Land Value: Extraction and Allocation

[dfalliaux]

Anyone have an easy way to differentiate the two? I always get the two confused for whatever reason. TIA

 

[Michigan CG]

Extraction
A method of estimating land value in which the depreciated cost of the improvements on the improved property is estimated and deducted from the total sale price to arrive at an estimated sale price for the land; most effective when the improvements contribute little to the total sale price of the property.

Allocation
1. The general process of separating value between the component parts of a property.
2. A method of estimating land value in which sales of improved properties are analyzed to establish a typical ratio of land value to total property value and this ratio is applied to the property being appraised or the comparable sale being analyzed.

I would suggest that anyone who considers appraising a career have on hand the AI Dictionary of Real Estate Appraisal. The 5th Edition came out last month.

 

[dfalliaux]

I would suggest that anyone who considers appraising a career have on hand the AI Dictionary of Real Estate Appraisal. The 5th Edition came out last month.

Thank you, I have the dictionary. I'm curious if someone has an easy acronym or rule of thumb they use to differentiate the two? For instance I use (DUST) Demand Utility Scarcity Transferability when referring to elements of value etc. Or P.E.T.E when referring to government powers.

 

[Metamorphic]

Taking them in alphabetical order....

Allocation is the CONCEPT that some of the overall value is a contribution of the land, and some is a contribution of the improvements.

Extraction is the PROCESS, of actually finding the land value by extracting the improvement value.

A.....E
Concept.....Process based on the concept.

 

[dfalliaux]

Taking them in alphabetical order....

Allocation is the CONCEPT that some of the overall value is a contribution of the land, and some is a contribution of the improvements.

Extraction is the PROCESS, of actually finding the land value by extracting the improvement value.

A.....E
Concept.....Process based on the concept.

Very cool, would have never of thought of that. Thanks for the help

 

[Michigan CG]

Most of the review work I do is for litigation. I see so many reports where the clueless "appraiser" states that they have determined the land value through extraction or allocation.

It is mostly BS where they learned this method of not keeping up with recent land sales from their clueless "mentor" by assigning 20% or 25% of the value of the home to the value of the land.

Most of the "appraisers" using these terms do not know what they mean, have never read the definition and could not defend what they write in the reports any more than a three year-old could explain the theory of relativity.

Developing abstraction takes a ton of work which includes researching and proving physical and external depreciation along with knowing current building costs and attributing them all to the proper places.

Researching land sales is much easier and more credible. To discredit the typical "appraiser" I turn to the Cost Approach first. They make it too easy to discredit that approach and therefore all of the report.

 

[dfalliaux]

Most of the review work I do is for litigation. I see so many reports where the clueless "appraiser" states that they have determined the land value through extraction or allocation.

It is mostly BS where they learned this method of not keeping up with recent land sales from their clueless "mentor" by assigning 20% or 25% of the value of the home to the value of the land.

Most of the "appraisers" using these terms do not know what they mean, have never read the definition and could not defend what they write in the reports any more than a three year-old could explain the theory of relativity.

Developing abstraction takes a ton of work which includes researching and proving physical and external depreciation along with knowing current building costs and attributing them all to the proper places.

Researching land sales is much easier and more credible. To discredit the typical "appraiser" I turn to the Cost Approach first. They make it too easy to discredit that approach and therefore all of the report.

Simply a study tool...

 

[Metamorphic]

Most of the review work I do is for litigation. I see so many reports where the clueless "appraiser" states that they have determined the land value through extraction or allocation.

It is mostly BS where they learned this method of not keeping up with recent land sales from their clueless "mentor" by assigning 20% or 25% of the value of the home to the value of the land.

Most of the "appraisers" using these terms do not know what they mean, have never read the definition and could not defend what they write in the reports any more than a three year-old could explain the theory of relativity.

Developing abstraction takes a ton of work which includes researching and proving physical and external depreciation along with knowing current building costs and attributing them all to the proper places.

Researching land sales is much easier and more credible. To discredit the typical "appraiser" I turn to the Cost Approach first. They make it too easy to discredit that approach and therefore all of the report.

I was trained to use the assessor's published % improvement data to find land values. At first I thought it was garbage. Working with it for a while I found it to be somewhat valuable, but far from perfect. Its a nice thing to have in the quiver for built out areas with no good lot sales/listings. I don't mind using it in those situations because the CA is totally theoretical anyway without the realistic possibility of building as an option to buying.

If you could actually build instead of buy pre-built, there should be some lot sale data, and that is obviously better data than something based on allocation.

As far as level of effort goes, I have a spreadsheet that I fill out to get aprs on the comps for prior sales analysis....just add the % improvement data and it does the extraction automatically...it also does depreciation in the same time. Its about the same as looking up and writing up actual lot data.

Its really about understanding the strengths and weaknesses of the method and using it appropriately.

 

[CANative]

I don't mind using it in those situations because the CA is totally theoretical anyway without the realistic possibility of building as an option to buying.

I'm not sure I would think of the CA as being "theoretical." To me, it's building a model based on sound principles. It shouldn't matter that there is no realistic possibility of building as an option to buying.

OP... Perhaps you could copy this to a notepad file on your desktop for easy reference.

Land Valuation

Land valuation is accomplished through six generally accepted procedures:

Direct Sales: Recent sales of similar vacant parcels are compared with the subject property. Adjustments are made for differences among the properties and are used to create indicators of value for the land under appraisal. The sales comparison approach is the most reliable method of land valuation.

Reliable sales data is not always available. The assessor must then rely on other methods of land valuation.

Allocation: This method is based on the principle of balance, which states that there is a sense of proportion in the four agents of production. Land, as one of the agents of production, has a logical value relationship to total property value. Sales of improved properties are analyzed and the values are allocated between land and improvements.

Abstraction (Extraction): In this method the cost approach is used in the analysis of the improved property sales data. The depreciated replacement cost of the improvements are subtracted from the sale price. The remainder is the indication of land value.

Anticipated Use or Development: Primarily used to value land in transition from agricultural to other uses, this method subtracts total development costs from projected sales prices to derive a value for the land.

Capitalization of Ground Rent: This method uses the income approach to value to establish a current value for land through its future income potential. Agricultural land in Arizona is valued using this method.

Land Residual Procedure: Calculates land value by first estimating net income earned by a property and then subtracting income that can be attributed to the improvements, leaving a residual value attributable to the land.

 

[dfalliaux]

I'm not sure I would think of the CA as being "theoretical." To me, it's building a model based on sound principles. It shouldn't matter that there is no realistic possibility of building as an option to buying.

OP... Perhaps you could copy this to a notepad file on your desktop for easy reference.

Land Valuation

Land valuation is accomplished through six generally accepted procedures:

Direct Sales: Recent sales of similar vacant parcels are compared with the subject property. Adjustments are made for differences among the properties and are used to create indicators of value for the land under appraisal. The sales comparison approach is the most reliable method of land valuation.

Reliable sales data is not always available. The assessor must then rely on other methods of land valuation.

Allocation: This method is based on the principle of balance, which states that there is a sense of proportion in the four agents of production. Land, as one of the agents of production, has a logical value relationship to total property value. Sales of improved properties are analyzed and the values are allocated between land and improvements.

Abstraction (Extraction): In this method the cost approach is used in the analysis of the improved property sales data. The depreciated replacement cost of the improvements are subtracted from the sale price. The remainder is the indication of land value.

Anticipated Use or Development: Primarily used to value land in transition from agricultural to other uses, this method subtracts total development costs from projected sales prices to derive a value for the land.

Capitalization of Ground Rent: This method uses the income approach to value to establish a current value for land through its future income potential. Agricultural land in Arizona is valued using this method.

Land Residual Procedure: Calculates land value by first estimating net income earned by a property and then subtracting income that can be attributed to the improvements, leaving a residual value attributable to the land.

Thanks!