Site/Improvements Ratio ?

[ZZGAMAZZ]

Comment/disclaimer:
I try to determine market reaction to the site as-vacant in every assignment, and use an alternative method if a direct sales comparison based upon pertinent vacant land activity isn't available.

Questions:
Q1) What's the basis of clients' concerns about the marketability of an improved residential site if the portion of value ascribed to the land is above xyz percentage? I don't think a typical buyer would ever even realize that a theoretical ratio exists, let alone make a decision based on the results. [Also, my attempts to explain the results are nothing more than a description of the the CA protocol, e.g., age/condition/functional/external depreciation factors, etc., etc.]

Q2) Relying upon market activity to determine the value of the site as-vacant, results of the CA inevitably are lower than SCA results; so why do lending clients require the time-consuming CA if it isn't used?

Q3) Presuming that results of the CA aren't a basis of collaterization, do peers ever develop & report but also indicate that it's a client request beyond the Scope of Work (as previously suggested on the AF)?

Q4) Do peers develop/report the CA in non-lending residential appraisals, e.g., estate, marriage dissolution, BK?

 

[Carnivore]

Site Value can reveal an over or under-improvement. Is there a set percentage? I don't know, but am aware that some use 20% or 30%, I don't know the Basis for that.

 

[George Hatch]

In residential lending some of those lenders use the CA for their insurable value estimates. That's a bad idea in general, but they do it anyway. It's not as common now, but back in the day some lenders used the CAs in SFR appraisals as a reality check for the SC. That was probably more common in the non-residential appraisals, though.

It's been my experience - across all different property types - that the CA results usually run a little higher than the SC when the markets are stable, a lot higher when the markets are in decline, and a little low when the markets are increasing. Land values vary, but so do the hard costs. The profit/loss factors on the developer side are by far the biggest variable of effect. In general, most development doesn't occur when the market's are down because there's no money to be made in a weak market. The developers always try to time their projects to hit during a strong market so they can max their profits. But sometimes they get delayed and it throws their projected completion dates off. That's how they get caught holding inventory during a weak market.

I only do a CA when I need to do it, whether due to the nature of the property (like new construction ) or due to the users requesting it. If what they really want is an insurable value opinion I do that instead of a CA to MV. I never do a CA for MV unless that's actually how they are telling me they're using it.

Whenever a client asks for something beyond what I need to do in order to develop my opinions and conclusions I attribute it that way: "In this case the client has requested a CA so I have added that as an assignment condition."

 

[ZZGAMAZZ]

In residential lending some of those lenders use the CA for their insurable value estimates. That's a bad idea in general, but they do it anyway. It's not as common now, but back in the day some lenders used the CAs in SFR appraisals as a reality check for the SC. That was probably more common in the non-residential appraisals, though.

It's been my experience - across all different property types - that the CA results usually run a little higher than the SC when the markets are stable, a lot higher when the markets are in decline, and a little low when the markets are increasing. Land values vary, but so do the hard costs. The profit/loss factors on the developer side are by far the biggest variable of effect. In general, most development doesn't occur when the market's are down because there's no money to be made in a weak market. The developers always try to time their projects to hit during a strong market so they can max their profits. But sometimes they get delayed and it throws their projected completion dates off. That's how they get caught holding inventory during a weak market.

I only do a CA when I need to do it, whether due to the nature of the property (like new construction ) or due to the users requesting it. If what they really want is an insurable value opinion I do that instead of a CA to MV. I never do a CA for MV unless that's actually how they are telling me they're using it.

Whenever a client asks for something beyond what I need to do in order to develop my opinions and conclusions I attribute it that way: "In this case the client has requested a CA so I have added that as an assignment condition."

Thanks very much for your insight.

I vaguely remember hoping to take advantage of the pending Apocalypse about 20 years ago, although Marshall & Swift advised of an alternative Cost Manual, used to determine Insurable Value, which might come in handy professionally when the next earthquake flattens downtown LA.

 

[Terrel L. Shields]

Relying upon market activity to determine the value of the site as-vacant, results of the CA inevitably are lower than SCA results

If so, you are doing it wrong. Valuing a site based upon anything except the site value "as if vacant and available for its highest and best use" introduces a profound error in everything else. The difference in the value of the site "in use" vs "as if vacant" is often the measure of obsolescence in the overall property value. When depreciation is 100%, then the site value as if vacant = the property value + some marginal cost to cure the site for a new improvement.

 

[DTB]

If I recall correctly, the IRS accepts the assessors improvement/land ratio.

 

[Carnivore]

How should we deal with 'Tap Fees'? In my city once a Tap fee is paid, then it's Paid forever. The City Water/Sewer Tap fee is Apprx $3,500. The actual Connection/cost from tap to Improvement is on the Property owner. Is that Paid Tap Fee a site Improvement?

 

[Sid Holderly]

The same as a well on new construction, a construction infrastructure cost just like a septic system

The ratio is what ever it is. If I was a lender I the higher the land value percentage would be a higher residual value if the house burnt. Land always has value, the improvements may not, just my perspective.

 

[ZZGAMAZZ]

If so, you are doing it wrong. Valuing a site based upon anything except the site value "as if vacant and available for its highest and best use" introduces a profound error in everything else. The difference in the value of the site "in use" vs "as if vacant" is often the measure of obsolescence in the overall property value. When depreciation is 100%, then the site value as if vacant = the property value + some marginal cost to cure the site for a new improvement.

I was referring to the site value determined by the market data approach based upon an analysis of actual, similar vacant land sales. Just never supports results of the SCA in my experience, although that could also be interpreted as the SCA value is too high!

 

[George Hatch]

The subject has certain features. If your comps lack those features then it may be necessary to apply an adjustment.