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Extraction Method

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Most of the site work contracts I see for land without public utilities available is around $150k.
 
Sometimes extraction is the best option available. A big chunk of DC is historic district and 100+ year old rowhouse neighborhoods. Obviously if you have site sales they are the best. Then vacant land sales adjusted for developing to the land to a site is second best. But after that extraction using depreciated homes is the best. Properties acquired by developers for renovation.
 
A K said:
Sometimes extraction is the best option available. A big chunk of DC is historic district and 100+ year old rowhouse neighborhoods. Obviously if you have site sales they are the best. Then vacant land sales adjusted for developing to the land to a site is second best. But after that extraction using depreciated homes is the best. Properties acquired by developers for renovation.
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The problem is that depreciation involves what developers are willing to actually pay for a lot at any given point in time. - Because you have to figure in entrepreneurial profit and such things. You simply can't get that without lot sales. And even then, you need to study the market to make sure that the developers assumptions still hold up. How good is extraction otherwise? Well, heck, you just don't know! Well, you say it means something. I say you are just as well off guessing.

Of course new construction, and/or especially minimal construction, followed on by a sale can give you a decent land/lot comp.
 
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Bert Craytor said:
The problem is that depreciation involves what developers are willing to actually pay for a lot at any given point in time. - Because you have to figure in entrepreneurial profit and such things. You simply can't get that without lot sales. And even then, you need to study the market to make sure that the developers assumptions still hold up. How good is extraction otherwise? Well, heck, you just don't know! Well, you say it means something. I say you are just as well off guessing.
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Site value is not always the value of the land at which new construction is feasible. By that logic it would never be not feasible to build. You may see depreciation factored into vacant land sale prices if market conditions are that way. When the market conditions are that way it is probably better to consider both land sales and extraction methods to see if it makes sense. George and I had a lengthy debate about this.

Anyway, I agree with you that extraction method by itself is less than ideal but sometimes it's the best option available.
 
People build houses when it is not feasible to build all the time. They do it because it is the only way to have a new house in the location where it is not feasible to build. When you see a lot of build-on-your-lot construction but no spec construction it is a good sign that there is insufficient entrepreneurial incentive to build and therefore not feasible to build.
 
There is more than one form of depreciation which can occur.

As well, land values swing pretty radically during boom vs bust.
 
A K said:
Site value is not always the value of the land at which new construction is feasible. By that logic it would never be not feasible to build. You may see depreciation factored into vacant land sale prices if market conditions are that way. When the market conditions are that way it is probably better to consider both land sales and extraction methods to see if it makes sense. George and I had a lengthy debate about this.

Anyway, I agree with you that extraction method by itself is less than ideal but sometimes it's the best option available.
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When you say there is construction that is not feasible, you mean there are cases where there is no entrepreneurial profit. I would say, that if that is the case, there are people who work for nothing. Common sense dictates otherwise. The problem is in such construction, say where a farm builds a barn on a vacant lot of land so he has, say, some extra place to store his hay that is closer to the cows, there is a value to that and there is entrepreneurial profit hidden in his activities. Since there is no sale, it's hard to say what that barn was worth to the farmer (it was we must assume the cost of materials + some amount). So if you had to value this and wanted to use the Extraction Method and only looked at the cost of construction without profit minus depreciation, you land value would be off because you are not able to calculate the entrepreneurial incentive/profit + architectural costs hidden in the farmers activities.

We can argue about this at length. But in reality, it depends on location. My experience here is that what developers actually pay for lots is often surprisingly low in comparison to sale prices and the fact that there are so few lots available for sale. It certainly depends on where the housing market is. But developers, in buying land, have all kinds of risks to contend with 1+ year down the road. They factor in that risk big time. So, in this area, based on my experience, your extraction method is useless.
 
Bert Craytor said:
When you say there is construction that is not feasible, you mean there are cases where there is no entrepreneurial profit. I would say, that if that is the case, there are people who work for nothing. Common sense dictates otherwise. The problem is in such construction, say where a farm builds a barn on a vacant lot of land so he has, say, some extra place to store his hay that is closer to the cows, there is a value to that and there is entrepreneurial profit hidden in his activities. Since there is no sale, it's hard to say what that barn was worth to the farmer (it was we must assume the cost of materials + some amount). So if you had to value this and wanted to use the Extraction Method and only looked at the cost of construction without profit minus depreciation, you land value would be off because you are not able to calculate the entrepreneurial incentive/profit + architectural costs hidden in the farmers activities.

We can argue about this at length. But in reality, it depends on location. My experience here is that what developers actually pay for lots is often surprisingly low in comparison to sale prices and the fact that there are so few lots available for sale. It certainly depends on where the housing market is. But developers, in buying land, have all kinds of risks to contend with 1+ year down the road. They factor in that risk big time. So, in this area, based on my experience, your extraction method is useless.
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Obviously the incentive is personal enjoyment of a new home. It is not a financial incentive as it is with developers.

I have to say that only a appraiser that has never done an appraisal in a real city could say extraction is useless. Maybe in your land of suburbia you can say extraction is useless.

Tear downs are the best indicators of site value. #2 is vacant land sales. After that there is no other option than extraction. Allocation to me is useless.
 
Extraction is fine if it is well supported. I have never used extraction in rural areas because the homes and lots are non-homogeneous, and there are usually plenty of vacant land sales.

Built up subdivisions however may not have adequate sales for sales comparison. There are only so many approaches to value. I don't feel that extraction is useless for residential areas with limited vacant land sales.
 
I've personally spoken with some of the builders who have built during a bust and they've told me they'll work for a near break-even in order to keep their crews together. That's how much they make when times are good. Others of those builders simply got caught with the timing of their projects and had to follow through despite the the reduction of profits or even taking a bit of a loss as being better for them than the alternative of losing everything they had already put into the entitlements.

I've seen MANY sales of subdivision projects which sold for less than the costs of the mapping, sometimes for as little at $0.15 on the dollar when compared to when they started out.

Fortunes are made and lost in the subdivision mapping business. THOSE profit margins are in addition to the builder's profit margins.
 
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