to the property.

  • Railroads
  • Bike Paths
  • Parks (particularly loudspeakers from pools and ball diamonds in the summer)
  • Schools (high schools might be particularly an issue with parking)
  • Factories/Industries
  • Restaurants or other commercial uses
  • Highways/busy roads

traffic at the Nathan Hale School 1Unfortunately when shoppping for a home you only spend a short amount of time at the property so you might not even notice these until after you have moved in. And only then do you realize that this use is a problem. The key to remember is that as a property owner, you have little to no control over a use that is already in place when you purchase. For example, if I buy a home across from a school during the summer and then in the fall realize I can't stand all the traffic in the school year from dropping off and picking up kids, it is not reasonable for me to expect everyone to somehow get rid of all the cars or to relocate the school. But it is understandable that I might not have been aware of just how significant the traffic is because of when I purchased the home. So spend some time just hanging out in the yard looking around at what is nearby. Listen to the sounds, try to identify any smells, and if you see neighbors ask them if there are any traffic, odor, or noise issues they experience at any time in the year.

Another thing to keep in mind with this issue is that someone might have tried to minimize the nuisance with fencing, walls, or landscaping. If these are not on your property and under your control, be aware that they might go away at some point, and you might not have any control on replacing them.

Seasonal Issues

This might not be a problem everywhere, but I bring this one up mainly because I live where it snows. And if you buy a home anytime it is not winter, it's easy to forget how awful it can get when it snows. Unfortunately when it does snow, we need to put that stuff somewhere. So as you are hanging around on the property listening, smelling, and hoping a neighbor stops by, think about the winter (if you are in "snow country") and visualize where you will put the snow from your driveway. Also think about where the city might put the snow from your road. Most of the time, the snow from the road will end up a pile at the curb or end of the driveway which happens to everyone and cannot be avoided. But if there is an open field across from the house or the home is in a cul-de-sac, snow might end up somewhere and in a large enough quantity that it causes problems you won't want. This is another good thing to ask the neighbors about so you aren't surprised after that first, big snowfall.

Nighttime issues

Another good idea is to check out the property at night. If you only look during the day, you might not get a good feel for the level of activity in the neighborhood when people are off school and work. Also, notice the level of lighting near the property. The lighting is determined by the city so if you believe there is not enough or too little, you might not be able to get it changed unless you add lights on your own property at your own cost.

Home Interior

I could write a whole other post on this, but I won't go into it all because there are so many items to check and many require a professional background to properly inspect. So my advice on this is, if you don't have that professional background yourself, have a home or building inspector inspect the house for any problems or deficiencies.

Below is a checklist you can print out and take with you on your home buying adventures. This cheat sheet summarizes the items described in more detail above. And if you have any other tips you think should be added, please comment below or email us your experiences. 


Public Works Group Home Buying Tips and Cheat Sheet