Acreage Value

[nauthead]

Mercury, props to you for seeking guidance on this. Afterall, you are on the hook for the value, so a little due diligence is a good thing. FWIW, we are appraisers and we get paid to render opinions. We provide free opinions on this board, all others must pay.

 

[DMZwerg]

Of course the value of an acre of tilled land in a 35 acre lot is equal throughout, but I have seen many examples of what Apprazur was saying. I personally bought an acre of land in the mountains for $76,000. If I wanted 5 acres, I could have bought it at $235,000 and if I wanted 20 acres, I could have bought it for $795,000. All just miles apart. Does that make my acre now worth $47,000 or $39,000?

No, you are showing what the rest of us were trying to tell him, aka that the land still had value. His example would have been finding that most 25 ac parcel would be selling for say less than $800,000 when 20ac were selling for what you stated, indicating to him a break point where what the typical buyer and how they look at it changes very suddenly (farmer types versus hobby farm types) with one group valuing land at one rate and the other a different so where they meet things can be strange, at least for a while. Your example is more typical gradual value per cre changes where smaller parcels tend to sell for more per acre than smaller parcels, in part due to the intrinsic value of utilities, etc.

Hope that helps you understand what the difference is and what the intense discussion was all about

 

[DMZwerg]

I don't think the brohaha in this thread was the result of a minor disagreement regarding the law of dimishing returns. Unless I totally misunderstood Appraisur's argument, I believe he was saying that beyond a given threshold, this law has been repealed.

I think what Aprazur was actually pointing out was that there are different types of buyers typical for different size parcels of land and they tend to purchase at different rates which can cause a weird inversion at a particular point.

Example: Residential versus agricultural

Let us say agricultural land (120ac+) goes for $Y/ac and residential land of 1/2ac typically goes for $X/ac. Now, given diminishing return as the parcel size gets larger the value drops and as it gets larger it increases, but we are talking about two separate markets that overlap at some point, let us say between 20 and 30 acres. At 20 ac a residential buyer may be willing to pay X/4 per ac and at 30ac the farmer may be willing to pay 50% more than Y but if X/4 = 2Y then the value of 20ac of land to a farmer might not be even 2Y and it may be highly unusual for residential buyers to want more than the 20ac of land due to the cost and thus somewhere between 20 and 30 acres the price does a weird flip where +5ac of land would flip the parcel to the other market and possibly DECREASE the value of the land so to speak because of how the two separate markets interact. I think that flip point for typically one market and pricing rate to another market andpricing rate is what Aprazur may have been trying to express, but did so as a "rule of thumb" calling "excess acres" from oly a residential appraisal standpoint rather than correctly identifying it for what it really was, namely the cossover zone between two seperate markets.

Just food for thought and something to consider.

 

[DMZwerg]

Oh and if you are not familiar with Colorado, neighborhing communities 15 or 20 miles away are either in the mountains or farmland. Neither are good sources for comparisons.

But sometimes matched pairs analysis can help.

Also, if there ARE no local equivalents and haven't been any for several years then that may be an indicator that H&BU is actually "divide it up into smaller parcels". Sometimes a lack of data tells as much as data found.

Calvin,
You keep suggesting that I'm too lazy to do the research. Ten years ago 5 acre lots were turned into subdivisions and were being sold for $200,000 and million dollar homes were built. After the downturn in building, those lots are going for less today. There is no correlation. In Ohio you can use old data because 35 acre properties don't change much there. Come live in my world.

Actually, I have seen 20+ ac parcels being foreclosed on in my local market ... lots obviously meant and sold for conversion into subdivisions (lad with farm sold as vacant, etc) as the real slowdown only hit here withing the last 2-3 years. I have seen lots like you have stated many times and I have even seen 20+ ac lots zoned for condominiums but the condos being built as separate SF homes and many places where values change just based on what side of the road you are on, etc. What you are describing is a complex appraisal and, well, many of us see them all the time (my boss likes trainees to "cut their teeth" assisting on complex appraisals). I can just image what appraising some of those 20+ ac parcels in one of the local cities are like when they come up (more and more of those inner city farms are finally turning to subdivisions within last 5 years after being active farms since I was a boy). We all have some very complex properties in our area (like a standard home with a small commercial service garage in back, Lake Geneva WI, etc).


So, if I have this straight ...
1) You have made the assumption it can't be subdivided
2) There are no similar sized parcels in the same or similar neighborhood(s) no matter how far back or out you go
2) Although there are similar sized parcels in some neighboring markets said markets are night and day compared to the local market due to land use, etc.

My advice would be look for matched pairs in the neighboring market to help guide you to reasonable adjustments, OR re-examine your assumptions OR decline the order. There is a reason Scope of Work is applied throughout and Competancy Rule can be applied after the order starts.

Good luck and hope we have been of some help.

 

[Ken B]

For those that may not be familiar with the concept, I would like to discuss economies of scale.

This would be where, given a standard unit of measurement (in this case, an acre), there is an inverse relationship between quantity and value per unit. Where 1 acre may be worth $50,000, 5 acres may be worth $40,000 per acre or $200,000, and 10 acres may be worth $25,000 per acre or $250,000.

A common method of expressing value is on a per unit basis.

We could examine the relationship between a subject and a selection of comparable sales in different ways.

We could consider natural break points.

Let's say the subject is an 8-acre lot. There are 3 comps; 1 acre ($50,000), 5 acre ($200,000), and 10 acre ($250,000).

Using natural break points, 1 acre is worth $50,000, 5 acres is worth 1 acre @ $50,000 plus 4 acres @ $37,500 per acre, and 20 acres would be worth 1 acre @ $50,000 plus 4 acres @ $37,500 per acre plus 5 acres @ $10,000 per acre.

In comparison to the subject property of 8 acres:

The 1-acre lot could be adjusted at (4x$37,500)+(3x$10,000) or +$180,000 with an adjusted sale price of $230,000.

The 5-acre lot could be adjusted at (3x$10,000) or +30,000 with an adjusted sale price of $230,000.

The 10-acre lot could be adjusted at (-2x$10,000) or -$20,000 with an adjusted sale price of $230,000.

The range of adjusted sale prices is a point value of $230,000. The subject's indicated value is $230,000.


Conversely, you could perform linear analysis of the properties

We have our three previous sales of 1-, 5-, and 10-acres and their indicated price per acre. Our subject property is 8 acres. Economies of scale would dictate that the value per acre of the 8 acres should be somewhere between price per unit of the 5- and 10- acre parcel. One could do use an HP-12C or equivalent and do a linear regression analysis, but that doesn't translate well to a reader. So, let's use Excel to create table depicting the relationship of the subject and comparable sales and create scattergram to graphically depict the relationships between lot size and price per unit. A copy of the table and the chart is shown below.

After placing a linear trend line on the chart, one could eyeball where the line crosses 8 units and see that the value should be somewhere around $31,000 per acre. Using the 12C, the value per unit is calculated to be $30,900 (rounded). Inserting that value into the table, one can visually see that the estimated value per unit is a near perfect fit. The correlation coefficient (r2) also indicates a near perfect fit. At $30,900 to $31,000 per unit, the indicated value for an 8-unit parcel is $247,200 to $248,000. With appropriate rounding, a value opinion of $248,000 is reasonable and well supported.


So we have two value indications for the subject: $230,000 and $248,000. Which one is right and which one is not? Based on the data available, both are credible. The sale data was insufficient to be truly statistically meaningful. Additional data may reveal additional breakpoints in the comparable sales. Method 2 is essentially a continuous pattern of breakpoints. That may not be completely accurate.

I would say that any final value opinion between $230,000 and $248,000 or $28,750 and $31,000 per acre is reasonable. One could use both approaches and reconcile to $30,000 per acre or $240,000.

So, it would appear there are a number of different ways to kill a bird.

 

[Calvin the Airedale]

I think what Aprazur was actually pointing out was that there are different types of buyers typical for different size parcels of land and they tend to purchase at different rates which can cause a weird inversion at a particular point.

Example: Residential versus agricultural

Let us say agricultural land (120ac+) goes for $Y/ac and residential land of 1/2ac typically goes for $X/ac. Now, given diminishing return as the parcel size gets larger the value (per acre) drops and as it gets larger (do you mean smaller?) it (price per acre) increases, but we are talking about two separate markets that overlap at some point, let us say between 20 and 30 acres. At 20 ac a residential buyer may be willing to pay X/4 per ac and at 30ac the farmer may be willing to pay 50% more than Y but if X/4 = 2Y then the value of 20ac of land to a farmer might not be even 2Y and it may be highly unusual for residential buyers to want more than the 20ac of land due to the cost and thus somewhere between 20 and 30 acres the price does a weird flip where +5ac of land would flip the parcel to the other market and possibly DECREASE the value of the land so to speak because of how the two separate markets interact. I think that flip point for typically one market and pricing rate to another market andpricing rate is what Aprazur may have been trying to express, but did so as a "rule of thumb" calling "excess acres" from oly a residential appraisal standpoint rather than correctly identifying it for what it really was, namely the cossover zone between two seperate markets.

Just food for thought and something to consider.

Dear Mr. Zwerg;

First, please account for what Apprazur was saying and what you thought he was saying may actually be different. Apprazur doesn't seem inarticulate and his argument did not strike me as the one being made in your post.

Second, please edit your post for clarity, as reading it is like trying to juggle a ten piece place setting of silverware. Use shorter paragraphs, each of which deals with one thought.

Please assume you are writing to an audience of airedales. We have short attention spans, and a limited abililty to juggle more than a few thoughts in our head at any one time (two of which most certainly are food and sex, leaving you just a small remainder of our cranial capacty with which to work.)

Several sentences into your post, my head was spinning. I'm sure you had a valid point to make but here we are; instead your getting my retort about posts making sense.

As an example, please refer to Ken B's exposition of economies of scale. This is well reasoned, cogent argument made in easily digestible bites of thought.