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The Student Handbook to T HE A PPRAISAL OF R EAL E STATE 1 Chapter 16 Land and Site Valuation.

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The Student Handbook to THE APPRAISAL OF REAL ESTATE 1 Chapter 16 Land and Site Valuation
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The Student Handbook toTHE APPRAISAL OF REAL ESTATE

1

Chapter 16

Land and Site Valuation

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 2

Relation to Appraisal Principles

Value concepts and principles Property rights and public controls Physical characteristics and site improvements Highest and best use

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 3

Applicability and Limitations of Valuation Techniques

Sales comparison Market extraction Allocation Direct capitalization: land residual Direct capitalization: ground rent capitalization Yield capitalization: discounted cash flow analysis

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 4

Sales Comparison

Preferred method Sequence of adjustments Gross and net adjustments Bracketing the subject property Adjustments for items of dissimilarity

Comparable inferior, add (CIA) Comparable superior, subtract (CSS)

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 5

Sales Comparison Grid

Subject Property Comparable 1 ADJ.$ Comparable 2 ADJ.$

Address 8225 Washington Blvd

Sales price $0 $79,000 $55,000

Price/sq. ft. $0 $2.13 $3.61

Rights transferred Fee Simple Fee simple 0.00% Fee simple 0.00%

Subtotal $79,000 $55,000

Financing Assume cash Contract sale -5.00% Cash to seller 0.00%

Subtotal $75,050 $55,000

Conditions of sale Arm's-length Arm's-length 0.00% Arm's-length 0.00%

Subtotal $75,050 $55,000

Market conditions 3% Now 5 months ago 1.25% 4 months ago 1.00%

Subtotal $75,988 $55,550

Topography Rolling Level 5.00% Level 5.00%

Location Cul de sac Corner lot 10.00% Cul de sac 0.00%

Wooded 10% 50% -8.00% 50% -8.00%

Flood area 0.00% 0.00% 0.00% 0.00% 0.00%

Size (sq. ft.) 22,000 37,026 15,246

Size (acres) 50% 0.5051 0.85 -17.25% 0.35 7.76%

Zoning Residential Residential 0.00% Residential 0.00%

Utilities Public water/sewer Public wtr/swr 0.00% Public wtr/swr 0.00%

Type (platted) Platted Platted 0.00% Platted 0.00%

Improved property $300,000 $450,000 $200,000

Price range 0.05% $400,000 $550,000 -7.50% $250,000 6.25%

Other factors None None 0.00% None 0.00%

Net adjustment N/A -17.75% 11.01%

Indicated value N/A $62,500 $61,661

1430 E. 82nd Street 1710 E. 80th Street

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 6

Paired Data Sales Analysis Example

Market Street 50’ R/WLot #1 Lot #2 Lot #4 Lot #6Sold $25,000 Sold $23,000 Sold $24,000 Sold $26,0006 mos. ago 12 mos. ago 6 mos. ago 6 days ago

Lot #9 Lot #12Sold $26,000 Sold $27,000now 6 days ago

Main Street 50’ R/WLot #13 Lot #14 Lot #15Sold $27,000 Sold $24,000 subjectNow 12 mos. agoLot #19 Lot #20 Lot #23Sold $28,000 Sold $25,000 Sold $27,000Now 12 mos. ago now

Lake Street

Lot #3 Lot #5

Lot #7 Lot #8 Lot #10 Lot #11

Lot #16 Lot #17 Lot #18

Lot #21 Lot #22 Lot #24

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 7

Paired Data Sales Analysis Example – Answers

The subject property is a lot in the middle of the block on Main Street (#15) and the comparable sales are equal to the subject in all other elements of comparison. What is the value? The answer is listed in the table below. The fact that the answers are all the same is not an accident or because of how the data was created; it is the process. Measuring the difference in sale price to explain the difference in the properties should narrow the range of indicated values.

Lot # 1 Lot # 2 Lot # 4 Lot # 6 Lot # 9 Lot # 12 Lot # 13 Lot # 14 Lot # 19 Lot # 20 Lot # 23

$25,000 $23,000 $24,000 $26,000 $26,000 $27,000 $27,000 $24,000 $28,000 $25,000 $27,000

Sale Date 6 mos. 12 mos. 6 mos. Now Now Now Now 12 mos. Now 12 mos. Now

+1,000 +2,000 +1,000 0 0 0 0 +2,000 0 +2,000 0

Street Location Market Market Market Market Main Main Main Main Lake Lake Lake

+1,000 +1,000 +1,000 +1,000 0 0 0 0 -1,000 -1,000 -1,000

Corner Yes No No Yes No Yes Yes No Yes No No

-1,000 -1,000 -1,000 -1,000 -1,000

Adj.Price $26,000 $26,000 $26,000 $26,000 $26,000 $26,000 $26,000 $26,000 $26,000 $26,000 $26,000

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 8

Alternative Techniques

Market extraction Commonly used to estimate land values when

comparable sales are not available Land value is the net result of subtracting the

value of the improvements by the cost approach from the sale price of an improved property.

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 9

Land Value via Market Extraction

$301,000

Residence cost new 2,800 @ $75 = $210,000

Basement cost new 500 @ $25 = $12,500

Porches, etc. cost new 500 @ $25 = $12,500

Garage cost 750 @ $25 = $18,750

Total cost new of $253,750

Total depreciation (all causes) 12% -$30,450

$223,300 -$223,300

-$12,500

$65,200

Depreciated value of site improvements

Estimated land value

Gross sale price

Depreciated value of building improvements

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 10

Page 235

= $140,000

= -$110,000

= -$5,000

= $25,000

Overall value

Less value of the building(s)

Less value of site improvements

Extracted site value

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 11

Alternative Techniques, continued

Allocation Uses land-to-building or land-to-property-value

ratios in improved areas to support a land value in the subject area when no land sales are available

Subject and comparable properties must be improved to their highest and best use or this technique is less applicable.

The ratio from one area and price range is not necessarily transferable to another area or price range.

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 12

Land Value via the Allocation Method

Sale 1 Sale 2 Sale 3 Sale 4

Sale price $250,000 $300,000 $220,000 $200,000

Estimated land value -$50,000 -$56,000 -$45,000 -$40,000Estimated building value$200,000 $244,000 $175,000 $160,000

Land/property ratio 20.00% 18.67% 20.45% 20.00%

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 13

Alternative Techniques, continued

Direct capitalization: ground rent capitalization Establishes a ratio of income to value in the

comparable properties and then uses that ratio for the subject property

Can be an excellent method if the market thinks this way

Requires very similar expenses and upside potential to be accurate

Can be incorrect if the risk is not the same in comparable properties and the subject property

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 14

Extraction and Application of Overall Capitalization

Example of extraction and application of overall capitalization of a single year’s income

Sale Income Sale Price Cap. Rate$1 $42,000 / $350,000 = 12.00%$2 $36,000 / $300,000 = 12.00%$3 $37,000 / $295,000 = 12.54%$4 $19,000 / $175,000 = 10.86%$5 $8,600 / $75,000 = 11.47%

Subject $12,000 / 12% = 100,000$

I

R V

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 15

Alternative Techniques, continued

Direct capitalization: land residual technique Uses the income capitalization approach to

isolate income to the land by segregating income from the building from overall income

Requires capitalization rates for both land and building, which are difficult to get with similar risk and income patterns

This is a theoretical technique because buyers and sellers do not buy land and buildings, rather they buy rights in realty (e.g., the leased fee and leasehold interests).

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 16

Alternative Techniques, continued

Yield capitalization: discounted cash flow analysis Not used in some markets at all but quite

applicable in others Assumes land value is based on development

potential, not on alternative properties Does not consider other listings but only that it

is feasible to develop the project

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 17

Land Value by Discounted Cash Flow Analysis

Quarter 1 2 3 4 5 6 7 8

Lots per quarter $8 $8 $8 $8 $8 $8 $8 $8

Sale price per lot $47,500 $47,500 $47,500 $47,500 $47,500 $47,500 $47,500 $47,500

Estimated PGI $356,250 $356,250 $356,250 $356,250 $356,250 $356,250 $356,250 $356,250

Development costs $200,000 $200,000 $200,000 $200,000 $0 $0 $0 $0

Real estate taxes $400 $0 $400 $0 2,000 $0 2,000 $0

Sales commission 7% 24,938 24,938 24,938 24,938 24,938 24,938 24,938 24,938

Advertising, etc. 4% 14,250 14,250 14,250 14,250 14,250 14,250 14,250 14,250

Entrepreneurial incentive 20% 71,250 71,250 71,250 71,250 71,250 71,250 71,250 71,250

Total expenses $310,838 $310,438 $310,838 $310,438 $112,438 $110,438 $112,438 $110,438

Net cash flow $45,412 $45,812 $45,412 $45,812 $243,812 $245,812 $243,812 $245,812

Discounted @ 12% 0.9709 0.9426 0.9151 0.8885 0.8626 0.8375 0.8131 0.7894

Present value $44,091 $43,182 $41,556 $40,704 $210,312 $205,868 $198,242 $194,044

$977,999

Less estimated expenses

Present value of land

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 18

Problems

Suggested solutions begin on page 426.

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 19

Problem 12—Suggested Solution

Subject Property Comparable 1 Adj. $ Comparable 2 Adj. $ Comparable 3 Adj. $

Address 1234 W. 87th St

Sale price $45,000 $60,000 $52,000

Rights transferred Fee simple Fee simple 0% Fee simple 0% Fee simple 0%

Subtotal 45,000$ 60,000$ 52,000$

Financing Assume cash Cash to seller 0% Cash to seller 0% Listing only 0%

Subtotal 45,000$ 60,000$ 52,000$

Conditions of sale Arm's-length Arm's-length 0% Arm's-length 0% Arm's-length 0%

Subtotal 45,000$ 60,000$ 52,000$

Market conditions Current 6 months ago +1.50% 9 months ago +2.25% Current listing 0.00%

Subtotal 45,675$ 61,350$ 52,000$

Topography Rolling Rolling 0% Level +5% Level +5%

Location River township River township 0% River township 0% River township 0%

Wooded 75% 25% +5% 75% 0% 25% 5%

Flood area 10.00% Equal 0% Equal 0% Equal 0%

Size (acres) $1.2500 $1.0000 +5% $1.7500 -10% $1.0000 +5%

Zoning Residential R1 Residential R1 0% Residential R1 0% Residential R1 0%

Utilities All public All public 0% All public 0% All public 0%

Type (platted) Platted Platted 0% Platted 0% Platted 0%

Improved property $200,000 $150,000 $300,000 $300,000

Price range $300,000 $250,000 $400,000 $400,000

Other factors None None 0% None 0% None

Net adjustment N/A +15% -15% +5%

Indicated value N/A 52,526 52,148 54,600

9001 Kissel Road 1112 W. 91st Street 815 W. 86th Street

+5% -10% -10%

Student Handbook to THE APPRAISAL OF REAL ESTATEChapter 16 20

Problem 13—Suggested Solution

Subject

Address 123 Nicole Street

Data source N/A

Sale price $0 $560,960 $350,000

Price/sq. ft. $0 $2.61 $3.48

Rights transferred Fee simple Fee simple Fee simple

Financing Assume cash Cash sale Cash sale

Conditions of sale Arm's length Arm's length Arm's length

Date of sale Current 12 months ago Inferior 18 months ago Inferior

Topography Level Level Level

Location West side East side Inferior West side

Access 1 point 2 points Superior 2 points Superior

Visibility Avg./industrial Equal Superior Superior

Flood area 0.00% 0.00% 0.00%

Road frontage 166 341 Superior 305 Superior

Average depth 981 630 330

Size (sq. ft.) 162,818 215,000 100,500

Size (acres) 3.7378 4.936 Inferior 2.301 Superior

Zoning Industrial I3S Industrial I3S Industrial I4S Superior

Utilities All public All public All public

Other factors None None None

Indicated value per sq. ft. A little more than $2.61 Much less than $3.48

Co-op # 29761 Co-op # 29761

505 Jeanine Drive 123 Eunice Lane

Comparable Land Analysis (Qualitative Analysis)

Comparable 1 Comparable 2


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