Extraction Method

[Terrel L. Shields]

only one property is required.

but NOT the subject. You extract it from the comps. I cannot think of a time I've used only 1 sale..in 30 years myself.

 

[George Hatch]

I compare data to each other before I import the results of that comparison for use in comparing these comps to the subject.

I never include the subject as one of the datapoints in a sensitivity analysis.

 

[Terrel L. Shields]

"3. Extraction. Land value is estimated by subtracting the estimated value of the depreciated improvements from the known sale price of the property. This
procedure is frequently used when the value of the improvements is relatively low or easily estimated."

Notice that 'property' is singular...

from a singular COMPARABLE... not the subject. And nothing in USPAP requires you use THREE or more sales as comparison...Yeah, you could use just ONE...but the idea of using multiple sales either in the SCA or in the analysis of land value implies you are attempting to at least corral the value somewhere within a range. A single sale might be necessary...you may not have any other, but I don't think in 30 years I've seen that situation, or at least not in common garden variety housing or land (be it lot, acreage, ranch land, or farmland)

 

[gregb]

This is appraisal 101-

A Spreadsheet Solution for Land Value Extraction - Appraisal Buzz

When the cost approach is needed, either by client requirement or applicability, it’s necessary to derive an estimate of the land value. Of course, the best way to determine an estimate of land value is through the use of the sales comparison approach. If there have been recent, similar lot...

www.appraisalbuzz.com

"Unfortunately, there are not always enough comparable sales of vacant land to permit the use of the sales comparison approach. When this happens, a possible solution is to use the extraction method.

Using this approach, improved properties with lots comparable to the subject’s lot are identified. In order to complete this step, the value of the improvements is calculated using the cost approach to estimate the replacement cost new. Using effective age and remaining economic life estimates to calculate the depreciated value of the improvements, then subtracting the depreciated value of the improvements from the sales price will produce a viable land value. This is done for several properties to produce the relationship between lot value per square foot and lot size as described above for the purpose of calculating the subject’s land value and lot size adjustments used in the sales comparison grid.

There is a lot of “estimating” involved with this approach, so it works best when the value of the improvements are a low percentage of the sales price so that inaccuracies with the estimates have minimal impact on the lot value estimate. This strategy includes selecting properties with small, older homes that have not been remodeled and with minimal site improvements. Of course, the sales should be recent and in the subject’s neighborhood and the lots should be as similar (views, topography etc.) to the subject’s lot as possible.

The first step in the process is to search MLS using the developed criteria to produce a list of potential improved property sales that contains information such as bed and bath counts, year built, garage spaces, GLA, sales price and sale date. Using this information, the next step is to select the “best” sales to use for the statistical analysis. At least six should be selected. The selected sales can, then be imported into an Excel spreadsheet similar to that shown for calculating their lot value and lot value per square foot.

The MLS sheets and their descriptions and photographs should be reviewed to determine the condition of the improvements. Based upon the condition rating, age and total economic life of the improvements, the spreadsheet can be set to calculate the effective age, remaining economic life and percent depreciation. The cost new is calculated based upon GLA, garage spaces, and unit prices. The cost new is reduced by the calculated amount of depreciation to produce the depreciated improvement value.

The improved sales prices are adjusted for date of sale, based upon the effective date of the appraisal, the estimated monthly price trend percentage for existing homes in the subjects market area, and the comparables’ dates of sale. For each of the selected property sales, the estimated lot value (Lot Val) is calculated as the difference between the adjusted improved sales price (Adj S$) and the depreciated value (Dep Val) of the improvements: Lot Val = Adj S$ – Dep Val

Finally, this information is used to estimate the value of the subject lot and the adjustments to the lot sizes for the comparable properties on the sales comparison grid. In the attached example, the Lot Value/SQFT and the Lot Acres are plotted and analyzed using regression analysis with the Power trend line. The equation is shown on the graph along with the square of the correlation coefficient. In this example, the equation is y = 7.476x-.650 where y is the lot value/sqft and x is the lot size in acres. The Subject’s lot size is .175 acres: y = 7.476 x .175^-.650 = $23.215/sqft. $23.215/sqft x .175 acres x 43560 sqft/acre = $176,966.

In my experience, the exponent normally falls between -.4 and -.9 with a minimum R2 of about 0.3. If there are “outliers” impacting these values, they should be removed. This process, if used sparingly, should produce reasonable coefficients and results. In summary, if it is necessary to use the Extraction method, using the process outlined above will help to produce credible and defensible results."

 

[Deleted member 152047]

This is appraisal 101-

A Spreadsheet Solution for Land Value Extraction - Appraisal Buzz

When the cost approach is needed, either by client requirement or applicability, it’s necessary to derive an estimate of the land value. Of course, the best way to determine an estimate of land value is through the use of the sales comparison approach. If there have been recent, similar lot...

www.appraisalbuzz.com

"Unfortunately, there are not always enough comparable sales of vacant land to permit the use of the sales comparison approach. When this happens, a possible solution is to use the extraction method.

Using this approach, improved properties with lots comparable to the subject’s lot are identified. In order to complete this step, the value of the improvements is calculated using the cost approach to estimate the replacement cost new. Using effective age and remaining economic life estimates to calculate the depreciated value of the improvements, then subtracting the depreciated value of the improvements from the sales price will produce a viable land value. This is done for several properties to produce the relationship between lot value per square foot and lot size as described above for the purpose of calculating the subject’s land value and lot size adjustments used in the sales comparison grid.

There is a lot of “estimating” involved with this approach, so it works best when the value of the improvements are a low percentage of the sales price so that inaccuracies with the estimates have minimal impact on the lot value estimate. This strategy includes selecting properties with small, older homes that have not been remodeled and with minimal site improvements. Of course, the sales should be recent and in the subject’s neighborhood and the lots should be as similar (views, topography etc.) to the subject’s lot as possible.

The first step in the process is to search MLS using the developed criteria to produce a list of potential improved property sales that contains information such as bed and bath counts, year built, garage spaces, GLA, sales price and sale date. Using this information, the next step is to select the “best” sales to use for the statistical analysis. At least six should be selected. The selected sales can, then be imported into an Excel spreadsheet similar to that shown for calculating their lot value and lot value per square foot.

The MLS sheets and their descriptions and photographs should be reviewed to determine the condition of the improvements. Based upon the condition rating, age and total economic life of the improvements, the spreadsheet can be set to calculate the effective age, remaining economic life and percent depreciation. The cost new is calculated based upon GLA, garage spaces, and unit prices. The cost new is reduced by the calculated amount of depreciation to produce the depreciated improvement value.

The improved sales prices are adjusted for date of sale, based upon the effective date of the appraisal, the estimated monthly price trend percentage for existing homes in the subjects market area, and the comparables’ dates of sale. For each of the selected property sales, the estimated lot value (Lot Val) is calculated as the difference between the adjusted improved sales price (Adj S$) and the depreciated value (Dep Val) of the improvements: Lot Val = Adj S$ – Dep Val

Finally, this information is used to estimate the value of the subject lot and the adjustments to the lot sizes for the comparable properties on the sales comparison grid. In the attached example, the Lot Value/SQFT and the Lot Acres are plotted and analyzed using regression analysis with the Power trend line. The equation is shown on the graph along with the square of the correlation coefficient. In this example, the equation is y = 7.476x-.650 where y is the lot value/sqft and x is the lot size in acres. The Subject’s lot size is .175 acres: y = 7.476 x .175^-.650 = $23.215/sqft. $23.215/sqft x .175 acres x 43560 sqft/acre = $176,966.

In my experience, the exponent normally falls between -.4 and -.9 with a minimum R2 of about 0.3. If there are “outliers” impacting these values, they should be removed. This process, if used sparingly, should produce reasonable coefficients and results. In summary, if it is necessary to use the Extraction method, using the process outlined above will help to produce credible and defensible results."

Thank you @gregb this is fantastic!

 

[alebrewer]

Your interpretation of the text is incorrect. Also, how is it that you are so confident in your depreciation estimates? What support do you have for that facet of this calculation? I can shoot holes in your limited scope of work all day and so will any reviewer worth their salt. You work in a property type where there is a plethora of data and are refusing to go out and find extraction comparables.

I'm not sure how we got sidetracked into depreciation estimates? I'm simply offering the absolute fact that, according to The Appraisal of Real Estate, extraction is where, "An estimate of teh depreciated cost of the improvements is deducted from the total sale price of the PROPERTY to arrive at the land value." (my bold and italics added) There is nothing to interpret. It is plain English. If you'll remember from your grade school English class, property is singular and 'properties' is plural. Regardless, please continue to perform extraction as you wish - I have no desire to change your mind. I simply have stated what the authoritative text says about it, and not just what my opinion is about it.

 

[George Hatch]

Apologies if this hasn't already been addressed 10x in this thread.

It seems to me the operative question here is "extract from what"? You have apparently interpreted "the property" to mean "the subject property". That clarification isn't made in your reference; not for this mode of land value analysis nor for any other mode of analysis of the value indicators or physical, legal or economic components of the comparable data we're using.

Nor do we limit the process of extraction to land value analyses. We commonly use extraction calculations in several different types of calculations.

When we extract the GIMs and price/sf indicators from our comparables we do it internally - the GIM from that transaction is the result of that sale price/that property's income. The price/sf is that sale price/that property's GBA or Land Area. It would make no sense and would provide no utility to the analysis to divide that property's sale price by the subject's income or the subject's GLA.

 

[alebrewer]

This is appraisal 101-

A Spreadsheet Solution for Land Value Extraction - Appraisal Buzz

When the cost approach is needed, either by client requirement or applicability, it’s necessary to derive an estimate of the land value. Of course, the best way to determine an estimate of land value is through the use of the sales comparison approach. If there have been recent, similar lot...

www.appraisalbuzz.com

"Unfortunately, there are not always enough comparable sales of vacant land to permit the use of the sales comparison approach. When this happens, a possible solution is to use the extraction method.

Using this approach, improved properties with lots comparable to the subject’s lot are identified. In order to complete this step, the value of the improvements is calculated using the cost approach to estimate the replacement cost new. Using effective age and remaining economic life estimates to calculate the depreciated value of the improvements, then subtracting the depreciated value of the improvements from the sales price will produce a viable land value. This is done for several properties to produce the relationship between lot value per square foot and lot size as described above for the purpose of calculating the subject’s land value and lot size adjustments used in the sales comparison grid.

There is a lot of “estimating” involved with this approach, so it works best when the value of the improvements are a low percentage of the sales price so that inaccuracies with the estimates have minimal impact on the lot value estimate. This strategy includes selecting properties with small, older homes that have not been remodeled and with minimal site improvements. Of course, the sales should be recent and in the subject’s neighborhood and the lots should be as similar (views, topography etc.) to the subject’s lot as possible.

The first step in the process is to search MLS using the developed criteria to produce a list of potential improved property sales that contains information such as bed and bath counts, year built, garage spaces, GLA, sales price and sale date. Using this information, the next step is to select the “best” sales to use for the statistical analysis. At least six should be selected. The selected sales can, then be imported into an Excel spreadsheet similar to that shown for calculating their lot value and lot value per square foot.

The MLS sheets and their descriptions and photographs should be reviewed to determine the condition of the improvements. Based upon the condition rating, age and total economic life of the improvements, the spreadsheet can be set to calculate the effective age, remaining economic life and percent depreciation. The cost new is calculated based upon GLA, garage spaces, and unit prices. The cost new is reduced by the calculated amount of depreciation to produce the depreciated improvement value.

The improved sales prices are adjusted for date of sale, based upon the effective date of the appraisal, the estimated monthly price trend percentage for existing homes in the subjects market area, and the comparables’ dates of sale. For each of the selected property sales, the estimated lot value (Lot Val) is calculated as the difference between the adjusted improved sales price (Adj S$) and the depreciated value (Dep Val) of the improvements: Lot Val = Adj S$ – Dep Val

Finally, this information is used to estimate the value of the subject lot and the adjustments to the lot sizes for the comparable properties on the sales comparison grid. In the attached example, the Lot Value/SQFT and the Lot Acres are plotted and analyzed using regression analysis with the Power trend line. The equation is shown on the graph along with the square of the correlation coefficient. In this example, the equation is y = 7.476x-.650 where y is the lot value/sqft and x is the lot size in acres. The Subject’s lot size is .175 acres: y = 7.476 x .175^-.650 = $23.215/sqft. $23.215/sqft x .175 acres x 43560 sqft/acre = $176,966.

In my experience, the exponent normally falls between -.4 and -.9 with a minimum R2 of about 0.3. If there are “outliers” impacting these values, they should be removed. This process, if used sparingly, should produce reasonable coefficients and results. In summary, if it is necessary to use the Extraction method, using the process outlined above will help to produce credible and defensible results."

lol - thanks GregB! This is an excellent dissertation on one way to perform extraction. A LOT more involved than the example from The Appraisal of Real Estate, but nonetheless very defensible. My only caution would be that you be able to understand what you're doing, and what an R2 even is, before trying to employ this. The example from The Appraisal of Real Estate is as follows: "..., assume an appraiser is estimating the value of the land under an aging, deteriorated automobile service garage that was recently sold for $575,000. No vacant lots have been sold in the market area recently. The appraiser estimates the cost of the improvement at $200,000 and total depreciation at 80%, indicating that the depreciated cost of the improvement is $40,000. Deducting $40,000 from the $575,000 sales price, the appraiser obtains a residual land value indication of $535,000 by the extraction technique." Notice that the example from the text is performed using only one property...

 

[Deleted member 152047]

If you are utilizing a singular property for extraction, your cost estimate and depreciation estimate better be dead on. If you widen the data set, your level of confidence in your cost estimates and depreciation estimates does not need to be as exact.

You arguing that the appraisal of real estate's usage of singular instead of plural as definitive evidence that you only have to use a singular extraction indication is laughable.

 

[alebrewer]

You have interpreted "the property" to mean "the subject property".

Correct - and in the example given by the text, the authors do as well...