Best Method To Determine Location Adjustment?

[Terrel L. Shields]

The difference in the new construction sale price is basically the difference in site value.

There is no logic to the alternative that can be explained except some intangibles OR there is a restricted market. Why would any builder not pack their tools and move 5 or even 20 miles for $60,000 extra bucks free?

Income, sales, & cost all use market data. Only reason income isn't same sometimes is because people buy by virtue of some non-economic reason, or property isn't a typical rental. CA, OTOH, uses sales to calculated accrued depreciation. If comps are truly sales comparables, & parsed correctly then CA will support SCA without exception. It isn't uncommon for people to overpay for exceptional property, but when they do they are basically allocating that to land slash site slash location. Otherwise you have an intangible "blue sky" component. The farmer overpays for an adjacent tract for his convenience. To him, the tract is truly worth more. Less travel, handier, time saving, and buffer from adverse development. Paying a high price for a unique property is a reflection of scarcity. So which is scarce? The improvements which can be built anywhere, or the site/land?

 

[George Hatch]

I don't know what to say. I am not understanding the economics of what you are describing is going on in your market.

I'm not talking about 20 miles away or a hour away. I am talking about site values being $600k in one neighborhood and then five miles further out in the next neighborhood site values being $400k. Or $1 million in one neighborhood and five miles further out in the next neighborhood site values being $600k. The difference in the new construction sale price is basically the difference in site value. That's how it works in my market anyways.

Just because you have no exposure to an example doesn't mean it doesn't exist anywhere.

There's no getting around the point that using cost is at best a secondary indication of value in a market segment that's driven by owner-users rather than builders, and that it's always better to use the most direct indicators of value when you have them.


If a market segment was driven by income I'd be looking for the income indicators, not telling you that you should look for land sales.

 

[George Hatch]

No matter how you develop the adjustments you use, the adjusted value indicators among your comps still have to make sense when compared to each other. That's the whole point of using an adjustment, to refine the range of value indicators you're using to come to a value conclusion.

And the primary method any reader will be using to develop an opinion of the credibility of that adjusted range is to compare those adjusted indicators of those existing properties to each other. So you still can't get away from that, even if cost does equal value in your locale.

 

[Joe Flacco]

Just because you have no exposure to an example doesn't mean it doesn't exist anywhere.

There's no getting around the point that using cost is at best a secondary indication of value in a market segment that's driven by owner-users rather than builders, and that it's always better to use the most direct indicators of value when you have them.


If a market segment was driven by income I'd be looking for the income indicators, not telling you that you should look for land sales.

When you do paired sales with two properties with two identical improvements, what are you comparing? You are comparing site values. The point of paired sales is to isolate the unknown variable right?

If you were to used the extraction method to develop site value then how do you do that? You subtract out the depreciated cost of improvements from the sale price and that gives you site value right? This is basically what you are doing when you do paired sales with two locations. You take out the improvement factor and compare what is left over which is site value.

 

[Joe Flacco]

In Michican CG's scenario, I have to believe him that site values ($30k) are the same and the improvement is identical. Location A sells for $200k and Location B sells for $240k. What that data is saying is 1) something is going on in location A causing $40k or 23.5% depreciation to the improvements, 2) something is going on in location B causing $40k or 20% excess entrepreneurial incentive/profit, or 3) it is a combination of both.

I have been trying to make sense of what he is describing and I can't really think of any other rational explanation than that.

 

[George Hatch]

So what?

The "why" is subordinate to the "what". In MOST cases Cost doesn't equal value. The reasons why cost don't equal value can be debated into the sunset but in the end the reasons for that don't really matter and are immaterial to the observation that the buyers of an existing property don't always respond to cost considerations on a direct basis.

Next to that, why it is or why it isn't becomes an esoteric - it's good to understand the underlying fundamentals, but in the end it's still subordinate to the direct observations.

Some sites cost more for development, either in terms of time or in actual fees and other costs. Many appraisers are horrible at land appraisals to begin with because they rarely do them and when they are doing them they often use the wrong units of comparison, compare gross instead of net, fail to account for offsite improvements or other development criteria and the like.

It sometimes takes more to bring a house to market in some locations than in others. Sometimes (quite often, in my experience) the value trends for land don't match the value trends among improved properties. The same market area in which I wouldn't use an improved sale that was older than 6 months can have land sales data that show little/no movement in the last 2 years. Or when there is movement the rate of change is nowhere near what the improved properties have been doing. In fact that's almost ALWAYS the case in my region, and across all residential and commercial properties types.

I appraise more land in one year than most SFR appraisers do in their entire careers, and most of those assignments involve far more complicated appraisal problems than comparing finished subdivision parcels to each other. Like the one I'm working on right now.

 

[Joe Flacco]

Good for you for appraising a lot of land and working on one right now. You are listing factors that all impact site values. One way to get site value is sale price minus depreciated cost of improvements. So for anybody to say difference in site value is a unreliable way to develop the adjustment is pretty ridiculous IMO. That is exactly what you are doing when you do paired sales with improved properties in two locations. It is 100% the exact same thing.

 

[George Hatch]

What part of my observation about "different property types moving at different rates and times" are you not understanding? If you want to disagree that it can happen then lets discuss that. Mind you, I'm not trying to tell you what you are seeing in your own market; I'm just asking you to refrain from thinking I don't know what I'm seeing in my own market.

IRL profit and loss margins at a particular point in time vary from one dataset to another. That's also an objectively true observation. You have almost certainly seen some neighborhoods moving faster than others at times, with the slower market in 05/2017 having a later spurt that catches up with the other market a couple months later. Again, how much of the difference is the rate of change @ land vs the rate of change @ profit/loss is immaterial to the observation that at the moment there's a difference.

Have you ever seen pricing trends for two different neighborhoods move at similar overall rates over a 1-2 yr span but at different time frames? Even if not, can you envision how it COULD possibly happen in other market areas?

 

[Joe Flacco]

I don't care about all that. You are just trying to change the subject. We all know you are a competent appraiser okay?

Just answer this. If you take a property sale price and subtract out the depreciated improvement costs, do you get estimated site value?

 

[George Hatch]

I'm not changing the subject at all, I'm just including the other elements that have been part of that discussion all along.

I taught the 8-hr M&S Cost Approach course to appraisers on a CE basis for 15 years and a large percentage of all the SFR appraisals I've done since getting my CG has been proposed construction. Including almost all the SFRs I've appraised in the last 5 years. I generally don't appraise the dogbox tract homes for the GSEs; I usually only get involved with the projects many of you guys are incapable of doing.

Depreciated costs include developer profit or loss, which varies from project to project even in the same time frame. IRL profit is a residual that floats with MV. A developer may start with a goal but in the end they get what they get based on what's happening in the sales market as of the date of sale. Sometimes it's more, sometimes it's less, and sometimes they take a loss.

You may not be seeing profit as a separate consideration that because it's aggregated at an arbitrary rate (that technically requires adjustment for market conditions) in the M&S Residential Cost Handbook and other SFR cost guides. But everywhere outside of FannieWorld it's treated as a separate line item in the Cost Approach.

Fun fact - you know the Cost Approach on the URAR? Well the further up the property type ladder you go the more factors get their own separate lines in the analyses. Just as an example I use different fees/permits by jurisdiction. I.e., different indirect costs in the same region that M&S is pimping the same aggregate cost multiplier. One of the reasons I know this is because I have actually been dealing with contractor cost breakdowns that include those different costs and have been in a position to compare them to each other and to the cost guides.