Land Value: Extraction and Allocation

[Metamorphic]

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.

Like any other approach to value....the credibility of the approach is dependent on the quality of the data.

If there's no real lot sale data so you have to boot strap yourself into a lot value, you're using some estimating guide where if you change a check box assumption here or there you can see a pretty big swing in value, and you're depreciating that build cost by using the same tool to estimate the depreciation of a bunch of recent sales that you know even less about the improvements, its pretty clear you're stacking large margins for error on large margins for error.

Its definitely a model based on sound principals, but there are a lot of links between where some market participant wrote a check and the final value indication. To me that reads less credible.

I also have a big question about the validity of the cost data in a market such as we currently have now. Its pretty clear that with the market as depressed as it is you can buy cheeper than you can build. So its a logical assumption that most of the people that are building (those that are responsible for creating the data that will be the in the cost manual tomorrow) are at some level caprice buyers/builders. They're building because its what they want, cost be dammed,...not because its a reasonable economic choice to buying an existing home. I'm concerned that cost data may be less credible because there are too many people in the data mix that are there based on the principal that "there is no substitute for exactly what the want", not based on the principal of substitution.

 

[CANative]

If there's no real lot sale data so you have to boot strap yourself into a lot value, you're using some estimating guide where if you change a check box assumption here or there you can see a pretty big swing in value, and you're depreciating that build cost by using the same tool to estimate the depreciation of a bunch of recent sales that you know even less about the improvements, its pretty clear you're stacking large margins for error on large margins for error.

Appraisers should avoid using a single cost source. Use M&S, use Craftsman's online tool at builder-cost.net, use the assessor's handbook (very good data), use cost bids in your files from proposed construction assignments, etc., etc.

Using extraction is more difficult than using allocation because in extraction you need old houses or houses that are ready for a new use and those are hard to come by. In allocation it can be much easier because you can use new construction with little or no depreciation. The process is basically finding lot sales in competing markets and then studying assessor records to see how they are allocating land and improvements. The upside of that is that there is a lot of information instead of a little information. Once you have a good idea of this allocation process you can apply the ratio to the comp sales used in the current appraisal you're working on. It's not perfect but it can make a convincing, supportable and credible argument.

Its pretty clear that with the market as depressed as it is you can buy cheeper than you can build. So its a logical assumption that most of the people that are building (those that are responsible for creating the data that will be the in the cost manual tomorrow) are at some level caprice buyers/builders. They're building because its what they want, cost be dammed,..

What about developers who already own subdivisions and continue building because they have to? Lots of those in the central valley. Manteca has several developments like this.

In any case, build your model using the best available data, be sure to include a factor for reasonable entrepreneurial incentive and then apply any depreciation (physical, functional and especially external or economic obsolesence).

It's a chore and lenders/AMCs refuse to acknowledge the expertise and time it takes to do all of this. That's why I don't do it for lenders. And I've never had a private party give a rat's azz about the CA.

 

[Mr Rex]

I see alot of the PFA Extraction method used in the Cost Approach. I guess I missed that part of the class, I must have stepped out to take a call or something.

 

[Lost Cause]

PFA Extraction, Indeed!

If I rejected appraisals because they don't provide a supported land value, I'd have a pass rate of less than 1%.