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Methods of Site Valuation. 1. Sales Comparison 2. Allocation 3. Extraction 4. Land Rent Capitalization 5. Land Residual 6. Subdivision Development. Wayne Foss, MBA, MAI Wayne Foss Appraisals, Inc . Email: wfoss@fossconsult.com. Underlying ideas.
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Methods of Site Valuation 1. Sales Comparison 2. Allocation 3. Extraction 4. Land Rent Capitalization 5. Land Residual 6. Subdivision Development Wayne Foss, MBA, MAI Wayne Foss Appraisals, Inc. Email: wfoss@fossconsult.com
Underlying ideas • Site is valued as though vacant and ready for its legal optimum, of highest and best, use • Appraisal techniques, numbers and formulas may be used to provide a foundation for judgement; but never a substitute for judgement • The market decides how much a site is worth or market value; “The market talks and the appraiser listens!”
1. Sales Comparison Approach • Based on idea that value is indicated by actual sales prices of similar sites. • Accomplished by comparing the appraised site to other similar, competitive, comparable sites which have recently sold. • Comparison adjustments are made to the price for differences; • positive (+) when subject is superior • negative (-) when subject is inferior
2. Allocation (%) • Investigate market standard ratio; what % that site represents of the total price • Example: from the market typically find: • Total Property 100% • less (-) improvements 80% • equal (=) site 20% • Then apply the site % to the total property values typical of subject type and location to find estimated contribution of the site.
3. Extraction • Estimate of site value based on deducting the estimated contribution of improvements from total property sales prices • Example: from the market typically find: • Sale of Similar property $10,000 • less (-) improvements contribution 6,000 • equal (=) site contribution $ 4,000 • This is done for several properties similar to subject situation to provide the site value estimate.
4. Land Rent Capitalization • Used when a property is producing fair market income under a ‘land lease’ and a market capitalization rate can be derived from the market (sales of land leased at time of sale) • Example: subject is under land lease with fair market rent: • Annual Income to owner after all expenses (such as insurance and real property tax): $10,000 • Capitalization Rate (RL) from market: 10% • Indicated Land Value = I/R or: $10,000 0.10 = $100,000
5. Land Residual • Used when a total property total market net income is known or estimated, and land and building capitalization rates may be found in the market. • For example: if we find a 2% recapture, or “return of” rate and 8% “return on” investment in the market, and … • Net Operating Income: $100,000 • Less income to the Building: 35,000 (if building value $350,000 x 10% bldg. capn’ rate(RB)) • Residual to the land: $ 65,000 • Land Value: (V=I/RL); $65,000 0.08 = $812,500
6. Subdivision Development • Used for land with near-term subdivision potential. Finding how much a developer would pay for the land considering potential revenue from development, less allowance for direct and indirect outlays, profit, and time delay. • Example: (oversimplified) • Revenue: 100 lots @ $5,000 = $500,000 • Less Development expense & Profit incentive: $400,000 • Net to the Land: $100,000 • Present worth @ xx% for # years: $ 65,000 • Note: time delay & profit must be included! • General layout is a discounted cash flow analysis
Key Points: • A site is valued as though vacant and ready for its highest and best use, or legal optimum use. • Sales Comparison approach is normally preferred; it works best if there is sufficient recent comparable sales data • Sales should be similar location, size, financing, amenities, AND have the same highest and best use as the subject. • Data should always be confirmed to find motivations, financing impact, and other details.
Key Points, continued ... • Comparison adjustment amounts must be from market information • Selection of unit-of-comparison must be based on market standards • Formulas and tables to adjust for items such as corner influence and depth are usually too abstract and simply don’t relate sufficiently to use. • Appraisal techniques provide a basis, not a substitute, for judgement in the final conclusion.
There are several ways to estimate the market value of a site as though vacant Are there any Questions? Wayne Foss, MBA, MAI, Fullerton, CA USA Phone: (714) 871-3585 Fax: (714) 871-8123 Email: wfoss@fossconsult.com
