Land vs. building appraisal question

[jh1025]

Hi everyone,

First off, thanks for responses and information given. As a person new to real estate, all information and help is greatly appreciated.

My wife and I are planning on purchasing a property in the Denver metro area for a short term rental. When looking at a perspective property, the county assessment showed that the land value was approximately 1/2 of the total value of the property itself. The land value ratio has actually increased even after the prior owner redid the kitchen, finished the basement and doubling the usable square footage of the property, and enclosing the patio. When we brought this question up to our agent, she mentioned that appraisals from the county and a professional appraiser can be different and in these cases often find that the land value ratio is lowered. During further digging on our part, we were able to find some vacant lots that sold for less than the assessed value of the prospective home- slight differences as our interested property was in a better than average location while the vacant lots were in average locations. The difference between the assessed value of the prospective home was still ~ 100% more in assessed value compared to the average location vacant lots.

All this to say, how do professional appraisers appraise the value of the home compared to the county assessment and what is the likelihood the ratio of the land value to overall value would be significant changed i.e. lowered, compared to what the county assessment says.

Thanks!

 

[TerryRohrer]

I would not rely on the assessor numbers or get caught up in the land building value ratio. It is not clear what your concern is, but if it is about the property as a whole, then comparing to other similar homes in that area is the relevant comparison. They trade as a package, not as land at one price plus improvements for another. Unless every thing in the vicinity of the property you are looking at is a short term rental, the value of the real property is based on single family homes. Any value of a rental aspect has less to do with the actual property and more to do with how it is managed.

 

[jh1025]

thanks for the response. To clarify, the value of the land cannot be depreciated against while the value of the building can. Thus, it is in our best interest if the value of the land is lower while the value of the building is higher and thus, more of our purchase can be depreciated.

Our question is, is this something that happens when another professional appraiser evaluates a property. If yes, what conditions would allow for an appraiser to estimate the value of the land is less than what the county assessor says?

 

[Tom4value]

thanks for the response. To clarify, the value of the land cannot be depreciated against while the value of the building can. Thus, it is in our best interest if the value of the land is lower while the value of the building is higher and thus, more of our purchase can be depreciated.

Our question is, is this something that happens when another professional appraiser evaluates a property. If yes, what conditions would allow for an appraiser to estimate the value of the land is less than what the county assessor says?

Good question and is asked….a lot! The answer is very little.

Appraisers estimate market value. Assessors estimate assessed value. Some people say it is like comparing apples to oranges but really it is like comparing apples to crabapples; the classic, “similar but different”. Appraisers estimate the market value of a property; how much would a property sell for on the open market if the buyer and seller are acting in their own best interests. Again, this is the market value of a well defined property (or even multiple properties).

Assessors determine assessed value for assessing purposes of many properties, using mass appraising techniques. In a broad nutshell, they take sales data and form adjustment models to apply to individual properties for assessment purposes only.

So back to your question, are they in line with appraised values? Usually not for two main reasons.
1. The very nature of mass appraisal is forming models to apply to properties rather than focusing on the individual property’s market value. In other words, appraising market value of a property is more focused and fine tuned.

2. In assessing, sales data used is derived from blocks of time that are used for several years, usually 2 or 5 years. For instance, if the fiscal cycle for a community starts in 2024, they will use sales data for 2023. This data will be used for assessments in fiscal 2024, 2025, 2026 (until the next cycle begins). So generally, assessments are more in line with true market values for the first year than they are for the last year. Also, in a period when market changes are more volatile, assessed values rarely are in line with market value.

Hope this helps!

 

[jh1025]

Thanks for the explanation. I can see how the comparison is made in terms of comparable sales for the whole property but what about the appraised land value of the home? Is that usually done through nearby empty lots or is there another method? How do appraisers compare an empty lot vs. a lot where a home has been built and likely had capital improvements to a yard i.e. a landscaped home vs. empty lot.

 

[George Hatch]

The best way to value the land is to look for sales of land with comparable location and zoning. Working on a cost analysis in order to get to a residual land value is a last resort for appraisers. We only do it when there are no relevant land sales.

 

[Zoe]

Hi everyone,

First off, thanks for responses and information given. As a person new to real estate, all information and help is greatly appreciated.

My wife and I are planning on purchasing a property in the Denver metro area for a short term rental. When looking at a perspective property, the county assessment showed that the land value was approximately 1/2 of the total value of the property itself. The land value ratio has actually increased even after the prior owner redid the kitchen, finished the basement and doubling the usable square footage of the property, and enclosing the patio. When we brought this question up to our agent, she mentioned that appraisals from the county and a professional appraiser can be different and in these cases often find that the land value ratio is lowered. During further digging on our part, we were able to find some vacant lots that sold for less than the assessed value of the prospective home- slight differences as our interested property was in a better than average location while the vacant lots were in average locations. The difference between the assessed value of the prospective home was still ~ 100% more in assessed value compared to the average location vacant lots.

All this to say, how do professional appraisers appraise the value of the home compared to the county assessment and what is the likelihood the ratio of the land value to overall value would be significant changed i.e. lowered, compared to what the county assessment says.

Thanks!

I'll play you. I'll ask a few questions. Are you from Denver area for short term investment?

1/2 half of land value to total value on tax assessment may not be unusual in Denver.

The information from your agent: " When we brought this question up to our agent, she mentioned that appraisals from the county and a professional appraiser can be different and in these cases often find that the land value ratio is lowered.

Can't comment. Ask you agent.

Lower land sales than your prospective assessed tax value on a build? Why?

I will close in don't rely on tax assessment value. Tax assessors rely on being equitable. Market value is not in tax assessors mind. It is called mass appraisal. The tax assessor wants it to me equitable.

Ask @JTip

 

[TerryRohrer]

Thanks for the explanation. I can see how the comparison is made in terms of comparable sales for the whole property but what about the appraised land value of the home? Is that usually done through nearby empty lots or is there another method?

Most residential appraisals don't rely on a cost approach, but one method of valuation is to estimate the value of the lot as if vacant, and add the cost of replacing the improvements, less any depreciation from all causes. However, if you are in an area where there are few or no vacant site sales (vacant site sales in an area where new homes are actively being constructed are irrelevant), then then fallback is to estimate land value by deducting the depreciated value of the improvement from sales prices. But, recall from 8th grade math, that if there are two unknown variables, there must be two independent equations. In practice, appraising in areas without competing vacant site sales generally relies on at least one unstated assumption: either it is assumed that depreciation is known (no indication of how it is known), or vacant site value is known (no indication of how it is known). Get the right "assumer" and you can get pretty much any conclusion you need.

How do appraisers compare an empty lot vs. a lot where a home has been built and likely had capital improvements to a yard i.e. a landscaped home vs. empty lot.

Appraisers typically have no reason to compare vacant lots to improved lots. They are different market segments. Much like hotels are not considered in the appraisal of shopping malls, even though both are commercial properties. The reality of your issue is there is no means to reliably measure how much the site value contributes to that total package. Any efforts to answer that question rely on endless assumptions that can't be tested. In your shoes, I would find vacant site sales in a area where homes are actively being built and compare the cost of the typical vacant site to the value of the homes constructed on those sites. Often, you can find the vacant site sale, and a short time later, the sale of the home constructed on that site. Get a handful or a dozen of those pairs of transaction, and divide the site sale price by the home sale price, and you will likely find a fairly narrow range. Apply that to your purchase price. That guess will be as good as any, better than most, and will be understandable to an IRS agent.

 

[Zoe]

It is very possible for site value to be more than the existing improvements. Site value could be a million. Improvements $20,000.

Take heed we are talking MV definition.

 

[jh1025]

I'll play you. I'll ask a few questions. Are you from Denver area for short term investment?

1/2 half of land value to total value on tax assessment may not be unusual in Denver.

The information from your agent: " When we brought this question up to our agent, she mentioned that appraisals from the county and a professional appraiser can be different and in these cases often find that the land value ratio is lowered.

Can't comment. Ask you agent.

Lower land sales than your prospective assessed tax value on a build? Why?

I will close in don't rely on tax assessment value. Tax assessors rely on being equitable. Market value is not in tax assessors mind. It is called mass appraisal. The tax assessor wants it to me equitable.

Ask @JTip

We are not from the Denver metro area. When we performed a google search, we did find the land value to total value tax assessment being around 1/2 can be typical for the Denver area and hence we reached out to our agent about the question. I also wanted to find more information and that's how I found this forum, which has been quite helpful.

In regards to why the question, the lower the land to total value ratio, the higher the depreciation we might be able to deduct against our taxes. (land is not depreciable while almost everything else, like the house structure itself is)

from what i can gather from the other responses, seeing vacant lots sale price and total home sale price would be a reasonable way to find what a similar ratio could be. Am i understanding that correctly?