Instructor’s Manual: Basic Real Estate Appraisal, 8th. Edition
Chapter 10
CHAPTER 10
VALUING THE SITE
STUDENT LEARNING OUTCOMES
This chapter outlines the three methods used to appraise land, and reviews the important site factors
covered in Chapter 6. Topics to be covered include:
10.1
10.2
10.3
Reasons for Appraisals of Land
The Five Methods Used to Appraise Land
How to Use Market Comparison Techniques
Class Activities
[Instructor: Complete as needed.]
Lecture [ ] Discussion [ ] Breakout Groups [ ] Other ____________[ ]
10.1 PURPOSE OF LAND OR SITE VALUE ESTIMATES
This section outlines the several purposes of site value appraisals.
Reasons for Appraisals of Land
Appraisals of vacant land are made for many market-related, legal, and public purposes, including the
following:
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Sale and purchase
Development
Feasibility studies
Land leases
Financing (Acquisition and Construction)
Government actions
Agriculture
Court actions
Allocation of Value for Tax Purposes
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Ad Valorem (or “according to value”) property tax assessments are usually imposed on land and
improvements as two separate amounts.
Income tax laws require that the purchase price of real property be allocated between the land and
improvement values, when depreciation is to be claimed.
Site Value in the Three Value Approaches
Site or land value estimates are used in all three approaches to value.
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The cost approach requires an estimate of the site value.
Certain techniques in the income approach rely on a separate site value.
The sales comparison approach may need an allocated site value to use some analysis techniques.
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Instructor’s Manual: Basic Real Estate Appraisal, 8th. Edition
Chapter 10
10.2 THE FIVE METHODS USED TO APPRAISE LAND
This section reviews the importance of highest and best use, and covers the five recognized methods of
appraising land.
Importance of Highest and Best Use
The highest and best use is defined as that reasonable and profitable use that will support the highest
land value as of the date of the appraisal.
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An opinion of highest and best use is required by USPAP in all market value appraisals.
The highest and best use provides the basis for land valuation and for selecting comparable sales.
Highest and Best Use Criteria
To qualify as the highest and best use, any suggested use must meet the following tests:
1. Physically possible
2. Legally permissible
3.
4.
Economically feasible
Most (or maximally) productive
While the sequence of applying the foregoing tests is not dictated, but Physically possible and Legally
permissible must be addressed before considering the latter two tests.
Appraising Land Using the Market Method
The market, or direct sales comparison, method is preferred above the other methods of appraising land.
Like the sales comparison approach used to appraise improved properties, the market method relies on
comparable sales.
The Basis and Criteria of Comparison
1.
The property is always compared as if it were vacant land, available for its highest and best use.
2.
All comparables should be sales of vacant land, close in time to the date of value, comparable as
to:
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Location
Physical characteristics
Zoning and/or potential use
Applying the Market Method
1.
The market method may be used to appraise all kinds of land:
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2.
When sales of comparable vacant sites or land parcels are available.
When land value is being estimated, or to allocate the land value of an improved property.
Apply the following steps, using the same standards required in the sales comparison approach:
a.
b.
Locate vacant land sales comparable to the subject.
Compare each sale with the subject property.
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Instructor’s Manual: Basic Real Estate Appraisal, 8th. Edition
Chapter 10
c.
d.
Adjust the selling prices as required for differences with the subject property.
Arrive at an indicated value.
[Instructor: Comparison and adjustment techniques are explored in Section 10.3.]
The Allocation and Abstraction Methods
1.
The allocation and abstraction methods are typically used:
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2.
In site appraisals where no vacant land sales are available.
When shared land interests are being appraised, for example, condominiums and planned
unit developments.
How to use the allocation method:
a.
b.
Locate sales of improved properties that are comparable to the subject property as to
highest and best use, and other site features, and that sold close in time to the date of
value.
Allocate the total sales price between land and buildings, relying upon one of
the following:
1)
2)
3.
A market-observed value relationship – percentage or ratio
The property tax assessment ratio
Examples of the allocation and abstraction methods, with the optional techniques cited:
a.
Allocation Method – Based upon a market-observed value relationship or ratio:
Assume a $450,000 sale of an improved property, where past research
has shown a 35% site value:
The site value allocation is: $450,000 × .35 = $157,500
b.
Abstraction Method:
Assume an improved property sales price of:
Less: depreciated cost of the improvements
The abstracted land value equals:
c.
$340,000
–156,000
$184,000
The property tax assessment ratio:
Assume a sales price of $300,000 for a property locally assessed at
$260,000: $60,000 land, and $200,000 improvements:
The ratio equals $60,000 ÷ $260,000 = 0.231, or 23.1% land value.
Land value allocation = $300,000 x 23.1% = $69,300.
4.
Limitations of the allocation and abstraction methods:
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Land value ratios vary with location and type of property.
The basis of assessment roll ratios may be outdated and/or unreliable.
Abstracted site values have limited reliability.
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Instructor’s Manual: Basic Real Estate Appraisal, 8th. Edition
Chapter 10
The Development Method
The development method requires: (1) a study of subdivided lot sales, and (2) a detailed development cost
estimate for the subject land parcel.
The development method is preferred:
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To appraise raw acreage that is ready for subdivision.
Where no comparable sales of similar acreage are available.
The steps in the development method are as follows:
1.
Estimate the number of lots to be developed.
2.
Project the total dollar amount to be realized from gross sales, based on market study of current
prices for subdivision lots.
3.
Subtract or otherwise account for all direct and indirect costs of development, promotion, and
sales. Developer’s profit may be treated in a number of ways, including:
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4.
As a percentage of gross sales, or
As a percentage of capital invested in raw land.
Conclude the value of the raw land by an analysis of the results.
[Instructor: The development method is illustrated in Example 10.1 of the text.]
The Land Residual Method
The land residual method calculates land value as a function of its contribution to the total income. It is:
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Based on the principle of surplus productivity.
A version of the income approach.
Useful when no comparable sales are available.
Suitable for either vacant or improved properties; particularly newer income-producing
properties.
This method will be covered in Chapter 14 in more detail.
10.3 HOW TO USE MARKET COMPARISON TECHNIQUES
The market comparison method of land appraisal relies on the same principles defined in Chapters 8 and
9. Techniques that are unique to site appraisals will be emphasized in this section.
Types and Sources of Data
Criteria for Comparable Sales
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All sales must be competitive with the subject property and each other.
They must be open market transactions.
They should be relatively close in time to the date of the appraisal.
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Instructor’s Manual: Basic Real Estate Appraisal, 8th. Edition
Chapter 10
Current or Prior Sale of Subject Property
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Any known agreement of sale, option, or listing of the subject property around the time of the
date of value should be considered and analyzed by the appraiser and discussed in any report.
Prior sales of the subject property should be investigated and analyzed if they have occurred
within three years of the date of value. If relevant, the appraiser must indicate how this
analysis influences the value of the subject property.
What Data to Include
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Physical data should include lot size, shape, frontage, slope, topography, etc.
Legal data should include the address, legal description, zoning, taxes, special assessments,
and public and private restrictions.
Details should include names of grantee (buyer) and grantor (seller), date, price, and terms of
sale.
Sales History of Comparables
A sales history of any comparable sales located in a speculative area should be included. Some clients
may require a sales history of all comparable properties sold during the year prior to the most current sale
(at a minimum). Each prior sale of a comparable should be analyzed by the appraiser as to its relevance to
the appraisal.
Sources of Data
Public records include:
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Recorded deeds, demolition and construction permits, subdivision map applications
Property tax and assessment records
Other sources of land sales data:
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Buyers and sellers
Brokers
Land developers
Realty board listings (MLS)
Title companies
Lenders
Newspaper advertisements
Market data services
Appraisers’ files
Verification of the Data
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The price and terms of the sale should be verified with a principal party; favorable interest
rates and terms are common in land sales.
Data from public records does not always indicate the full purchase price. For example,
transfer tax amounts shown on recorded deeds may reflect only the cash consideration.
Outstanding balances of assumed loans may not be included.
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Instructor’s Manual: Basic Real Estate Appraisal, 8th. Edition
Chapter 10
Major Land Features Affecting Value
The land features affecting value, discussed in Chapter 6, are listed here.
Physical Features
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Size
Shape
Frontage
Width
Depth
Plottage
Type of lot
Topography
Other attributes
Legal and Locational Features
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Legal form of ownership (airspace condominiums, detached lot, etc.)
Zoning: use and density regulations; legal nonconforming use
Environmental protection laws
Easements, right-of-way regulations, deed restrictions, and private encumbrances
Negative locational factors, e.g., earthquake, flood, and waste hazards
Utilities and other municipal or public services
The level of property taxes
Analyzing the Sales Data
Land sales must be analyzed and compared, as in the sales comparison approach with improved
properties.
Elements of Comparison
The four elements of comparison are:
1.
2.
Terms/conditions of sale
Time of sale
3.
4.
Location
Physical characteristics
Vacant land sales are often financed by the seller. Lower interest rates and subordination clauses are
common. (The latter is an agreement by the seller to subordinate the loan, usually to a future construction
or development loan.)
Units of Comparison for Land Appraisals
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Residential lots are often sold and compared by selling price per lot, square foot, or acre.
Lots zoned for multiple-residential or condominium projects may sell at the price per
dwelling unit that can be developed.
Commercial or industrial land is usually sold by the selling price per square foot, but larger
parcels are sold by the acre.
Office and mixed-use properties are often sold on a price per buildable square foot basis.
High-valued commercial property may be sold on a front foot basis.
Several analyses may be needed to discover the best unit of comparison (see Example 10-2).
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Instructor’s Manual: Basic Real Estate Appraisal, 8th. Edition
Chapter 10
The Adjustments
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Land prices are adjusted with either lump-sum or percentage amounts. You can review these
adjustment methods in Chapter 9.
A sales adjustment grid is recommended. (See Text Example 10.3, below.)
Give the greatest weight to the sales requiring the least total absolute or gross adjustment
(that is, without considering plus or minus signs).
SUMMARY
[Instructor: Refer back to the beginning of your outline, or review the following terms and
concepts to summarize this session.]
Important Terms and Concepts
Abstraction method
Allocation method
Developer’s profit
Development method
Elements of comparison
Highest and best use criteria
Interim use value
Land residual method
Market method
Plottage value
REVIEWING YOUR UNDERSTANDING
[Instructor: See end of text chapter for student review questions.]
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Sales history
Site characteristics
Units of comparison
Instructor’s Manual: Basic Real Estate Appraisal, 8th. Edition
Chapter 10
STUDENT EXERCISES
[Instructor: Suggested Multiple Choice and True/False questions are available to use for Chapter
10.]
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