Residential Site Valuation And Cost Approach

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Land vs. Site

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Land:
1. The earth's surface, both land and water, and anything that is attached to it whether by the course of nature or human hands; all natural resources in their original state, e.g., mineral deposits, wildlife, timber, fish, water, coal deposits, soil.
2. In law, the solid surface on the earth, as distinguished from water.
3. One of the four agents of production in economic theory.

Site:
Land that is improved so that it is ready to be used for a specific purpose.

(Land plus necessary site improvements equals a site.)

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Plat

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1. A plan, map, or chart of a city, town, section, or subdivision indicating the location and boundaries of individual properties.

2. A map or sketch of an individual property that shows property lines and may include features such as soils, building locations, vegetation, and topography.

3. A map intended to show the division of land into lots or parcels. Upon recordation with the appropriate authorities, land included in the plat can thenceforth be legally described by reference to the plat, omitting a metes and bounds description. (IAAO)

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Types of Legal Descriptions

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1. Metes and Bounds

2. Government Survey

3. Lot and Block

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Metes and Bounds

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This is the earliest system and was employed in the 13 original colonies in the East and Southeast United State. Bearings (or Metes) were the directions that a boundary line traveled from a Benchmark. The Distances (or Bounds) were how long the boundary line ran.

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Gunter's Chain

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The distances in earlier metes and bounds descriptions were calculated in chains, links, and rods based on the system developed by Edmund Gunter in England in 1624.
The system was based on Gunter's Surveyor's chain:

1 Mile = 8 Furlongs
1 Furlong = 660 Feet, or 10 Chains
1 Chain = 66 Feet, or 4 Rods
1 Rod = 16½ Feet, or 25 Links
1 Link = 7.92 Inches

A Rod, a Perch, and a Pole are the same thing: 16.5 feet long.

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Unusual Measurements found in Surveys

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1 League = 3 Miles (or 25 Labors)
1 Labor = 177.14 Acres
1 Vara = 33 1/3 inches (Texas)
1 Arpent = ±191.8 Feet (Louisiana)
1 Smoke = The distance a man travels on mule back while smoking a cigarette
1 Colpa = Old Irish measure of land equal to that which can support a horse or cow for a year - approximately, an Irish acre of good land

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Government Survey

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The Government Survey System (also called the Rectangular Survey System) is used in 30 states today; primarily in the Midwest and west (excluding Texas).

Land is divided into Townships (6 miles x 6 miles)
Each Township has 36 numbered Sections

Each Section is theoretically 1 square mile, or 640 acres
West & North sections of a township were used for error and curvature correction, and are often smaller

Sections are then divided into quarters, which are divided into quarters, and so on.

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Lot and Block

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The Lot and Block system employs plats and plat books. Sometimes it is called the Section, Lot and Block system.

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Lot

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1. A distinct piece of land; a piece of land that forms a part of a district, community, city block, etc.
2. A piece of land in one ownership, whether platted or unplatted.

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Tract

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A parcel of land; an area of real estate that is frequently divided into smaller parcels.

Tract is simply a larger piece of land that is frequently divided. People use the term "development tract." Sometimes the phrases "tract home" or "tract builder" are heard in the market place.

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Parcel

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A piece of land of any size in one ownership

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Types of Private Restrictions on Site Use

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Easements
Deed restrictions
CC&R's or Subdivision covenants
Leases
Transferable Development Rights
Conservation easements

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The two interests created by an easement

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Affirmative easement
The right to perform a specific action on a property owned by another; also called the dominant estate.

Negative easement
Property that is burdened by an easement; also called servient estate.

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Transferable Development Rights

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A development right that cannot be used by the landowner, or that the owner chooses not to use, but can be sold to landowners in another location; generally used to preserve agricultural land; may also be used to preserve historic sites or buildings and open space or to protect scenic features. TDRs are said to be transferred from a landowner in a sending district to the use of a landowner in a receiving district.

Although there are variations among the states transferable development rights are generally considered to be an interest in real property only as long as they are attached to the land and once they are sold they become personal property. Once they are transferred and attached to a second property, they would again gain status as a real property right.

If you're lucky enough to find an adequate sales data you could value a TDR through sales comparison analysis. Lacking market activity and market evidence, TDR's may be valued by an income capitalization technique. You could capitalize the value added due to the acquisition of a TDR.

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Conservation Easement

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A landowner sometimes sells a conservation easement, but usually easements are donated. If the donation benefits the public by permanently protecting important conservation resources and meets other federal tax code requirements--it can qualify as a tax-deductible charitable donation. The amount of the donation is the difference between the land's value with the easement and its value without the easement.

Placing an easement on your property may also result in property tax savings.

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Excess Land

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In regard to an improved site, the land not needed to serve or support the existing improvement. In regard to a vacant site or a site considered as though vacant, the land not needed to accommodate the site's primary highest and best use. Such land may be separated from the larger site and have its own highest and best use, or it may allow for future expansion of the existing or anticipated improvement.

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Surplus Land

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Land not necessary to support the highest and best use of the existing improvement but, because of physical limitations, building placement, or neighborhood norms, cannot be sold off separately. Such land may or may not contribute positively to value and may or may not accommodate future expansion of an existing or anticipated improvement.

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FEMA designations for Special Flood Hazard Area

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A, AE, C, V

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Methods for Land Valuation

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Sales Comparison
Extraction
Allocation
Subdivision Development
Land Residual
Ground Rent Capitalization

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Extraction Method

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A method of estimating land value in which the depreciated cost of the improvements on the improved property is estimated and deducted from the total sale price to arrive at an estimated sale price for the land; most effective when the improvements contribute little to the total sale price of the property.

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Allocation Method

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A method of estimating land value in which sales of improved properties are analyzed to establish a typical ratio of land value to total property value and this ratio is applied to the property being appraised or the comparable sale being analyzed.

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What can support the percentage used in the allocation method?

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Mass appraisals
Observed patterns
Consultations with developers on their cost
An appraiser's files
Published studies

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Subdivision Development Method

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A method of estimating land value when subdivision and development are the highest and best use of the parcel of land being appraised. When all direct and indirect costs and entrepreneurial incentive are deducted from an estimate of the anticipated gross sales price of the finished lots, the resultant net sales proceeds are then discounted to present value at a market-derived rate over the development and absorption period to indicate the value of the raw land.

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Land Residual Method

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A method of estimating land value in which the net operating income attributable to the land is isolated and capitalized to produce an indication of the land's contribution to the total property.

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Methods of Qualitative Analysis

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Relative Comparison Analysis (Sales grid with +'s and -'s)

Ranking Analysis

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Interim Use

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The temporary use to which a site or improved property is put until it is ready to be put to its future highest and best use.

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Assemblage

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Assemblage is the combining of two or more parcels, usually but not necessarily contiguous, into one ownership or use.

Assemblage cost is the excess cost involved to acquire individual adjacent parcels of real estate in a single ownership beyond the estimated cost of acquiring similar sites that do not form a specifically designed assemblage.

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Plottage

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Plottage is the increment of value created when two or more sites are combined to create greater utility.

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Definition of Cost Approach

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A set of procedures through which a value indication is derived for the fee simple interest in a property by estimating the current cost to construct a reproduction of (or replacement for) the existing structure, including an entrepreneurial incentive, deducting depreciation from the total cost, and adding the estimated land value. Adjustments may then be made to the indicated fee simple value of the subject property to reflect the value of the property interest being appraised.

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Definition of Entrepreneurial Incentive

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A market-derived figure that represents the amount an entrepreneur expects to receive for his or her contribution to a project and risk. See also entrepreneurial profit.

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USPAP on cost approach

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Standard Rule 1-1a says an appraiser must be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal.

Standard Rule 1-2f says you must identify the scope of work necessary to complete the assignment.

Standard Rule 1-4B says when a cost approach is applicable, an appraiser must:

(i)
develop an opinion of site value by an appropriate appraisal method or technique;

(ii)
analyze such comparable cost data as are available to estimate the cost new of the improvements (if any); and

(iii)
analyze such comparable data as are available to estimate the difference between the cost new and the present worth of the improvements (accrued depreciation).

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Is the cost approach required?

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Fannie Mae may say the Cost Approach is not required - by them. But if the property is new or reasonably new and of standard construction, the Cost Approach may be applicable and necessary and required by USPAP. Fannie Mae doesn't say you CAN'T do a Cost Approach.

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The Cost Approach is most applicable when:

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The property is not typically income producing and the Income Capitalization Approach is not pertinent

The building improvements are new or relatively new

The land value is well supported

The improvements represent the Highest and Best Use of the land as though vacant

Estimating the use value of special purpose properties

Building additions or renovations are being considered

The appraisal requires that land and improvements be valued separately; such as for insurance or accounting purposes

Land value is a significant portion of the overall value; such as with agricultural properties

A lack of market activity precludes the use of the Sales Comparison Approach

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Situations in which the cost approach is least applicable:

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The depreciation is of a type that is more difficult to estimate

Data is scarce or lacking to estimate the amount of entrepreneurial profit

Data is scarce or lacking to estimate the land value

The interest valued is anything other than fee simple - adjustments must be made