Site Value in Cost Approach

[Donny Lindner]

Is the site value in the cost approach "as vacant"?

The reason I ask is that the subject's lot size is excessive for the market area. By the sales comparison approach, the larger site does not add value in this market area. It appears the subject has excess land.

However, if "as vacant", the large lot could possibly be divided into two residential lots. Therefore, the value estimate in the cost approach would be higher than the value estimate used in the sales comparison approach. Let me explain, the value estimate used in the sales comparison approach for the subject was said to be equal to the value of the comparables which were on smaller lots. No positive adjustment for the larger site. Now, when doing the cost approach and locating lot sales, the site value for such a large lot is estimated to be more. "As vacant", the site has more value than "as is".

Am I correct in valuing the site differently for the two different approaches?

 

[Couch Potato]

I don't think you would value it differently. You would need two different HBU sections as you would be using a different one in the cost approach. From your description I take it you mean the site has surplus land not excess land (land that can be divided from the subject and sold separately without removing the improvements. Such land can have its own HBU.) If you truly have excess land (not surplus land) then you should value it separately in both approaches.

 

[Lee Lansford]

Greg, congratulations are in order!

Too few appraisers make the necessary distinction between "surplus" land and "excess" land.

Donny, per "The Appraisal of Real Estate", 12th edition, Appraisal Institute:
"Land value must always be considered in terms of highest and best use. Even if the land has improvements, the land value is based on its highest and best use as though vacant and available for development to its most economic use."
This book would be a good one for you to have in your library; it's a good reference book.

Lee

 

[Webbed Feet]

Is the site value in the cost approach "as vacant"?

The reason I ask is that the subject's lot size is excessive for the market area. By the sales comparison approach, the larger site does not add value in this market area. It appears the subject has excess land.

However, if "as vacant", the large lot could possibly be divided into two residential lots. Therefore, the value estimate in the cost approach would be higher than the value estimate used in the sales comparison approach. Let me explain, the value estimate used in the sales comparison approach for the subject was said to be equal to the value of the comparables which were on smaller lots. No positive adjustment for the larger site. Now, when doing the cost approach and locating lot sales, the site value for such a large lot is estimated to be more. "As vacant", the site has more value than "as is".

Am I correct in valuing the site differently for the two different approaches?

Mr. Lindner,

No you are not correct. You need to read up on "Consistent Use" What you are doing is similar to having a subject property that has a residential home in a state of interim use on commercially zoned land. So you value the land "as vacant" at a commercial value and then come up with a contributory value for the house as a residential improvement. .. When the current market for the property is residential because it is not economically feasible to remove the house and use the land for commercial... No can do! Recognize the way you are doing it is technically valuing the land at one use and the improvements at another. But if it is not ecomomically feasible to parcel, your value for the land is hypothetical... The current market for the site would be as one single family site with land not needed to support the use due to the house already on it.

If due to the location of the improvements and their contributory value the current situation is the highest and best use, you should be using land sales with only one building site on them. Your parcelable land sales are only comparable if the improvements should be removed from the subject. If it is not economically feasible to do so, the improvements are not at the end of their economic life, then land sales of sites that can be parceled are not comparable. You are reflecting market value of two building sites, not one, if you do that. Your subject, as of your effective date, only has one. Unless you plan on "Subject To" demolition and using a HC. By the way, your site is not "As-Is", it's "As Improved"

Read Fannie's Handbook. You do not need to opine site value "As Vacant" when working on a SFR improved site at it's highest and best use. There is a reason for that. Too many appraisers headed down the road you have taken.

While you are at it, I recommend you use a combination of allocation and extraction on those comparable sales to estimate their site values and check it against the outcome of your opinion of subject site value. Give yourself proof that excess land has no value at all. I do not know how much land you have there.

Barry Dayton

 

[Donny Lindner]

Greg, congratulations are in order!

Too few appraisers make the necessary distinction between "surplus" land and "excess" land.

Donny, per "The Appraisal of Real Estate", 12th edition, Appraisal Institute:
"Land value must always be considered in terms of highest and best use. Even if the land has improvements, the land value is based on its highest and best use as though vacant and available for development to its most economic use."
This book would be a good one for you to have in your library; it's a good reference book.

Lee

This is what brought about my questioning. The subject lot (which is residential and .70 acres) as vacant could be divided into multiple sites. As is, the dwelling is located on only a portion of the site. There is additional vacant land around the dwelling and the fencing. As is, this is a single family site with an improvement. As vacant, there would be the option to divide.

 

[The Warrior Monk]

This is what brought about my questioning. The subject lot (which is residential and .70 acres) as vacant could be divided into multiple sites. As is, the dwelling is located on only a portion of the site. There is additional vacant land around the dwelling and the fencing. As is, this is a single family site with an improvement. As vacant, there would be the option to divide.

Are the improvements situated such that the property cannot divided as it currently exists?

 

[Webbed Feet]

Mr. Myers, and Mr. Lansford,

You guys are great, and I agree in concept with the "Surplus" land and "Excess" land thing. I feel our industry should define them both so we all instantly know what we all are talking about. Only so far, and in challenging / asking for this in other threads, I have obtained no written definition of "Surplus Land" quoted from any major text on real estate appraising as the source.

After a lot of searching I found some references in State documents regarding condemnation valuation. But no written definition. I feel this is very important because all my career I have listened to other appraisers swap the meaning of the two phrases back and forth both ways. Meanwhile, in the texts I have (and I could use a better library, I admit it!) they define excess land and surplus land to be the exact same thing or simply never mention "surplus" in reference to land at all!

In fact, I can quote publications all over the web that state excess land can be dividable or undividable and that surplus land can be dividable or not dividable. Even within one publication using both words for the same meaning, not two different meanings.

In short here, for Real Estate appraising, preferably residential, please state a specific professional text that has within it two separate definitions of "Surplus" land versus "Excess" land stating they are two different things and not the same thing. I want to purchase it.... So next time I am in a CE class and one appraiser says Surplus means there is more than one building site, while another appraiser says it is Excess that means there is more than one building site, and the instructor says they both mean the same thing..... I can wave my text book around at them.

Barry Dayton

 

[Donny Lindner]

You would be able to divide with the improvements as they are.

 

[Randolph Kinney]

surplus land
Land not necessary to support the highest and best use of the existing improvement but, because of physical limitations, building placement, or neighborhood norms, cannot be sold off separately. Such land may or may not contribute positively to value and may or may not accommodate future expansion of an existing or anticipated improvement. See also excess land.

excess land
In regard to an improved site, the land not needed to serve or support the existing improvement. In regard to a vacant site or a site considered as though vacant, the land not needed to accommodate the site's primary highest and best use. Such land may be separated from the larger site and have its own highest and best use, or it may allow for future expansion of the existing or anticipated improvement. See also surplus land.

The Dictionary of Real Estate Appraisal, 4th edition

 

[The Warrior Monk]

You would be able to divide with the improvements as they are.

Since the property is subdivisible, this statement does not make sense to me:

By the sales comparison approach, the larger site does not add value in this market area.

How did you arrive at this conclusion?

Were lots with subdivision potential compared to other smaller lots with subdivision potential?

With the information given, it seems to me that the subject property has a highest and best use as a subdivision. If that is the case, it shouldn't be compared directly to properties with no subdivisible potential and than a value concluded. There are more steps to the process.