Extraction Method

[Carnivore]

Tear downs of extremely old buildings in the city are helpful. There are a number of buildings I remember researching near the 150 year mark where they were worth about $10/sf for the shell. It was fairly consistent and made it easy to determine land value. It's a bit of an art but supportable. Other ways I've utilized for vacant land value was to go back a few years, widen the search parameter. I'm with George on the discussions with contractors. They will work without entrepreneurial profit to keep their workers busy. If they make zero profit and everyone gets paid, they are fine with that. Laying off crews is its own set of problems. I also agree with A K, plenty of personal residences and especially cottages get constructed without a care in the world to resale value. Wealthy people who knock down a $1 million lakefront home to construct a $2 million lakefront home that is worth $2.5 million. They don't care, they built it to enjoy it. If we're talking about a developer doing that as a spec house, that guy is not going to be in business long.

Bold above really struck a chord with me. I have that right here in Good Ole North Cacky Lackey... Last year I get a Quote request from El Cheapo AMC. The assignment was for a Lake Norman Lakefront Home. The well-known Female Author(NYC) paid about 1.1 Mil for the Improved Property. Good deep water Site. Existing House just beautiful. Estimated Contractor Cost sheet over 1.5 million. My first thought looking over the Doc's was the cost will be an easy 1/2-3/4 mil over the estimated MV.

In Asheville, NC there are a lot of Wealthy people from California or NYC. Cost means nothing to them.

Another Example; In Uptown charlotte there is a Top Floor Condo owned by another well know person of Wealth. This person also bought the entire floor underneath the Penthouse, put a staircase into the lower Floor where his Guest would stay, You can not access either Floor without a special PassCode

Your Right, they simply don't care. "I want it because I said I want it!"

 

[Terrel L. Shields]

Cost means nothing to them.

We see it time and again, yet they want it to appraise for what they paid or invested in it...So many outbuildings - all the numbered buildings have central heat and air.

 

[George Hatch]

The other thing these CA discussions always overlook is the point that the fundamentals of appraising were not developed solely or primarily for residential subdivision properties. These principles and concepts were developed out of the valuation of all sorts of different property types where the applications and methodology could be tested outside of the bubble that any one property type might otherwise appear to imply.

So if extraction or depreciation or developer profit or some of these other concepts can be demonstrated across multiple other property types then that amounts to proof of concept even if its more difficult to isolate in any other given property type.

Another example is the Income Approach. If I can develop a GRM for 2-4s then that demonstrates that GRM is a real thing and that it *can* be developed in other property types if/when there's enough data to pin down the rents. That's not to suggest that the users of mortgage lennders will or should consider an income approach on an SFR to be meaningful to their decision making, but I would say that if they ever did come to that conclusion then appraisers would be capable of meeting that expectation.

 

[Carnivore]

The other thing these CA discussions always overlook is the point that the fundamentals of appraising were not developed solely or primarily for residential subdivision properties. These principles and concepts were developed out of the valuation of all sorts of different property types where the applications and methodology could be tested outside of the bubble that any one property type might otherwise appear to imply.

So if extraction or depreciation or developer profit or some of these other concepts can be demonstrated across multiple other property types then that amounts to proof of concept even if its more difficult to isolate in any other given property type.

Another example is the Income Approach. If I can develop a GRM for 2-4s then that demonstrates that GRM is a real thing and that it *can* be developed in other property types if/when there's enough data to pin down the rents. That's not to suggest that the users of mortgage lennders will or should consider an income approach on an SFR to be meaningful to their decision making, but I would say that if they ever did come to that conclusion then appraisers would be capable of meeting that expectation.

It may not be all that meaningful to the Client, but for the Appraiser, it may be very meaningful in the analysis and Reconciliation. I think what I am trying to say as it pertains to Residential Appraising, we agree with the Client on the SOW. Nothing prevents us from expanding the SOW and exceeding Client Expectations. Time is money, so many may not see it as economical. That's not an excuse for not developing an income approach or at the very minimum actually determining if there are a significant amount of rentals. One only has to look at the Census tract to get some idea of rental versus the owner-occupied ratio. Local market knowledge is important also, but just stating that is BS if you did not even look.

Right now under the GSE Format, the minimum SOW IS the Selling Guide. The GSE's have a Hard stop. You can not omit the SCA. Nothing in the Selling guide prohibits analysis of other approaches to value. Nothing in the Selling Guide prevents you from weighting the Cost Approach or Income Approach in your final reconciliation.

I hope that makes sense.

 

[alebrewer]

Hmmmm. The Extraction Method has been pretty much debunked. Why add meaningless trash to your appraisal report? And, do you really need it?

Appraisal Scoop: Land Valuation: Extraction Has No Traction (typepad.com)

The reality is the Extraction Method, really doesn't mean anything without land sales and if you have land sales, you just don't need it. If you don't have any land sales in the past 10 years or so anywhere in the vicinity of the subject property, you should seriously just consider scrapping the approach. ... Well, I suppose you could do a survey of potential buyers and ask them what they would be willing to pay for lots, if they were available. That would be something, but not much. But, then, better than the Extraction Method.

And, good sir, if you don't have land sales, what would you suggest? Allocation?.....

 

[WestMichiganCG]

It may not be all that meaningful to the Client, but for the Appraiser, it may be very meaningful in the analysis and Reconciliation. I think what I am trying to say as it pertains to Residential Appraising, we agree with the Client on the SOW. Nothing prevents us from expanding the SOW and exceeding Client Expectations. Time is money, so many may not see it as economical. That's not an excuse for not developing an income approach or at the very minimum actually determining if there are a significant amount of rentals. One only has to look at the Census tract to get some idea of rental versus the owner-occupied ratio. Local market knowledge is important also, but just stating that is BS if you did not even look.

Right now under the GSE Format, the minimum SOW IS the Selling Guide. The GSE's have a Hard stop. You can not omit the SCA. Nothing in the Selling guide prohibits analysis of other approaches to value. Nothing in the Selling Guide prevents you from weighting the Cost Approach or Income Approach in your final reconciliation.

I hope that makes sense.

I agree. Going beyond the scope of work is fine. If you can't convince yourself of a value then going beyond the SOW is important. The extra work can always be retained in the work file. That said, if there is a strong valuation case and you're within the SOW, an appraisers primary purpose is to stay in business.

 

[WestMichiganCG]

We see it time and again, yet they want it to appraise for what they paid or invested in it...So many outbuildings - all the numbered buildings have central heat and air.
View attachment 50835

I'd be curious as to what was in all those buildings. Hoarder is the first word that came into my head. Did you appraise this?

 

[George Hatch]

And, good sir, if you don't have land sales, what would you suggest? Allocation?..... ​

I work in a metro area and I virtually never have "no land sales". Not counting the times I've done land sale analysis in support of an HBU analysis or in a CA, I did 18 land appraisals last year. I didn't have any problems identifying sufficient comparable sales in any of those assignments.

It's typical to have no land sales in a specific subdivision, but the market segment for land will often have much different geographic boundaries and involve different timelines than the market segment for SFRs. You can't approach land valuation with the same search parameters you use for subdivision homes.

With all that said, extraction is a tool that sometimes comes in handy. But the most direct way to figure out if the improvements on a beater had any contributory value to the whole is to compare them to land sales data, even if that comparo is using very dated sales data.

 

[alebrewer]

We've been over this. I'm REALLY, REALLY happy that you have plentiful land sales, but (a) not everyone lives in CA - in fact, a lot of folks are moving away from there - maybe because there are too many land sales; (b) not every state is a disclosure state, so sales data cannot be extracted from public records in all states. As you're want to say - 'all RE is local'. Might not hurt to heed your own advice...

Also - just because there is a land sale within a 5 mile radius, does not make it a COMPARABLE land sale... some folks are ok with producing less than credible results. I'm not.

 

[Deleted member 152047]

All are in the same neighborhood, updated and range from 15-20 years old (my effective age is 10 out of 90 total economic life). Thanks in advance.

This concerns me. Placing a 90 year economic life on relatively new construction is not realistic. That says that the improvements will not require substantial renovation for 80 more years, which just is not going to happen.

Also, I would never present an "Opinion of Site Value (Median)" and an "Opinion of Site Value (Average)" this is misleading to the reader. Rather you should use: Indicated Value (Median) and Indicated Value (Average). Then conclude to your estimate of market value.

Also, I would not present the decimals.