Module 2: From Analysis to Solutions Flashcards
Step 5: Land Value Opinion
Unimproved land
raw land that may have development potential
Step 5: Land Value Opinion
Improved Land
is considered as being prepared for development by grading, draining, installing streets and utilities
Step 5: Land Value Opinion
Site
commonly refers to an improved parcel that does not require further land development or subdivision. It is ready for improvements suited to its highest and best use.
Step 5: Land Value Opinion
Analytical methods that require land values separate from total property value
cost approach
income capitalization when residual techniques are used
highest and best use analysis as though vacant
Step 5: Land Value Opinion
The appraiser can chooses among six procedures for analyzing land or site value. Four of them require improved sales.
- Ground rent capitalization
- Land residual technique
- Allocation
- Subdivision development
- Extraction
- Sales comparison
Step 5: Land Value Opinion
GLADES
Ground rent capitalization Land residual Allocation Development (subdivision) Extraction Sales comparison
Step 5: Land Value Opinion
GLADES
in the absences of sales of comparable properties, the 5 procedures GLADE can be used alone or in combination with each other to support land value
Step 5: Land Value Opinion
Sales Comparison
most common and preffered method of valuing land because the data necessary to use this procedure is most often available. It is also most easily understood by users of appraisals including the courts and the general public.
Step 5: Land Value Opinion
Extraction
Based on improved sales, and the depreciated cost (contributory value) of the improvements is subtracted from the sales price.
Sale price of comparable sale
— Depreciated cost of improvements
——————————————————–
Land value of comparable sale
The value of the land is extracted from the total value
Step 5: Land Value Opinion
Allocation
Sale Price x Typical Ratio of Land Value to Improvement Vale = Land Value
Step 5: Land Value Opinion
Allocation
can be used to establish land value when the number of vacant land sales is inadequate
Step 5: Land Value Opinion
Land Residual Technique
Income approach based on the economic principle of surplus productivity.As the other three agents of production have been paid, land as the residual receives income, which is capitalized into land value.
- the appraiser separates the rent between the land and improvements
- the appraiser converts the net income to the land only through the capitalization process to develop a value opinion for the land
the basic formula for income capitalization is called IRV, Income ÷ Rate = Value
Step 5: Land Value Opinion
Ground Rent Capitilization
an income approach to land value. This procedure can be used when the land rent is a known amount, as in a land lease.
Step 5: Land Value Opinion
Ground Rent Capitilization
the appraiser divides the net amount estimated for the right to use and occupy the land by a capitalization rate (derived from the market) to form an opinion of land value.
Step 5: Land Value Opinion
Ground Rent Capitilization
Land Rent
——————————- = Land Value
Capitalization Rate
Step 5: Land Value Opinion
Subdivision development
an income approach to the valuation of tracts of land with subdivision potential. Valuing lots in a subdivision is a common assignment for real estate appraisers
Step 6: Approaches to value
- Cost approach
- Sales comparison approach
- Income capitalization approach
Step 6: Approaches to value
An appraiser often employs more than one approach. The resulting value indications will likely differ from one another, and can either support or refute each other.
Step 6: Application of the Approaches to Value:
Cost Approach
a summation approach to value. In this approach, the value of the site is first estimated using one of the six procedures for valuing land, then the value contribution of the building and site improvements are added to indicate the value of the overall property.
Step 6: Application of the Approaches to Value:
Cost Approach
The cost approach reflects market thinking by recognizing that participants in the marketplace relate value to cost
Step 6: Application of the Approaches to Value:
Cost Approach
A buyer will not pay more for a property than the cost to acquire a similar site and construct improvements of equivalent desirability and utility without undue delay
Step 6: Application of the Approaches to Value:
Cost Approach
This is also true of building components such as decks, porches, added plumbing fixtures, and fireplaces in the case of residential properties or expanded open space and additional elevators in commercial properties
Step 6: Application of the Approaches to Value:
Cost Approach
8 Step Procedure
- Estimate the value of the land as though vacant and available to be put to its highest and best use
- Estimate the direct and indirect costs of the improvements.
- Estimate the entrepreneurial incentive.
- Add steps 2 and 3 together to obtain the total current cost.
- Estimate the accrued depreciation from three sources:
a. Physical deterioration
b. Functional obsolescence
c. External obsilescence - Deduct the depreciation from the total cost to derive an estimate of the depreciated cost of improvements.
- Add contributory (as is) value of any site improvements.
- Add the alnd value to the total depreciated costs.
Step 6: Application of the Approaches to Value:
Sales Comparison
The sales comparison approach is based on a comparison of the subject property to similar sales. This is the same procedure discussed previously as one of the six procedures for valuing land, except it will be applied to improved properties (with building improvements).
Step 6: Application of the Approaches to Value:
Sales Comparison Approach (Adjustments)
If the comparable sale is Superior, Subtract.
If the comparable sale is Inferior, Increase.
Commonly used elements of comparison
- Property rights conveyed
- Financing
- Conditions of sale
- Expenditures made immediately after sale
- Market conditions
- Location
- Physical characteristics
- Economic characteristics
- Use / zoning
- Non-realty components
Step 6: Application of the Approaches to Value:
Income Approach
measures the present value of future benefits derived from property ownership , such as collecting future rent payments and eventual resale of the property in the future. It is based on the conversion of the income producing capability of a property into value through the capitalization process.
Step 6: Application of the Approaches to Value:
Income Approach
the anticipated benefits or potential of the property to produce income is used to assess its value.
Step 6: Application of the Approaches to Value:
Income Approach
After income and expenses are estimated, the appropriate income stream(s) may be capitalized into a value opinion. This typically involves annual income, or income over a one-year period.
Step 7: Reconciliation
the process of resolving the differences among the various value indications and arriving at a final opinion of value. The value opinion can be a single dollar figure or a range into which the value will most likely fall.
Step 7: Reconciliation
Reconciliation is a disciplined process using reason and judgment based on the quality and quantity of data.
Step 7: Reconciliation
the reconciliation process is not limited to just one step, but occurs throughout the valuation process
Step 7: Reconciliation
Reconciliation requires individual judgments on the part of the appraiser. This is where the science blends with the art
Step 8: Report of Defined Value
The valuation process is not complete until the appraiser states the value opinion in a report and presents it to the client in the form of either an oral or written report.
Step 8: Report of Defined Value
The appraiser must ensure that the communication of the assignment results are carried out in a manner that is not misleading.
The appraiser must ensure that the communication of the assignment results are carried out in a manner that is not misleading.
- When an appraiser resolves differences among several value indications, what is this called?
A) Weighted average
B) Estimation
C) Reconciliation
D) Correlation of value
C) Reconciliation
Feedback: Reconciliation is the process of resolving various value indications into a single dollar figure or range into which the value will likely fall.
Feedback: Link: Page 17
If an appraiser uses a known rent amount for land and divides the rent by a land capitalization rate to form an opinion of value, which land valuation technique is the appraiser using? A) Extraction B) Allocation C) Ground rent capitalization D) Land residual
C) Ground rent capitalization
Feedback: The appraiser is using ground rent capitalization, one of the six procedures of land valuation method where the appraiser divides the net amount estimated for the right to use and occupy the land by a land capitalization rate (derived from the market) to form an opinion of land value.
Feedback: Link: Page 9
4. The approach that is based on the conversion of the income producing capability of a property into value through the capitalization process is called what? A) Cost approach B) Reconciliation approach C) Sales comparison approach D) Income approach
D) Income approach
Feedback: Link: Page 16
5. Which of the following is not an element of comparison? A) Reconciliation B) Property rights conveyed C) Financing D) Conditions of sale
A) Reconciliation
Feedback: Link: Page 15
6.The allocation method of site valuation is based on which of the following?
A) A ratio of building size to land size
B) A ratio of net income to property value
C) A ratio of the value of the land to the value of the property
D) It is not based on a ratio at all
C) A ratio of the value of the land to the value of the property
Feedback: Correct.
Feedback: Link: Page 7
7. During reconciliation, the appraiser may develop an opinion of value that is: A) None of the above B) A single dollar amount C) All of these options D) Within a range of values
C) All of these options
Feedback: An opinion of value can be a single dollar figure or a range into which the value will most likely fall.
Feedback: Link: Page 17
- Which of the following statements about land valuation is true?
A) The extraction method considers land value to total property value ratios.
B) For estimating the market value of a residential site, the sales comparison method is preferable.
C) Income capitalization is the most appropriate way to value a fee simple interest in a residential site.
D) If land sales are readily available, allocation is the most appropriate method to use for valuing a site.
B) For estimating the market value of a residential site, the sales comparison method is preferable.
Feedback: The sales comparison approach is the most common and preferred method of land valuation because the data necessary to use this procedure is most often available.
Feedback: Link: Page 13
9.Which of the following is NOT an accurate statement regarding the reconciliation process?
A) Reconciliation is achieved through the application of a precise mathematical formula.
B) Reconciliation occurs throughout the valuation process.
C) Reconciliation is a disciplined process using reason and judgment.
D) Reconciliation logically leads the reader of the appraisal report to a final opinion of value.
A) Reconciliation is achieved through the application of a precise mathematical formula.
Feedback: There is no mathematical formula for the reconciliation process that an appraiser goes through, but instead it is a reasoned judgment based on the quality and the quantity of data.
10.In a land valuation assignment, an appraiser subtracts the depreciated cost of the improvements from the sale price to obtain the value of the land. Which land valuation technique is the appraiser using? A) Ground rent capitalization B) Allocation C) Extraction D) Land residual
C) Extraction
Feedback: The estimated value (depreciated cost) of the improvements is subtracted from the sale price of an improved property. The remaining amount should reflect the value of the land. Extraction is a land valuation procedure that can be used when a sold property has improvements on the site.
Feedback: Link: Page 17
