Ch 3 Flashcards
After diligent research you’re unable to come up with vacant land sales in the vicinity of an assignment you have in Old Town. You find a sale of a dilapidated storefront with two apartments upstairs.
The sale price of the property was $250,000. Your investigation of the Building Department’s records allow you to estimate that the reproduction cost of the improvements would currently be $280,000. After an analysis of the property, you conclude that the total accrued depreciation is 60%. On that basis, what would be your conclusion as to the value of the land?
Extraction Method
$280,000 x .60 (depreciation) = $168,000
$280,000 - $168,000 = $112,000 (contributory value of improvements)
$250,000 (total property value) - $112,000 (contributory value of improvements) = $138,000 (value of land)
We have a ground rent of $135,000 and a market derived rate of 9%. What is the value of the land?
Ground Rent Capitalization Method
$135,000 ÷ .09 = $1,500,000.
Let us assume a property where the net operating income (NOI) is $100,000 and a “Cap” rate of 10% or .10.
The appropriate cap rate to be applied to the building improvements only was 11%, and the building value is $800,000.
Our research isolated a land cap rate of 8%.
What is the indicated land value?
Land Residual Method
Remember the basic income capitalization formula that Value = Income/Rate.
Value = Market Value Income = Net Operating Income Rate = Capitalization rate.
Let us assume a property where the net operating income (NOI) is $100,000. In direct capitalization, we would divide the $100,000 by an appropriate rate to arrive at value. For simplicity’s sake, let us assume a “Cap” rate of 10% or .10.
$100,000 ÷ .10 = $1,000,000 - a nice round one million dollars.
However, in this example let us assume that somehow we were able to determine that the appropriate cap rate to be applied to the building improvements only was 11%, and the building value is $800,000.
Next we would multiply the $800,000 building value x .11 and see that $88,000 of the total income stream must be utilized to produce the appropriate return to the building.
Well what’s left? $100,000 NOI - $88,000 = $12,000. That must be the portion of the income that is attributable to the land. It can’t come from anything else - the presumption is that all there is that could produce income is the land and the improvements.
In the last step, we go to the market and extract an appropriate cap rate for the land. Let’s make another assumption; that our research isolated a land cap rate of 8%. That means someone investing in land would expect an 8% return on their investment.
Well that was easy! Now all we have to do is divide the income stream attributable to the land ($12,000) by the land cap rate (.08) and the indicated land value is $150,000.
We have a 4 acre parcel that can be developed into 16 smaller lots or 12 larger lots. Which alternative is the highest and best use?
Legal considerations: Zoning will allow 4 lots per gross acre. Subject parcel is 4 acres.
Physical considerations: There is one acre of unusable wetland so you could develop 16 smaller lots on 3 acres OR 12 larger lots on 3 acres (a more typical lot size for the area). Note that the 1 acre of wetlands could be used to satisfy “greenbelt” requirements so if properly configured, the 3 net acres could still produce 16 lots by creative use of the 1 acre of wetlands.
The development costs for roads, surveys, etc., will run $20,000 for each small lot and $25,000 for each larger lot
Financial feasibility: Comparable small lots sell for $45,000 and comparable larger lots sell for $55,000. They are both feasible alternatives because they sell for more than the development costs of $20,000 to $25,000 per lot.
Which yields the maximum profitability - small lots or larger lots?
Small lots: 16 x $45,000 = $720,000
Minus development costs 16 x $20,000 = $320,000
Value $400,000
Larger lots 12 x $55,000 = $660,000
Minus development costs12 x $25,000 = $300,000
Value $360,000
So according to our analysis, small lots is the way to go. You will make $40,000 more and that is the highest and best use.
A method of estimating land value in which the depreciated cost of the improvements on the improved property is calculated and deducted from the total sale price to arrive at an estimated sale price for the land.
defines
Extraction Method
After diligent research you’re unable to come up with vacant land sales in the vicinity of an assignment you have in Old Town. You find a sale of a dilapidated storefront with two apartments upstairs.
The sale price of the property was $250,000. Your investigation of the Building Department’s records allow you to estimate that the reproduction cost of the improvements would currently be $280,000. After an analysis of the property, you conclude that the total accrued depreciation is 60%. On that basis, what would be your conclusion as to the value of the land?
Extraction Method
$280,000 = 100%
x = 40%
$250,000
Minus $112,000
= $138,000
A run-down neighborhood grocery store on a good corner location in a desirable older neighborhood recently sold for $400,000.
The reproduction cost of the improvements today would be $250,000 and the total depreciation is estimated to be 80%.
By extraction, what is the land value?
Extraction Method
$400,000 Sale Price
$250,000 Cost New = 100%
x = 20%
= $50,000 depreciated value of Improvements
$400,000 Sale Price
Minus $50,000 Improvements depreciated
= $350,000 land value
A method of estimating land value in which sales of improved properties are analyzed to establish a typical ratio of land value to total property value and this ratio is applied to the property being appraised or the comparable sale being analyzed.
defines
Allocation Method
You are having a hard time finding sales of vacant land in an established built-up residential area. You have found some sales of improved property that include sites similar in size to your subject property. Through research into properties of this type in the subject market, you are able to conclude that typically 30% of the total value is in the land and the rest in the improvements.
You have good comparable sales that indicate the total value of your subject property, as improved, is $180,000.
By the allocation method, what is your opinion of the value of the subject site?
Allocation Method
Simply multiply $180,000 by .30 and the answer is $54,000.
The process of valuing a universe of properties as of a given date using standard methodology, employing common data, and allowing for statistical testing. (USPAP, 2010-2011 ed.) Often associated with real estate tax assessment valuation.
defines
Mass Appraisals
Which two principles are meant with this statement:
Particularly if someone is building on speculation, they want to produce an easily salable product. They don’t want to mis-improve a property. It doesn’t make sense to build a million-dollar house on a $10,000 lot or put $100,000 house on a $500,000 lot.
Principle of Balance and Principle of Conformity
The principle of balance states that real property value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium.
The principle of conformity states that real property value is created and sustained when the characteristics of a property conform to the demands of its market.
The subject improved property has a total value of $300,000 by the sales comparison approach.
One neighborhood across town has home sales from $260,000 to $270,000, and recent lot sales averaging $63,000.
Another nearby neighborhood has $340,000 home sales, and recent lot sales of $70,000.
A builder in the area says his lots typically run about 25% of total value on new construction.
Based on the above data, what value would you conclude for the subject’s land?
Allocation Method
$63,000 / $265,000 = .24 or 24%
$70,000 by $340,000 = .21 or 21%
The indication from the builder is 25%.
$300,000 x .21 = $63,000 $300,000 x .24 = $72,000 $300,000 x .25 = $75,000
Therefore, the indicated value of the subject lot ranges from $63,000 to $75,000. We could use a value range ($63,000 - $75,000) or we could reconcile this range to a single-point estimate (e.g., $70,000).
A method of estimating land value when xx are the highest and best use of the parcel of land being appraised. When all direct and indirect costs and entrepreneurial incentive are deducted from an estimate of the anticipated gross sales price of the finished lots, the resultant net sales proceeds are then discounted to present value at a market-derived rate over the development and absorption period to indicate the value of the land.
Defines
subdivision development
Subdivision Development Method
A method of estimating land value in which the net operating income attributable to the land is capitalized to produce an indication of the land’s contribution to the total property.
defines
Land Residual
Let us assume a property where the net operating income (NOI) is $100,000. The appropriate cap rate to be applied to the building improvements only was 11%, and the building value is $800,000. Land cap rate of 8%.
$800,000 building value x .11 = $88,000 of the total income stream must be utilized to produce the appropriate return to the building.
$100,000 NOI - $88,000 = $12,000 portion of the income that is attributable to the land.
That means someone investing in land would expect an 8% return on their investment.
$12,000/08
= and the indicated land value is $150,000.
