Cost approach site value (sales lot vs extraction)

[gorillakimchi]

I'm working on cost approach and wondering which method that I have to choose.

As I know sales comparison (paired sales lot for cost approach) is the best way to determine a site value. Extraction can be the 2nd method if there's no vacant lot sales.

Developed sales comparison approach for the subject & values around $1,300,000 (Refinance)

Subject located in Los angeles, 7500sf lot size and Depreciated cost of improvements around $233,000

Found some R1 (SFR) sold lots but size & prices are varying. AVG around $35/lot.

I learned that SFR site are not price/SF basis, so I don't think it's right to estimate site value $7500 X $35.

Above sales comparison approach value ($1,300,000) is pretty solid, and I have no doubt. If so, I assume the site value should be near $1,067,000 ( $1,300,000 - $233,000)

However, I can't logically explain why site value can be near 1mil if I use vacant lot sales.



So I tried extraction method to see how it looks like (based on my knowledge)

Since subject unit is Refi, I couldn't extract site values from the subject, so found some SFR comps.

Similar lot size but poor condition (C5~C6) SFR. I assume improvements with poor condition have no much contributory value, so developers buy that SFR for land values.

Also, researched New built SFR (to check how much was the acquisition value) but there are not enough data (only 1 found), so it's disregarded.

I found 5~6 SFR (C5~C6 ) with 7000~7500SF lot size. Those properties are sold AVG $130/SF, so I am guessing underlying land value for SFR site in that area can be around $130/SF

So, 7500SF X $130SF = $975,000.

$975,000 makes more sense to me but I still have vacant lot sales in that area, so I can't just simply saying "There are no vacant lots sales, so extraction method utilized"

Is it ok to use extraction method rather than vacant lot sales? or If I have to use vacant sales lot for site value, how to calculate?

Any advice can be helpful for me.

Thank you!

 

[glenn walker]

V

I'm working on cost approach and wondering which method that I have to choose.

As I know sales comparison (paired sales lot for cost approach) is the best way to determine a site value. Extraction can be the 2nd method if there's no vacant lot sales.

Developed sales comparison approach for the subject & values around $1,300,000 (Refinance)

Subject located in Los angeles, 7500sf lot size and Depreciated cost of improvements around $233,000

Found some R1 (SFR) sold lots but size & prices are varying. AVG around $35/lot.

I learned that SFR site are not price/SF basis, so I don't think it's right to estimate site value $7500 X $35.

Above sales comparison approach value ($1,300,000) is pretty solid, and I have no doubt. If so, I assume the site value should be near $1,067,000 ( $1,300,000 - $233,000)

However, I can't logically explain why site value can be near 1mil if I use vacant lot sales.



So I tried extraction method to see how it looks like (based on my knowledge)

Since subject unit is Refi, I couldn't extract site values from the subject, so found some SFR comps.

Similar lot size but poor condition (C5~C6) SFR. I assume improvements with poor condition have no much contributory value, so developers buy that SFR for land values.

Also, researched New built SFR (to check how much was the acquisition value) but there are not enough data (only 1 found), so it's disregarded.

I found 5~6 SFR (C5~C6 ) with 7000~7500SF lot size. Those properties are sold AVG $130/SF, so I am guessing underlying land value for SFR site in that area can be around $130/SF

So, 7500SF X $130SF = $975,000.

$975,000 makes more sense to me but I still have vacant lot sales in that area, so I can't just simply saying "There are no vacant lots sales, so extraction method utilized"

Is it ok to use extraction method rather than vacant lot sales? or If I have to use vacant sales lot for site value, how to calculate?

Any advice can be helpful for me.

Thank you!

Very Common in Los Angeles often 80% value in lot-

 

[Terrel L. Shields]

If you have sales, then sales are the best way. Absent sales, then extraction is the best way. Avoid "allocation" from the assessor's records. Very weak way.

 

[sputnam]

You choose the method, or methods, based on the quality and quantity of available data. If you have plenty of similar land sales, then use Sales Comparison Analysis. If you don't, then you might use extraction, or allocation, or others. You might decide to use several and then reconcile.

 

[JeffSH]

Edit : Extraction takes forever unless you just pull a percentage out of your butt. You have to do the cost approach on multiple properties for the extraction method.

Find comps. They're out there. Search the assessor for land sales. Find teardowns. Expand the search to superior/inferior locations. I really hate extraction.

 

[JeffSH]

V

Very Common in Los Angeles often 80% value in lot-

Here my assignments have ranged from 1% site value to as high as 80%. It's pretty incredible how many vacant lots there are in neighborhoods of Chicago that nobody wants to live in. I doubt vacant land lasts very long in the LA metro.

 

[alebrewer]

Extraction takes forever unless you just pull a percentage out of your butt. You have to do the cost approach on multiple properties for the extraction method.

Not to argue, Jeffrey, but what textbook says you have to have multiple properties to perform extraction? And what are you talking about regarding a percentage? Extraction is a backwards CA, no? Instead of starting with the site value and ending up with the overall value, you start with the overall value and end up with the site value, right?

 

[JeffSH]

Not to argue, Jeffrey, but what textbook says you have to have multiple properties to perform extraction? And what are you talking about regarding a percentage? Extraction is a backwards CA, no? Instead of starting with the site value and ending up with the overall value, you start with the overall value and end up with the site value, right?

You are correct. I was kind of mashing together allocation and extraction. I haven't used either method in a very long time because I just find land sales. Even if they are dated.

 

[glenn walker]

Not to argue, Jeffrey, but what textbook says you have to have multiple properties to perform extraction? And what are you talking about regarding a percentage? Extraction is a backwards CA, no? Instead of starting with the site value and ending up with the overall value, you start with the overall value and end up with the site value, right?

The OP works Los Angeles its common to have older homes where 75% or more is in the small 7,000 Sq.Ft. to 8,000 Sq.Ft. lot. Also in Los Angeles due to high entitlements fees, up to $100K to $200K per house, therefore most rehabbers and builders often leave one wall standing to claim its a Remodel and not new home, so there never is a Lot Sale. Unlike other Cities, often there is no lot sales and even if there is often just one mile east or west can be entirely different neighborhoods and large price swings . Therefore extraction is all you can do and just explain there is no vacant land or lots for sale. It is what it is and unique to certain markets.

 

[gorillakimchi]

V

Very Common in Los Angeles often 80% value

The OP works Los Angeles its common to have older homes where 75% or more is in the small 7,000 Sq.Ft. to 8,000 Sq.Ft. lot. Also in Los Angeles due to high entitlements fees, up to $100K to $200K per house, therefore most rehabbers and builders often leave one wall standing to claim its a Remodel and not new home, so there never is a Lot Sale. Unlike other Cities, often there is no lot sales and even if there is often just one mile east or west can be entirely different neighborhoods and large price swings . Therefore extraction is all you can do and just explain there is no vacant land or lots for sale. It is what it is and unique to certain markets.

In my case, there are land sales. As I explained, land sales comps prices are way way lower than the prices that I got from extraction methods.

AVG land sale values are $35/lot but extraction methods (C5~C6 condition with improvements) showing $130/SF. I know sales comp is the best but somehow it doesn't work in my case.
If there are a few $700~800k land sales with 7000~8000SF lots, I use it without hesitation. (Still it's odd why other similar size lots sold around $35/lot) It's simple and clean.

Sales comp approach value $1,300,000 but cost approach value around $500,000? (If I use paired sales $35/lot) I don't think that seems normal. EP can be 800K even dep cost around 220K?
If, so I am going buy lots there and build property right away. I know this doesn't make sense & I def did something wrong but can't figure out.

Extraction methods close to $1,200,000 so it seems more reasonable. I don't know why there are huge gaps between Sales approach value and Cost approach (Paired sales) value.