Extraction Method

[TPA_24]

Hey fam,

So I am trying to learn/understand the extraction method. I am starting to appraise in more urban areas with no land sales in sight. SO I had to start looking at how the other methods work (I had read about them in class, but never had to use because I had land sales up to this point).

Here are the big issues I can't seem to understand/provide support:
- the effective age for depreciation is based imo, so how do you prove that? Do lenders just accept the age I use?
- The Site values seem really high (like I know just a few miles from here new construction lots are $60k and selling for 400k+)

This spreadsheet is made up of everything I read about from class and online forums/WorkingRE, so feel free to tear it apart and help me be better. All are in the same neighborhood, updated and range from 15-20 years old (my effective age is 10 out of 90 total economic life). Thanks in advance.

SQFT	2134​	2754​	1890​	1594​	1977​
Property Address	7910 Indian Blanket	7810 Buttercup	2395 Sunflower	2310 Sunflower	2435 Sunflower
Date of Sale	8/20/2020​	6/15/2020​	5/4/2020​	1/5/2021​	10/29/2020​
Sale Price (A)	$247,500.00​	$287,000.00​	$247,500.00​	$209,900.00​	$257,000.00​
Replacement Cost New	$202,730.00​	$231,336.00​	$183,330.00​	$153,024.00​	$179,907.00​
Less: Depreciation of Improvements	$22,525.56​	$25,704.00​	$20,370.00​	$17,002.67​	$19,989.67​
Depreciated Value of Improvements (B)	$180,204.44​	$205,632.00​	$162,960.00​	$136,021.33​	$159,917.33​
Site Value (A less B)	$67,295.56​	$81,368.00​	$84,540.00​	$73,878.67​	$97,082.67​
Site Size	7200​	7800​	6171​	5000​	9660​
Site Value per Sq. Ft.	$9.35​	$10.43​	$13.70​	$14.78​	$10.05​
Site Value to Sale Price Percentage	27%​	28%​	34%​	35%​	38%​
Average Percent of Site to Sale Price	33%​
Median Price per Sq. Ft.	$10.43​
Average Price per Sq. Ft.	$11.66​
Subject Site Size	8640​	Opinion of Site Value (Median)	$90,130.71​
		Opinion of Site Value (Average)	$100,748.73​

 

[glenn walker]

Looks very good, lets face it in many areas where I work 70% or more can end up being site value in the cost approach when using extraction. A common scenario in Los Angeles County is a 1,200 square foot, 75 year old CA Bungalow selling or valued at $600,000 to $1,000,000 and sitting on a small 4,000 to 7,000 Sq.Ft. Lot's. There are no vacant lots for sale unless something burns down, and even then its normally not sold as a vacant lot but they just rebuild a new home on it. So the cost approach in these areas is always a conundrum. Frankly it's rarely even worth considering as of any real use, but we still have most lenders wanting it done.

Ideally the appraiser needs lot or land sales, but hey what do you do when there are none. Anyway I attached a typical comment below that I use when in this situation. Feel free to use it, modify it or disregard it. Years ago back in the day , I had some reviewer from hell, wanting me to resppond to his question on the extraction issue. My boss was a old Grumpy MAI and he gave me the rebuttle below. Today I place it in my cost approach section on page three of the 1004.

The Subject's market area is almost completely built out, therefore the Extraction Method, a variant of the Land Residual Method, will be used to estimate the Subject's Site value. A nominal price of $XXXXX per square foot of site area was derived and shown below as the site estimate. Market responses to lot size and site utility are a function of the consideration of the property as a whole.

 

[Joe Flacco]

There is a gap between vacant land and tear downs or results from extraction because there is site development costs associated with improving vacant land to a site that is suitable for construction of ideal improvement.

 

[Mejappz]

Hey fam,

So I am trying to learn/understand the extraction method. I am starting to appraise in more urban areas with no land sales in sight. SO I had to start looking at how the other methods work (I had read about them in class, but never had to use because I had land sales up to this point).

Here are the big issues I can't seem to understand/provide support:
- the effective age for depreciation is based imo, so how do you prove that? Do lenders just accept the age I use?
- The Site values seem really high (like I know just a few miles from here new construction lots are $60k and selling for 400k+)

This spreadsheet is made up of everything I read about from class and online forums/WorkingRE, so feel free to tear it apart and help me be better. All are in the same neighborhood, updated and range from 15-20 years old (my effective age is 10 out of 90 total economic life). Thanks in advance.

SQFT	2134​	2754​	1890​	1594​	1977​
Property Address	7910 Indian Blanket	7810 Buttercup	2395 Sunflower	2310 Sunflower	2435 Sunflower
Date of Sale	8/20/2020​	6/15/2020​	5/4/2020​	1/5/2021​	10/29/2020​
Sale Price (A)	$247,500.00​	$287,000.00​	$247,500.00​	$209,900.00​	$257,000.00​
Replacement Cost New	$202,730.00​	$231,336.00​	$183,330.00​	$153,024.00​	$179,907.00​
Less: Depreciation of Improvements	$22,525.56​	$25,704.00​	$20,370.00​	$17,002.67​	$19,989.67​
Depreciated Value of Improvements (B)	$180,204.44​	$205,632.00​	$162,960.00​	$136,021.33​	$159,917.33​
Site Value (A less B)	$67,295.56​	$81,368.00​	$84,540.00​	$73,878.67​	$97,082.67​
Site Size	7200​	7800​	6171​	5000​	9660​
Site Value per Sq. Ft.	$9.35​	$10.43​	$13.70​	$14.78​	$10.05​
Site Value to Sale Price Percentage	27%​	28%​	34%​	35%​	38%​
Average Percent of Site to Sale Price	33%​
Median Price per Sq. Ft.	$10.43​
Average Price per Sq. Ft.	$11.66​
Subject Site Size	8640​	Opinion of Site Value (Median)	$90,130.71​
		Opinion of Site Value (Average)	$100,748.73​

It looks good. Nice job.

 

[Joe Flacco]

I just did a appraisal of a new home on an alley lot and they acquired the alley lot for $100k. It cost about $250k just to get water / sewer into the alley and to get the approvals necessary for that. There was a tear down on a regular street fronting lot a block south the developer acquired the lot for $500k. That lot already utilities on site. The vacant land in the alley is around $100k. The site value of the alley lot is not $100k.

 

[Meandering]

The land value, is for: vacant and ready for development.

Without utilities, it is not "ready for development"

so the costs associated for utilities is included in the land "value" which may be higher than just a sale price for vacant land.

.

 

[Terrel L. Shields]

The Site values seem really high (like I know just a few miles from here new construction lots are $60k and selling for 400k+)

You look like you are doing it about right. You say bare lots are selling for $60k and you are coming out $10-20K higher. That is the value (and cost) of utilities, permits, etc. that I normally would call "site improvements" - which might mean septic, driveway, sidewalk, fencing...items that I tend to lump sum. The RCN is only the dwelling itself (and/or any associated buildings like detached garage, etc.) And the banker can accept it or prove you wrong. Let 'em try. It is your judgment based upon the heuristic knowledge you have acquired over your career.

 

[NachoPerito]

For Depreciation:
You can estimate effective age and effective life if you think it is accurate. If you don't then plot a large sample of similar sales except for age. Use a trendline to determine the change in value as the age of the homes change. Or use a regression formula program.

Site values being too high:
How did you determine replacement cost? It can be hard to include all costs involved. It depends on where you are, but in my area you have to pay $20,000 to hook up to water/sewer, $7500 for traffic impacts, $8,000 for school mitigation fees, $7,500 in permit fees, $7,500 in landscaping, costs or the driveway, fencing, garage, and other things that are beyond the cost of the home. Then you have some profit, loan costs during construction, and 5% of the sale price for broker fees may be appropriate, and also you can include closing costs if appropriate (A spec builder would be paying these fees).

You can check your result with the assessor's ratio. Lets say your property sold for $300k. The assessor says its value is $200k and the land is 30% of the total. you can attribute that 30% to your sale price to get another estimate of the land value. In this case it would be $90k.

 

[RCA]

Hmmmm. The Extraction Method has been pretty much debunked. Why add meaningless trash to your appraisal report? And, do you really need it?

Appraisal Scoop: Land Valuation: Extraction Has No Traction (typepad.com)

The reality is the Extraction Method, really doesn't mean anything without land sales and if you have land sales, you just don't need it. If you don't have any land sales in the past 10 years or so anywhere in the vicinity of the subject property, you should seriously just consider scrapping the approach. ... Well, I suppose you could do a survey of potential buyers and ask them what they would be willing to pay for lots, if they were available. That would be something, but not much. But, then, better than the Extraction Method.

 

[Basically Rectangular]

Since you have the sale price, replacement cost, and depreciation, you can extract the effective age by multiplying the percent depreciated by the useful life (total economic life). Add a couple lines to your spreadsheet and you will have support for the effective age.