Site Valuation Techniques: A Comprehensive Guide

Site Valuation Techniques: A Comprehensive Guide

(Chapter in: “Mastering Real Estate Appraisal: Data Collection and Analysis”)

Description: Unlock the secrets to accurate real estate appraisal with our comprehensive course on data collection and analysis! Learn how to identify, verify, and interpret crucial market data❓, including comparable sales, financing terms, cost data, and income/expense information. Discover cutting-edge mobile apps and technologies that streamline your workflow and enhance precision. Elevate your appraisal skills and make confident, data-driven decisions in today’s dynamic real estate market.

I. Introduction: The Significance of Site Valuation

In real estate appraisal, accurate site valuation is paramount. It serves as a cornerstone for several critical appraisal methodologies and is particularly crucial in:

• Cost Approach to Value: As highlighted in the provided book content, the cost approach relies heavily on an accurate site value estimate. The formula, which will be explored later, hinges on this separate valuation.

• Building Residual Technique (Income Capitalization): While covered extensively in later chapters, it’s important to note that the building residual technique, a key component of the income approach, also necessitates a discrete site valuation to isolate the income attributable to the improvements.

• Legal and Regulatory Compliance: The book content points out that certain appraisals, especially those for property tax assessments and eminent domain proceedings (condemnation), are legally mandated to include a separate site valuation. This arises from the specific requirements outlined within the appraisal assignment’s scope.

This chapter will explore site valuation techniques in depth, emphasizing their scientific basis and practical application within the broader context of real estate appraisal. We will focus on methodologies aligned with accurate data collection and analysis, crucial skills emphasized within the “Mastering Real Estate Appraisal” course. The integration of mobile apps and technologies, as highlighted in the course description, will be discussed as it relates to streamlining data collection and enhancing site valuation accuracy.

II. Understanding the Scientific Basis of Site Valuation

Site valuation is not merely an art but a process rooted in economic principles and market analysis. Several scientific theories underpin these techniques:

• The Principle of Substitution: This core economic concept posits that a rational buyer will pay no more for a property than the cost of acquiring an equally desirable substitute. In site valuation, this means comparable sites guide the subject property’s value.

• The Principle of Anticipation: The value of a site is based on the future benefits it’s expected to provide. This incorporates potential development opportunities and future income streams into the current site value. As noted in the provided book content, the appraiser must always consider the possible future uses of the property.

• Supply and Demand Dynamics: The fundamental economic forces of supply and demand profoundly influence site values. Scarcity drives up value, while oversupply leads to decline. Comprehensive regional, community, and neighborhood data, as covered in Chapter 5, is key to understanding these dynamics.

III. Highest and Best Use Analysis: Setting the Stage for Accurate Site Valuation

Before applying any valuation technique, a rigorous Highest and Best Use (HBU) analysis is mandatory. The HBU is defined as: The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.

The HBU determination involves four key criteria:

1. Legally Permitted Use: The use must comply with existing zoning regulations, building codes, and any deed restrictions. An appraiser must verify zoning information and understand its implications. Use mobile apps to access municipal zoning maps and regulations in the field, ensuring accurate data collection and compliance.

2. Physically Possible Use: The site’s size, shape, topography, soil conditions, and accessibility must accommodate the proposed use. Soil testing data or geological surveys, sometimes accessible through online databases, can inform this assessment.

3. Financially Feasible Use: The use must generate sufficient income or utility to justify the investment. This requires analyzing market demand, construction costs, and potential revenue streams. Data collection involves gathering cost data and income/expense information, key skills that this course aims to develop.

4. Maximally Productive Use: Among all feasible uses, the HBU is the one that yields the highest net return or present worth. This requires comparing the financial outcomes of various potential uses and selecting the most profitable one. Applying discounted cash flow analysis techniques, as mentioned later in relation to the Development Method, is vital in this comparison.

The HBU analysis further differentiates between:

• HBU as if Vacant: This assumes the site is unimproved and considers all potential uses, providing a baseline for comparison.

• HBU as Improved: This considers the existing improvements and their contribution to value, taking into account the cost of demolition or renovation. The cost approach, as outlined in the book content, is used to estimate the reproduction or replacement cost of the improvements, and also in the analysis of depreciation due to deterioration or other causes.

The HBU guides the entire valuation process, influencing the selection of comparable properties and the application of appropriate valuation techniques. As mentioned in the book content, the use of the appraisal will affect the appraiser’s selection of data, and also the appraiser’s judgments in the reconciliation phase of the appraisal.

IV. Site Valuation Techniques: A Comprehensive Overview

The book content lists six techniques for land or site valuation. This section will present a scientific explanation of each.

1. Sales Comparison Method: The most reliable and widely accepted technique. It relies on comparing the subject site to similar sites that have recently sold. The equation is:
   Subject Value = Comparable Sales Price +/- Adjustments
   (as shown in the book’s content section on the Sales Comparison Approach)

   • Data Collection: This requires diligent research and verification of sales data. Mobile apps can facilitate this process by providing access to MLS databases, public records, and comparable data providers while in the field. However, remember the book’s caution to supplement form reports with an addendum when necessary to ensure compliance with USPAP.

   • Elements of Comparison: The provided book content highlights the importance of identifying similar properties that are truly “comparable” to the subject property; and making the proper adjustments to the sales prices of the comparable properties to account for any differences between the subject property and the comparables.
     Adjustments are made to the comparable’s sale price for differences in:

     • Property Rights Conveyed: Fee simple vs. leasehold, mineral rights, etc.
     • Financing Terms: Favorable financing can inflate sale price, requiring A downward adjustment❓❓.
     • Conditions of Sale: Arm’s length transaction vs. forced sale, relationship between buyer and seller.
     • Expenditures Immediately After Sale: Costs to repair environmental contamination or re-zone.
     • Market Conditions: Changes in economic conditions over time. A market conditions adjustment can take a significant portion of the value to take account of changes in market value.
     • Location: Neighborhood desirability, proximity to amenities, views.
     • Physical Characteristics: Size, shape, topography, soil conditions.
     • Economic Characteristics Income, expenses, lease provisions, management, and tenant mix.

     The book’s case/example concerning the extra bath in the comparable property illustrates this adjustment process.
     Data Verification: Verify all data with at least two independent sources.

     Mathematical Adjustment: Calculate adjustments accurately, understanding the impact of compounding percentage adjustments.

   • Practical Application & Experiment: Suppose you are valuing a 1-acre residential lot in a suburban area. You find three comparable sales with the following characteristics:

     • Comparable 1: 1.1 acres, sold 3 months ago for $100,000. Requires a -5% adjustment due to larger lot size, and a +2% adjustment for a better view.
     • Comparable 2: 0.9 acres, sold 6 months ago for $95,000. Requires a +5% adjustment due to the smaller lot size, and a +3% adjustment due to market appreciation over the last 6 months.
     • Comparable 3: 1 acre, sold 1 month ago for $105,000. Requires a -3% downward adjustment because it’s located on a busier street.

     Calculate the adjusted sale prices for each comparable. Then, reconcile these adjusted values to arrive at an estimated value for the subject property.

2. Allocation Method❓❓: (2nd Method) This technique allocates a portion of the total property value to the land. The equation is:

   Land Value = Total Property Value x Allocation Percentage

   • Data Collection: Market data on land-to-value ratios for similar properties.
   • Scientific Basis: Assumes a predictable relationship between land and improvement values.
   • Limitations: The allocation percentages will not be constant in different situations, and therefore are often incorrect. As noted in the book content, the allocation method does not take into consideration the variation in the value of improvements.

   • Practical Application: Often used in mass appraisals for tax assessment where quick approximations are needed.

   • Experiment: Find several comparable properties with differing allocations and do a statistical study on how each property compares to current market prices.

3. Extraction Method: (3rd Method) The depreciated cost of the improvements is extracted from the sales price to arrive at the land value. The equation is:

   Land Value = Sale Price – Depreciated Cost of Improvements

   • Data Collection: Sales data on improved properties and accurate estimates of improvement costs and depreciation.
   • Scientific Basis: Relies on accurate depreciation estimates, which can be challenging.
   • Limitations: A common situation is that the value of the improvements cannot be accurately determined.
   • Practical Application: Useful when valuing older properties where land value is a significant component of the total value.
   • Experiment: Find two properties, one new and one older and see if your results compare to current market values.

4. Development Method: (4th Method) Also known as the “subdivision development method,” this projects the income from the sale of developed lots, deducts all development costs, and discounts the resulting net income stream back to present value. It has been mentioned in the book content, and is described more in the subdivision and development analysis. The equation is:

   Land Value = Present Value of Projected Sales – Development Costs

   • Data Collection: Thorough market research, detailed development cost estimates (construction, marketing, financing), absorption rates.
   • Scientific Basis: Relies on accurate projections of future income and expenses and a sound discount rate.
   • Limitations: The equation is complex and requires an accurate HBU and has been proven to produce unrealistically high value conclusions.

   • Practical Application: Valuing large tracts of land for residential or commercial development.

   • Experiment: Find an older real estate transaction and see how your findings compare to the current market value.

5. Land Residual Method: (5th Method) This technique isolates the income attributable to the land by deducting the income attributable to the improvements from the total net operating income (NOI). As noted in the book content on the Income Approach, the equation is:

   • Calculate Income to improvements:* Value(Improvements) * Cap Rate(Building).

   • Then: Income(Land) = Income(Total) - Income (Improvements)
     Land Value = Land Income ÷ Land Capitalization Rate

   • Data Collection: Accurate estimates of NOI, building value, and appropriate capitalization rates for land and improvements.

   • Scientific Basis: The validity depends on the accuracy of the extracted building income.
   • Limitations: This method is highly sensitive to capitalization rate assumptions.

   • Practical Application: Used for valuing land underlying income-producing properties.

   • Experiment: Use two comparable properties and see how your findings compare to one another.

6. Ground Rent Capitalization Method: (6th Method) This method capitalizes the ground rent income generated from a ground lease to estimate the land value. The equation is:
   Land Value = Annual Ground Rent ÷ Capitalization Rate
   Data Collection: Data on ground rent income from comparable properties.
   Scientific Basis: Relies on accurate data, as highlighted by the fact that some data may be generated directly by the appraiser (the appraiser’s role in collecting PRIMARY data) or it may be obtained from published sources (the appraiser’s role in collecting SECONDARY data).
   Limitations: Limited applicability, as ground leases are not common in all markets.
   Practical Application: Valuing land under long-term ground leases, which are more common for commercial properties.
   *Experiment: See how your findings on two properties compare to current market values.

NOTE, Depth Tables are primarily used to value commercial properties

V. The Role of Mobile Apps and Technology in Streamlining Site Valuation

As the course description indicates, “Mastering Real Estate Appraisal” emphasizes the use of technology to enhance accuracy and efficiency. Mobile apps and technologies play a critical role in site valuation:

• Data Collection: Access MLS databases, public records, zoning maps, and demographic information directly from the field, reducing reliance on manual data entry.
• GIS (Geographic Information System) Integration: Use GIS apps to analyze spatial data, identify environmental hazards, and assess site characteristics.
• Laser Measurement: Employ laser measuring devices to obtain precise site dimensions for accurate area calculations.
• Sketching and Mapping: Utilize mobile sketching apps to create detailed site plans, highlighting easements, encroachments, and other relevant features.

However, always remember that these tools are aids, not replacements for sound judgment and thorough analysis. Appraisers must critically evaluate the data obtained from these sources and comply with all relevant appraisal standards.

VI. Conclusion: Mastering the Art and Science of Site Valuation

Accurate site valuation is a crucial skill for real estate appraisers. By understanding the underlying scientific principles, mastering the various valuation techniques, and leveraging the power of modern technology, appraisers can provide reliable and credible opinions of value that contribute to sound real estate decision-making. This chapter provided a foundation for these skills and the following chapters will build upon it to increase your understanding of this crucial skill.