Site Value For Cost Approach?

[Steve King]

Appraising a subdivision home in a endless sea of subdivision homes, sometimes it is difficult to get a meaningful site value for the cost approach. Can anyone explain the formula for the extraction method?

 

[Restrain]

There's not a formula. However, if you have some builder costs or a good handle on reproduction costs from M&S, etc that you are confident with, try the following.

Example. New home sale

Sale price =$100,000
Less
Residence
1400 SF x $50 per foot = $70,000 cost
Garage 400 SF x $20 per foot = $8,000 cost
Porches, patio = $2500 cost
Landscaping, fencing , drives - $5000
Total costs including profit, etc - $85,500.

Total sale price of $100,000 less Total improvement cost of $85,500
Land value (including soft costs attributable to land) -$14,500.

It's best to use this with new homes. If you have a home that is several years old, then you have to consider age, condition, updates or deferred maintenance, etc, which gets more complicated.

Of course, you can just use the value from the tax records.

Hope this helps.

Roger

 

[Farm Gal]

Steve:
{edited to add this link}
Here's is a link to a 12 page thread which runs this stuff around all the angles... there is quite a bit of fluff and thunder in it : but also a LOT of the arguements pro and con for extraction and cost approach, how to by real live working appraiser as opposed to a book!
link

Nobody said it was gonna be easy!

Roger has it close but don't forget the site improvements: sewer, waterlines, sidewalks fences etc.

I am going to assume for the sake of arguement that you are in fact talking about an older neighborhood where there just plain are not any land sales.

I have a blurb in my cost approach that states exactly that, and adds "vacant lot sales only occur in the event of catastropic uninsured loss". Which is to say almost never, since most folks owe on their home: they have home insurance.

The easy way out (assuming fairly homogenous lots and appeal) is to take a few homes which you yourself have inspected, on which you can estimate the depreciation, and subtract out everything else you know about what it would cost to replace the improvement, and don't skip the site improvements. AH, but here is where it gets a little tricky: What you have left is going to be a combination of external depreciation (fergiddit: before you start in on my folks: I warn you that I will maintain to the end of my days that this DOES exist) entrepreneural profit , site improvements and oh yeah~ depreciation for site improvements! (there IS more but this will do for starters.

Now do the same thing all over again in a similar competing neighborhood, use a house of the same and then one of slightly different sizem and again in one with similar homes but higher sale prices! Eventually you get 'estimated lot value' sets that makes sense.

In my area I have done this sufficiently often to be pretty comfortable with the county assessors lot values in SOME areas of town. Rural, certain areas and new construction however are NOT reliable, so you do it the hard way (investigate!) OR SWAG estimate the value based on all that research you did long ago.

Honestly: OPINION of lot value is sometimes all you got to go with, and don't let them tell you otherwise... just make very sure you stay honest and don't go 'makeing the value ' in the lot: it just won't work, long term. Someone is going to turn you into hamburger if you try that approach!

Be VERY carefull that your geographic competency is in order. Some folks I think are pretty solid appraisers got themselves in trouble by comin' over on my turf where I can without a second thought disclaim the county lot value in certain areas... and got their lil wrists slapped big time for their efforts. Their problem was NOT taking the county value, but rather backing into lot values with the subtractive cost approach ~ but they were comin into it from a much higher valued market and forgot to check for vacant lot sales. Talk about skewed!

NEW construction in areas with specials also gets really t.r.i.c.k.y as to lot values ... Just make sure you really KNOW what you are doing!

Go find some basic texts and play with their reccomendations. It does work~ sorta .

 

[Fred]

A standard question I have been asking for many years – if there is no vacant land why are you doing a cost approach? Isn’t the oft-cited basis for looking at cost that prudent buyers won’t pay more for an existing one than the cost of building a new one? Well, if there is no vacant land, then there is no possibility of building a new one and no way the seller’s ask price can be restrained by the cost of an option that buyer does not have. From a USPAP standpoint, isn’t this a bit of a hypothetical? A vacant site with a supposed value of X is “contrary to what exists.” :blink:

 

[Mike Seward]

Steven,
That's a good thought, but if you say "cost approach was considered but not developed............" most UW's will come back and ask for it anyway. What about putting it in and giving it no weight, stating your reasons above?

BTW,
I was was an appraiser in San Francisco 5-6 years ago. A lot of my work involved appraising 100 year old victorians built of redwood on brick foundations that were in the $1-2 million price range. Every time I tried leaving the cost approach out they would come back and want it.

 

[Restrain]

Steve:

They want it because it's the large box at the top of the page and their guidelines say it should be filled out. As opposed to the 2 lines for the income approach that they don't want filled out.

Roger

 

[Mike Garrett RAA]

They want it because tucked away in some obscure manual there is a line that says......"land value should not exceed 29% of the total value". How else can they determine that if you don't give them the number?

Who's manual???? Your guess is as good as mine.

 

[Ross (CO)]

Yes, they can freak out when the %-issue is out-out-synch (with what ?). I did report on older home in a favored downtown section of my city a few months ago. Did have some vacant lot sales to lean on. My estimate of site value was 38% of the total, and extra explanation was asked for, despite already telling them about the 3 sales that guided my estimate. If I were an aggressive buyer/investor, interested in that property on that larger lot, and it were for sale....I'd likely buy just to raze the house and build something nicer, bigger and new. I should have seen it coming ..... when the ratio was >30% !

 

[bradellis]

Steve,

Roger's post is fine as far as it goes, but there is actually another step:

Extraction or abstraction occurs by doing multiple exercises like Roger outlined- at least for your assignment.

Like paired sales, one is better than none and more is better than one.

Remember you seek site value and this should be based upon sales other than your subject.

And my friend Steve left out an important part of the principle- namely the contributory value of the improvements "in their depreciated form". Nothing hypothetical, necessarily, about that.

Brad Ellis, IFA, RAA

 

[Fred]

Brad,
I did not omit contributory value. The assignment conditions did. Since the cost approach is not relevant in 100% built-up areas, "the depreciation" needed for the cost approach is outside the necessary scope of research and analysis.