Site Valuation & Construction Basics

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Mastering Residential Construction & Valuation

Chapter 4: Site Valuation & Construction Basics

I. Introduction: The Symbiotic Relationship of Site and Structure

The appraisal of residential property necessitates a holistic understanding of both the site – the land upon which the structure resides – and the improvements – the buildings and enhancements made to the land. These two components are inextricably linked; the value❓ of one directly impacts the value of the other. Furthermore, the highest and best use (HBU) analysis, a cornerstone of valuation, hinges on understanding the site’s potential and the constraints imposed by its physical and legal characteristics.

II. Site Valuation: Principles and Methodologies

The determination of site value is a critical step in several appraisal techniques, including the cost approach to value and the building residual technique. A separate site valuation is necessary if either of these techniques is used in an appraisal.
A. The Importance of Separate Site Valuation
1. Legal and Regulatory Requirements: Many jurisdictions mandate separate valuation of site and improvements, especially in appraisals related to property tax assessment and eminent domain (condemnation). This ensures fairness and transparency in taxation and compensation.

2. Foundation for Valuation Techniques:
   • Cost Approach: This approach explicitly requires a separate estimate of the site’s value, to which the depreciated replacement cost of the improvements is added.
   • Building Residual Technique (Income Capitalization): This technique, relevant for income-producing properties, isolates the income attributable to the building by deducting the income attributable to the land. Accurate land valuation is therefore essential.

B. Defining the Site: Key Characteristics

1. Legal Description: The precise legal boundaries of the site, as defined by a metes and bounds description, rectangular survey system, or lot and block system, are paramount. This establishes the extent of the appraiser’s valuation.

2. Physical Attributes:

   • Topography: The slope, elevation, and surface features of the land. Steep slopes may increase construction costs, while desirable views can increase value.
   • Soil Composition: The type and stability of the soil. Poor soil conditions (e.g., expansive clay, high water table) necessitate costly remediation measures. Soil Liquefaction which is a soil condition in which the soil becomes virtually a liquid during an earthquake. High groundwater levels can create the need for sump pumps. Finally, certain clay deposits may create slide conditions on hillsides. If an appraiser suspects any of these conditions, he/she should notify the client, and the appraisal may need to be carried out utilizing an Extraordinary Assumption, a Hypothetical Condition, or both.
   • Drainage: The ability of the site to effectively manage surface water runoff. Poor drainage can lead to erosion, water damage, and reduced usability.
   • Access and Utilities: Availability of road access, water, sewer, electricity, gas, and telecommunications infrastructure. Connection fees and availability impact development feasibility.

3. Legal and Regulatory Considerations:

   • Zoning: Permitted uses, density restrictions, setback requirements, and height limitations. Zoning regulations significantly impact development potential.
   • Easements and Restrictions: Any easements (rights of way for utilities or access) or restrictive covenants (limitations on use or development) that affect the site.
   • Environmental Regulations: Applicable environmental regulations pertaining to wetlands, endangered species, or hazardous materials.

C. Site Valuation Methodologies
1. Sales Comparison Approach: The most reliable and widely used method. It involves analyzing sales of comparable vacant sites, adjusting for differences in key characteristics.

  *   **Mathematical Representation:**

      `Site Value (Subject) = Sales Price (Comparable) +/- Adjustments`
      *   `Subject Value = Comparable Sales Price +/- Adjustments`

  *   **Elements of Comparison:**
      *   *Location:* Adjustments for differences in neighborhood desirability, proximity to amenities, and traffic patterns.
      *   *Size and Shape:* Adjustments for lot size, frontage, and overall shape. Irregularly shaped lots may be less desirable.
      *   *Zoning and Land Use:* Adjustments for differences in permitted uses and zoning restrictions.
      *   *Physical Characteristics:* Adjustments for topography, soil conditions, and drainage.
      *   *Date of Sale:* Adjustments to account for changes in market conditions between the comparable sale date and the appraisal date.
      *   *Terms of Sale:* Adjustments for non-market financing or unusual sale conditions.

  *   **Example:**

      A comparable site, identical to the subject in all aspects except for its smaller size (10,000 sq ft vs. the subject's 12,000 sq ft), recently sold for $100,000. Market analysis indicates that a 1,000 sq ft size difference contributes $5,000 to the selling price. The market demand varies for a 2,000 sq ft difference. The appraiser would add 10,000 for this site valuation.

      `Subject Value = $100,000 + $10,000 = $110,000`

2. Allocation Method: This method derives site value by applying a ratio to the overall property value, derived from comparable sales of improved properties.

   • Formula:

     Site Value = Total Property Value x Allocation Ratio

   • Example:

     Comparable properties in the area typically have a land-to-total value ratio of 20%. A comparable improved property sold for $300,000.

     Site Value = $300,000 x 0.20 = $60,000

   • Limitations: Accuracy depends on the consistency of the land-to-total value ratio within the market.

3. Extraction Method: This method deducts the depreciated cost of the improvements from the overall property value to arrive at the site value.

   • Formula:

     Site Value = Total Property Value - Depreciated Cost of Improvements

   • Example:

     An improved comparable property sold for $250,000. The depreciated replacement cost of the improvements is estimated to be $150,000.

     Site Value = $250,000 - $150,000 = $100,000

   • Limitations: The accuracy depends on accurately estimating the depreciation of the improvements.

4. Land Residual Method: Separates income attributable to the land and capitalizes it. Requires accurate estimation of expenses and costs, income, and rate.

   • Formula: V=I/R

   • Example: Capitalization rate =25%, Income $40,000
     Value = 40,000/25% = $160,000

5. Ground Rent Capitalization Method: Applies an annual rate for how much the land will generate.

   • Formula: V=I/R

   • Example: Ground Rent = $50,000, Rate = 10%
     Value = $50,000/10% = $500,000

6. Development Method: Analyzes the costs of developing.
   * Formula: Volume = Length x Width x Height

III. Construction Basics: A Foundation for Valuation

An understanding of residential construction techniques and materials is essential for accurately assessing property condition and quality, estimating costs, and identifying potential defects.

A. Foundation Systems
1. Types:
* Slab-on-Grade: A concrete slab poured directly on the ground. Suitable for stable soil conditions and warmer climates.
* Basement: A fully or partially below-grade enclosed space. Provides additional living or storage area.
* Crawlspace: An unexcavated area beneath the first floor, providing access for utilities and ventilation.
* Pier and Beam: A system of vertical piers supporting horizontal beams, creating a raised floor. Often used in areas with unstable soils or flood risk.
2. Materials:
* Concrete: The most common material, providing strength and durability.
* Reinforced Concrete: Concrete with embedded steel reinforcing bars (rebar) to increase tensile strength.
* Concrete Blocks (CMUs): Hollow concrete blocks used to construct foundation walls.

B. Framing Systems
1. Types:
* Platform Framing: The most common method, where each floor is constructed as a separate platform.
* Balloon Framing: Studs extend continuously from the foundation to the roof. Less common due to fire safety concerns.
* Post and Beam: Heavy timber or steel posts and beams support the roof and floors, creating large open spaces.

2. Components:
   • Studs: Vertical framing members that form the walls.
   • Joists: Horizontal framing members that support the floors and ceilings.
   • Rafters: Inclined framing members that support the roof.
   • Sheathing: Exterior covering (plywood or OSB) that provides structural support and a nailing surface for siding.

C. Exterior Finishes
1. Siding Materials:
* Wood: Traditional option, requiring regular maintenance.
* Vinyl: Low-maintenance, durable, and affordable.
* Fiber Cement: Durable and fire-resistant, mimicking the appearance of wood.
* Brick: Durable and aesthetically pleasing.
* Stucco: A cement-based plaster finish, often used in warmer climates.

2. Roofing Materials:
   • Asphalt Shingles: The most common and affordable option.
   • Tile: Durable and aesthetically appealing, suitable for warmer climates.
   • Metal: Durable, fire-resistant, and energy-efficient.
   • Slate: High-end, long-lasting material.
   • Solar Shingles: Renewable option

D. Interior Finishes
1. Wall Finishes:
* Drywall: The most common wall finish, providing a smooth surface for painting or wallpaper.
* Plaster: A traditional wall finish, offering a durable and aesthetically pleasing surface.
2. Floor Finishes:
* Hardwood: Durable, long-lasting, and aesthetically appealing.
* Carpet: Provides warmth, comfort, and noise reduction.
* Tile: Durable, water-resistant, and easy to clean.
* Laminate: Affordable and easy to install, mimicking the appearance of wood or tile.
* Bamboo Flooring: An eco-friendly renewable resource.

IV. Construction Quality and Functional Utility

Assessing the construction quality and functional utility of a residential property is crucial for determining its market value. This involves evaluating the materials used, the workmanship, the design, and the overall suitability of the property to the needs and preferences of typical buyers.

A. Quality Grades
1. High Quality: Superior materials, meticulous workmanship, and high-end finishes.
2. Average Quality: Standard materials, adequate workmanship, and typical finishes.
3. *Low Quality: Inexpensive materials, poor workmanship, and minimal finishes.

B. Functional Utility
1. Floor Plan Efficiency: Efficient layout, adequate room sizes, and minimal wasted space.
2. Adequacy of Amenities: Sufficient number of bathrooms, closets, and storage space.
3. *Accessibility: Ease of access for all occupants, including those with disabilities.
4. Energy Efficiency:* Insulation, energy-efficient windows and doors, and efficient heating and cooling systems.

C. Green Technology (Green features)
* Tankless Water Heaters: An energy efficient choice.
* Solar Shingles: A sustainable way to power your roof

D. Depreciation
Depreciation is the difference in value between the cost (new) of the improvements and their current value, regardless of the reasons for the difference.

Formula to determine the Property Value of Site (by Cost Approach):
Property Value of Site (by Cost Approach) = Replacement Cost New + Value of Site (by Cost Approach) + Depreciation
Where:
* Depreciation = Difference in value between the cost (new) of the improvements and their current value, regardless of the reasons for the difference.

V. Conclusion: The Appraiser’s Role

The appraiser serves as the bridge between the scientific principles of site assessment and construction technology, and the economic realities of the real estate market. By combining a thorough understanding of site characteristics, building techniques, and HBU analysis, the appraiser can arrive at a well-supported and credible estimate of value, which is essential for informed decision-making by buyers, sellers, lenders, and other stakeholders.

VI. Key Equations:

• Site Value (Subject) = Sales Price (Comparable) +/- Adjustments
• Site Value = Total Property Value x Allocation Ratio
• Site Value = Total Property Value - Depreciated Cost of Improvements
• V=I/R Volume = Length x Width x Height

This expanded chapter provides a comprehensive overview of site valuation and construction basics, incorporating the requested scientific depth, practical examples, and mathematical formulas. I tried to address the request to have the content reflect what an appraiser would see and use.