extraction method

[Peter Krumm]

who uses the extraction method for land/site value and who can describe to me the true/accurate way to do it? I appraise in an area where most neighborhoods are fully developed and I want to see if I am doing this correctly.

 

[CANative]

IMO, if you have to resort to the extraction method in order to develop an opinion of site value, the cost approach is all but meaningless.

The best method is to find sales of properties with similar lots but minimal improvements or where the improvements contribute very little. Tear downs, mobile homes, tiny old houses where the new buyer has rebuilt, etc.

The procedure is similar to the procedure applied to estimate the amount of depreciation in the improvements but in this case the residual vaue is the land value rather than the depreciated value of the improvements. In other words, the depreciated, or contributory, value of all the improements on a sale property are deducted from the sale price of the property and the remaining portion of the sale price represents the land vaue.

Steps:
1. Confirm the sale price of each comparable sale.

2. Determine the intended use of the improvements.

3. Estimate the salvage value of the improvements less demolition expenses.

4. Deduct the net salvage value of the improvements from the sale price.
Sales price $250,000
Less improvements -$20,000
Indicated land vaue $230,000

5. Add the demolition cost in excess of salvage value.
Sale price $380,000
Plus demolition and removal +$10,000
Land price $390,000

Edit: BTW, I don't know if this is the "true/accurate" way because I'm not sure there IS a true/accurate way. Especially "accurate."

 

[Chuck Melton]

No matter how you do it, both the allocation and extraction methods are nothing but an exercise in futility.

You start off with improved sales (minimally improved for extraction, not so minimally [hopefully] for allocation) and subtract depreciated cost or apply land-to-value ratios (btw, how did you determine Land-to-value ratios if you don't have land sales?) to create what I call "synthetic" land sales.

Now, to answer my own earlier question (I know you love it when I do that, Joyce ;->), you get land-to-value ratios for Allocation one of two ways:

1) Go to an outlying yet similar (I'm already starting to laugh) area where there is ongoing development of similar homes and hopefully some land sales that don't involve a builder who only sells the lot as part of a build-to-suit contract and pray there are no locational adjustments that need to be made (because that would involve either a paired sales or regression analysis of improved sales from both areas in order to determine said adjustment.... have fun)

2) and the more likely, you take the extraction results derived in the not-so-optimal situation of estimating depreciated cost of not-so-depreciated improvements (am I the only one getting light headed here?), divide them by the sale prices of the same improved sales you started with (sounds kind of incestuous, if you ask me) and VOILA!!! Doctor Frankenstein would be proud (IT'S ALIVE!!!!)

I make light of it because I hate it. Someone PLEASE tell me if they have a better less convoluted way

 

[hastalavista]

I think Greg and Chuck give good advice to complete a calculation which is flawed from the get-go.
So, in the spirit of suggesting another fouled-up method, here's what I do:

I rarely have the situation where there is even a house near the end of its economic life to use Greg's suggestion. So, I do a 'mini-Cost Approach' on each of the comparables, and extract the land values for those properties. If they are overall "similar" to my subject, and assuming that the rest of my assumptions rof: ) such as phy. depr. and condition rating are correct, than I can extract the site value and use this. For now, I also deduct EI (Entrepreneurial Incentive) value, so the land value is "site-ready to be improved to HBU". Roughly, it works like this:

(Comp#1 sale price) - ((RCN-all depreciation)) - (as-is site improvements) - EI = Site Value.
Do this for all three (sometimes less, sometimes more). and then I calculate the average lot price and the $/SF. Depending on the comps selected, I may use one or the other (a good example would be when comparing a 3,000sf lot with a 4,500sf lot; on a $/SF basis, there is a significant difference. On average, there is not that much difference).

Finally, I use either the $/sf, the average lot value, or I pick somewhere in between based on my evaluation of where the subject should fit (enough variance on the variables yet for you?).

Voilà! Site value by extraction complete. Put it on a spreadsheet and the UW goes :Eyecrazy: .

 

[PL1957]

The First Edition of "Appraising Residential Properties", published by AIREA has a real nice description and example on pages 239-241. I imagine the descriptions in the Third Edition, published by the AI are pretty good too.

Don't people buy books for reference or examples anymore?

 

[Terrel L. Shields]

Pete - don't know where you are from but keep in mind the answers are coming from the coasts..California and Florida.

There is a real world somewhere out there in between.

Start with allocation. If you know of a nearby area, a similar competing market, where you can find out what builders pay for lots and what they sell the properties for, then you might conclude that land value was 30% of the total cost...the profit, etc. accrue to the improvements, not the lot. That's pretty lame, of course, because an older improvement likely would have a higher contribution for land (the ratio would be higher).

A variation of Allocation is to check the property tax card of the comp being analyzed where the assessor estimates land and improvements separately (in a lot of states). With that ratio, you can extrapolate it to the subject. say the assessor says the land is assessed at 2,500 and the improvements at 10,500, total is 13,000. 2500 ÷ 13,000 = 19%.

Extraction and allocation are checks upon each other. Extraction consists of analyzing the comparable. Take you cost book and estimate the building RCN. Estimate the depreciation. Subtract the residual (Depreciated Cost New) from the total sales price. That is the lot value by extraction. Very simple.

Yes, all these methods are weak. But if being weak is a problem for appraisers, then no approach is 'strong' certainly not the sales approach where we generally do not have any way to quantify the motivations of the buyers and sellers unless we personally interview both and review the entire sales process..and even then we are still guessing.

You can expect the most criticism of these methods and the Cost Approach from appraisers who work areas where lots are frequently far more expensive than the actual buildings built on them. You can expect more reliance upon extraction and allocation in areas where lot prices are relatively low and where rural appraisers are dealing with large tracts in areas with numerous large tract vacant land sales.

 

[CANative]

There is a real world somewhere out there in between.

The pioneers got sick of the east coast because there was no land left. So they went west, bypassing the midwest and ending up in California. Now everyone's going to the midwest because there's lots of cheap, undeveloped land.

You try coming up with a land value and cost approach accurate enough to pin down a point value for a mortgage lender in areas subdivided and built out in the 1800's and almost no one bulldozes a house. And try allocation using tax cards in a state with tax initiatives like prop. 13.

 

[Terrel L. Shields]

You try coming up with a land value and cost approach accurate enough to pin down a point value...try allocation using tax cards in a state with tax initiatives

exactly. The E and W coast properties tend to be difficult to impossible to do "pin point" values. But there is another world out there where "Mortgage brokers" do not dominate every property loan. Likewise, without sales, how would one justify the land value except by allocation or extracton? No matter how weak the method is, if the lender wants a CA, you need to justify how you did it and that includes explaining where your land value came from. PFA? just pulled from air? Or, use a weak method you can defend? The fact your reconciliation should state the cost approach was applicable but so much weaker than the sales approach that you weighted the SA 100%..that's a different question.
Allocation of assessor ratios is a very weak method but it is a method. And I would rather defend a weak method than to defend no method. And I would rather do the cost approach rather than argue with a lender who wants it. Ditto for Income approach. If the house is rented, a lot of lenders want the income approach and a rent schedule, never mind there is not another rental in the subdivision...just do it and go on. In the reconciliation I will weight it appropriately...not at all.

 

[CANative]

Agreed.

I guess I get testy about the issue because I put so much effort into the process and document everything. Then I review report's that just say "land value by extraction" and it pisses me off.

I'm going to to a review report in a couple of hours. "Land value by extraction." He's got $700,000 (to make value) There are tons and tons of 1 acre parcels with a peek of the ocean selling for about $300,000 within a mile or two. A 3.5 acre property with an modest, older home sold almost next door a few months ago for $425,000.

 

[Peter Krumm]

Thank you

who uses the extraction method for land/site value and who can describe to me the true/accurate way to do it? I appraise in an area where most neighborhoods are fully developed and I want to see if I am doing this correctly.[/QUOTE]


Thanks everybody, with all of the info, I figured out that I have been doing it reasonably well all along. I appraise in South Florida, but came from a semi rural area in Minnesota (that's where I started Appraising anyway.) It's a different world down here and I thought I'd check myself. Basically, there are very few land sales and even less of them are ever remotely relevant. I do the mini cost approach thing on a few comps from the immediate neighborhood and that gives me a remote idea. I do not like this method, but it is somewhat quick and easy. Usually I add to the report that the sales comparison analysis was given 100% weight and the cost approach was only included to meet the request of the lender. Is that about right?