Valuing The Site

Basic Real Estate Appraisal: Principles & Procedures – 9th Edition

© 2015 OnCourse Learning

Chapter 10

STUDENT LEARNING OUTCOMES

•Name at least Five Different Uses of Site Valuations• List the Five Methods of Valuing Land•Name the Physical Characteristics of a

Site that Affect its Value•Name the Legal and Locational

Considerations in Site Value2

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10.1 PURPOSE OF LAND OR SITE VALUE ESTIMATES

Reasons for Land Valuations• Sale and Purchase• Land Leasing (Rental Value)• Development (Feasibility)• Financing (Lenders – Loan Security)• Agriculture• Government Actions (RE Taxes, Eminent Domain)• Court Actions

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ALLOCATION OF VALUE FOR TAX PURPOSES

•Ad Valorem Taxes• Land and Improvement Values are Often

Separated• Example – CA Law Requires It

• Income Taxes• Building Value is Allocated for Depreciation

“Write-Off” Purposes, thus Balance of Tax Basis is Allocated to the Land

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SITE VALUE IN THREE APPROACHES

•Cost Approach• Land + Building = Total Value Indicator

• Income Approach• Certain Techniques Require Allocation to Site

• Sales Comparison Approach• Land Value Estimate is Often Needed for

Comparison Techniques

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10.2 FIVE METHODS TO VALUE LAND

•Market or Direct Sales Comparison•Allocation•Abstraction•Development• Land Residual

Detailed on slides that follow6

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IMPORTANCE OF HIGHEST & BEST USE

Alternate Definition:The Reasonable and Profitable Use that will Support the Highest Land Value as of the Date of Value

• Four H&B Use Tests/Criteria (Chapter #6)• Physically Possible• Legally Permissible• Economically Feasible• Most Productive

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VALUING LAND BY MARKET METHOD

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ALLOCATION & ABSTRACTION METHODS

•When to Use• When Vacant Land Sale are not Available• The Appraisal of Shared Land Interests

Allocation Method• Allocations by the Assessor may provide some

guidance, but not always reliable or up to date

Sale Price (Total Property) $450,000Site Contributes 35% x 0.35Site Value Indicator $157,500

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ALLOCATION & ABSTRACTION METHODS

Abstraction Method• Identify Comparable Improved Property Sales• Estimate Depreciated Cost of Improvements• Deduct Depreciated Cost to Abstract Site Value

Sale Price (Total Property) $340,000Depreciated Imp. Cost - $156,000Abstracted Site Value $184,000

Both the Allocation and Abstraction Methods are Less Accurate than the Market Method

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DEVELOPMENT METHOD• Used to Estimate Value of Land Ready to be

Subdivided (Hypothetical)• Used When No Comparable Land Sales are

Available, or Detailed Analysis (Feasibility) of a Project is Desired• Residential Subdivision – see Example 10.1• Estimate Number of Lots to be Developed• Estimate Total Gross Sales (Dollars)• Subtract Direct & Indirect Costs of Development• Allow for (Deduct) Developer’s Profit• Conclude the Value of the Land (i.e. Last $’s go to Land)

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LAND RESIDUAL METHOD• Version of the Income Approach• Based on the Principle of Surplus Productivity• Used When there are No Comparable Sales• Suitable for Vacant or Improved Income

Properties (Actual or Hypothetical)• Estimate Net Income for Total Property (L + Imp.)• Estimate Income Attributable to Improvements• Subtract Income to Improvements from Total• Capitalize Residual to Land @ Land Cap Rate (RL)

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10.3 HOW TO USE MARKET COMPARISON TECHNIQUES

Types and Sources of DataComparability Criteria• Competitive Property / Similar H&B or Intended Use• Open-Market Transaction / Conditions of Sale• Recent Sale (Close to Date of Value)

Current or Prior Sales of the Subject Property• Research and Analyze any agreement of Sale,

Option, Listing or Transfer close to the date of value• All Sales or Transfers within Three Years (USPAP)

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TYPES & SOURCES OF DATA (Con’t.)

What Data to Include• All Physical, Legal and Location Factors• Physical – Size, Shape, Frontage, etc.• Legal – Zoning, Taxes, Special Assessments, etc.

Sales History of the Comparables• Research and Analyze all Sales or Transfers within

One Year of Most Recent Sale Date• Important in Speculative Markets• Assess the Relevance to the Most Recent Sale

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TYPES & SOURCES OF DATA (Con’t.)

Sources of Data• Public Records (Recordings, Assessor’s Records)• Permits (Demolition/Construction), Maps• MLS, Brokers, Developers, Lenders, Databases

Verification of the Data• Verify with Buyer, Seller &/or Broker• Price and Terms (Contingencies), Loans• Proposed Rezone and/or Development• What Factors Influenced the Price Paid

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IMPORTANT SITE CHARACTERISTICS

Detailed on slides that follow 16

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PHYSICAL FEATURES

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LEGAL AND LOCATIONAL FEATURES

Legal• Legal Form of Ownership (Detached vs. Condo)• Zoning & Other Land-Use Regulations• Environmental Protection Laws• Rezones / New Use Restrictions / OtherLocational Factors• Negative – Earthquake, Flood, Hazardous Waste• Utilities & Municipal Services – Availability• Level of Taxes / Other Economic Factors• Quality of Schools, Fire & Police Protection 18

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ANALYZING THE SALES DATA

Use the Four Elements of Comparison• Terms & Conditions of Sale• Time of Sale• Location• Physical Characteristics

Unit of Comparison for Land• Physical (per SF, per Acre, etc.)• Economic (Per Potential Unit or Building SF)

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ANALYZING THE SALES DATA (Con’t.)

•Which Unit of Comparison is the Best Guide to Value – Per Front Foot or Sq. Ft.?

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ANALYZING THE SALES DATA (Con’t.)

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CHAPTER SUMMARY

The five primary methods for arriving at land values are:

1. The Market Method2. The Allocation Method3. The Abstraction Method4. The Development Method5. The Land Residual Method

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CHAPTER SUMMARY (Con’t.)

The most important physical factors include size, shape, frontage, width, depth, plottage, type of lot, and topography. Legal and locational factors include the most likely profitable use, zoning and other land use regulations, as well as utilities and public facilities available. Analysis of the sales data uses the Four Elements of Comparison, and identifies the most common units of comparison.

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IMPORTANT TERMS & CONCEPTSAbstraction Method Land Residual Method

Allocation Method Market Method

Developer’s Profit Plottage Value

Development Method Sales History

Elements of Comparison Site Characteristics

Highest & Best Use Criteria Units of Comparison

Interim Use Value

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