Methods of Site Valuation

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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_at_fossconsult.com
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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!

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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

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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.

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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.

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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

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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 (VI/RL) 65,000 ? 0.08 812,500

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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 _at_ 5,000 500,000
• Less Development expense Profit
  incentive 400,000
• Net to the Land 100,000
• Present worth _at_ xx for years 65,000
• Note time delay profit must be included!
• General layout is a discounted cash flow analysis

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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.

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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 dont relate sufficiently to
  use.
• Appraisal techniques provide a basis, not a
  substitute, for judgement in the final conclusion.

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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
[phone] Fax [phone] Email
wfoss_at_fossconsult.com