Part 13 Land Valuation Flashcards
When would an appraiser ever need to know the value of the land or site?
Vacant land. Highest and best use as though vacant Cost approach Income capitalization approach Property taxation Insurance Condemnation.
The land is said to have value,
while improvements contribute to value
The concepts and principles that have particular importance in the valuation of vacant land include the following:
Anticipation Change Supply and demand Substitution Balance Externalities
In mid-2005, the U.S. Supreme Court ruled in the case of Kelo vs. New London that jurisdictions may
exercise the right of eminent domain to acquire private property for development by other private entities providing there is an economic benefit (such as an increase in tax revenue).
The supply of land is relatively stable, so
it is particularly sensitive to laws of
supply and demand.
Land has value because
it provides potential utility for development
What is the appraiser’s initial analyses in regards to land?
Property rights
Of particular interest is the influence of government or public
controls that may limit development of land,
A development right that cannot be used by the landowner, or that the owner chooses not to use, but can be conveyed to landowners in another location or leased for a period of years to then revert back to the original owner; TDRs are said to be transferred from a landowner in a sending district to the use of a landowner in a receiving district. TDRs are generally used to preserve agricultural land; may also be used to preserve historic sites or buildings and open space or to protect scenic features.
Transferable development right (TDR
Examples of TDRs might be
excess
water and sewer capacity, air space, and builder’s density rights (such as
in the use of FAR).
Open space and conservation easements are
permanent encumbrances that limit or prohibit future development. Jurisdictions at all levels (federal, state, and local) can use these types of easements to preserve natural wildlife areas and parks.
By definition, land does not depreciate in value,
By definition, only improvements depreciate in value
although the value may change as a result of external conditions and market forces.
The six procedures for analyzing and deriving a land value opinion
Ground rent capitalization Land residual Allocation Development (subdivision) Extraction Sales comparison
In this procedure
- appraiser selects sales of similar
parcels. - sales are analyzed, compared, adjusted, and reconciled into an indicated value for the subject property.
Sales comparison
Most common procedure to value land
Is the preferred method
Sales comparison analysis is also the preferred method for
valuing improved
properties
When selecting comparable sales, an appraiser must consider the following factors about how the sales relate to the subject property:
– Zoning
– Highest and best use
– Site improvements, if any
– Physical characteristics
can be used to analyze current market competition.
Listings
when available, can give the appraiser the most
current picture on what is taking place in the market.
Offers to purchase
provide the appraiser with information on potential competition.
Options
According to our professional standards, appraisers must
verify (or confirm) their data, in order to ensure that it is authentic.
The characteristics or attributes of properties
and transactions that cause the prices of real property to vary.
Elements of comparison.
In land and site valuation (as well as for improved properties), the
adjustments for the elements of comparison are usually applied in the
following order:
a. Property rights conveyed.
b. Financing terms.
c. Conditions of sale. The sale is analyzed for any unusual motivations
d. Expenditures made immediately after purchase
e. Market conditions. Market conditions can quickly change
f. Location and geography. Land and sites are particularly sensitive to their
immediate environments.
The increment of value that often occurs when two
or more sites are combined to produce greater utility. The process
that creates plottage is called assemblage.
Excess land and surplus land
Plottage value
The components into which a property may be
divided for purposes of comparison, e.g., price per square foot, front foot,
cubic foot, room, bed, seat, apartment unit. These units usually facilitate
analysis even when the properties are not very comparable.
Units of comparison
Common units of comparison are
a. Acre
b. Square foot. Used for smaller-sized parcels, usually less than 1 acre.
c. Front foot. Usually used in waterfront or commercial properties where the most important consideration is how much frontage there is on the water
or on a busy thoroughfare.
d. Lot or plot. In some instances, an appraiser may observe a pattern in lots that are ready for improvement in which the price does not vary
based on discernible differences. In other words, a 1.5-acre parcel may sell at the same price as a 2.5-acre parcel because buyers treat them as
comparable lots.
e. Buildable unit. For development land, a pattern may develop where
builders pay consistent prices for a site based on how many units the site
will support (depending on what is allowed by zoning, topography, access,
and utilities). Some parcels may sell at a certain price per permitted unit.
Starting at the top, with the most reliable, sales data can consist of the following:
Closed Sale
Contract for sale
Listings
Offers to purchase
Options
For vacant land, non-realty items may consist of transferable development rights (TDRs) that may be conveyed from the landowner to a different landowner for future development.
Non-realty items
Your Course Handbook lists the elements of comparison as follows:
Property rights conveyed Financing terms Conditions of sale Expenditures made immediately after purchase Market conditions Location and geography Physical and geological characteristics Economic characteristics Use/zoning Non-realty items
Elements of comparison analyze
the general aspects of the sale of the subject property, whereas units of comparison are the result of a mathematical calculation. Units of comparison are the denominators we use to equate a sale price to a sale price per something, such as sale price per square foot, per acre, or per cubic foot.
During reconciliation of the comparable sales, the appraiser will use various
measures of reliability to weigh the sales for their comparability to the subject
property. The following measures can be used for that purpose
. Number of adjustments. Generally, the fewer the adjustments, the more comparable the property.
b. Gross adjustments. This is the total dollar amount of adjustments regardless of whether they are positive or negative.
c. Net adjustments. This is the net dollar amount after all plus and minus adjustments have been applied.
d. Amount of available data. This affects the overall reliability of the
approach.
Many clients require that gross adjustments not exceed ____ of the sale price and net adjustments not exceed _____ of the sale price.
25% gross adjustment
15% net adjustment
The sources of adjustments, in descending order of preference, are as follows:
Paired data analysis is a method of extracting adjustments by comparing two sales that are similar in most respects with the exception of the one for which you are seeking the adjustment.
The cost to cure is a method of deriving adjustments for the cost to effect a necessary repair or renovation
Capitalization of ground rent is a method of deriving adjustments. In this type of analysis, the appraiser compares the capitalized values of leased land parcels, incomes, or rates.
Present value calculations can be used to derive adjustments, particularly if a finite time frame is involved (like two years until the road is completed, or six months until the lease is up) in which you have a known future value and solve for present value using an appropriate discount rate..
can be used to derive an adjustment through the statistical “graphing” of sales and a trend line forecast for the subject property. This technique is very useful when value changes occur as the result of a change in only one variable like time, size, or distance from a city core, and can be done using your calculator. This technique can be used to answer questions like ‘What happens to sale price per square foot when the size of the building increases?”
Linear regression
Types of adjustments
- Percentage adjustments
2. Dollar amounts
adjustment can be made to the sale price of the comparable sale. This method is used frequently in appraisals of all property types, including land appraisals. For example, Comparable A is 10% superior in location to the subject property.
a percentage adjustment
amount adjustments can be made to the sale price of the comparable sale. This is generally the preferred method. For example, Comparable A is $10,000 inferior to the subject in topography.
Second, a whole dollar amount adjustment
preferred method
My personal method of remembering how to make these adjustments is using the adage:
If the comparable sale is Superior, Subtract.
If the comparable sale is Inferior, Increase.
A method of estimating land [or site] value in which the depreciated cost of the improvements on an improved property is estimated and deducted from the total sale price to arrive at an estimated sale price for the land; most effective when the improvements contribute little to the total sale price of the property.
Extraction
Extraction is most applicable when
the improvements can be reliably valued, such as when the improvements are either new (no depreciation) or very old (almost total depreciation).
is a procedure where the land value is represented by a certain percentage of the gross value
Allocation
When vacant land sales are rare or nonexistent, the appraiser can analyze sales of improved properties in competitive neighborhoods and apply
an allocation procedure to derive the site value
Extraction steps
a. Find an improved property sale in which the site is comparable to the
subject’s site.
b. Obtain an accurate description of the improvements.
c. Undertake a cost analysis and develop the depreciated cost of all site
improvements for the comparable sale.
d. Deduct the depreciated cost from the sale price. The residual value can
be attributed to the site.
To use the allocation procedure, the appraiser must identify
the typical land-to-property-value ratio in the subject’s area
The principles of_________ affirm that there is a normal, or
typical, ratio of land value to property value for specific types of properties
balance and contribution
Extracting a Value Indication
If the effective age is estimated at 20 years and the remaining economic life at 60 years, what is the depreciated cost of the improvements?
20/80 = 0.25 (or 25% depreciation)
$156,000 current cost x 0.75 (i.e., 1 − 0.25) = $117,000 depreciated bldg.
What is the indicated land value for the subject based on the extraction of Sale 7?
$176,000 – $117,000 depreciated cost of improvements = $59,000 (land)
Which land/site valuation procedure requires a cost estimate of the improvements
for each of the comparable sales?
A. extraction
Assemblage is the process of combining two or more sites in order to produce
greater utility. The increment of value created from assemblage is called
B. plottage
An appraiser made the following dollar adjustments to a comparable sale of
vacant land: +$5,000; −$2,000; and −$6,000. What is the gross adjustment for
the land comparable?
D. +$13,000
Components into which a property may be divided for purposes of comparison are
called
D. units of comparison.
What is the preferred method of land or site valuation when adequate data is
available?
D. sales comparison
his procedure is used to value unimproved or improved land when
subdivision and development is the highest and best use.
Subdivision development method
The value of the land is estimated by subtracting all the costs of
development (including hard costs, selling costs, contractor’s overhead
and profit, and developer’s profit) from the anticipated total of the
projected sale prices, discounted for sell-out time.
Note. In subdivision development, entrepreneurial incentive may be
referred to as developer’s profit.
Subdivision development method.
Which of these elements of comparison would an appraiser be adjusting when making an adjustment for a seller who sold too quickly because they were in a hurry?
conditions of sale
Which of the following methods of site valuation requires an appraiser to use a ratio?
The allocation method requires the use of a ratio of land to property value.
Which of the following units of comparison would be appropriate in the valuation of a waterfront property?
If frontage is the primary criteria for waterfront properties, then sales price per front foot may be the most appropriate unit of comparison.
When land has improvements that no longer contribute to value, what is the highest and best use conclusion?
demolish the improvements
Land is said to have value, while improvements contribute to value. When improvements no longer contribute to property value, demolition is indicated.
Which of the following methods of site valuation requires an appraiser to subtract the contributory value of the improvements from the sale price?
The extraction method requires the deduction of the contributory value of the improvements from the sale price of an improved property. The difference is an indication of site value.
Which of the following does the standard land valuation techniques include?
allocation
Allocation is one of the six methods of valuing land.
Which of the following terms applies to the increment in value created when two or more sites are combined to produce greater utility?
plottage
Plottage is the increment in value when two or more sites are combined to produce greater utility. The process that creates plottage is called assemblage.
An appraiser is developing a separate estimate of land value as part of an appraisal assignment. Which approach to value is the appraiser using?
cost approach
Only the cost approach requires a separate estimate of land value.
