Site Value in Cost Approach

[Couch Potato]

Exactly Greg.

Excess land has all the same qualities as surplus land (is over six feet tall), and has a quality that plain surplus land lacks, it can be sold (is over seven feet tall).

To look at it the other way is to say Surplus land has all of the qualities of Excess land (is seven feet tall), but lacks the ability to be sold separately (except for being less than seven feet tall by 1-12 inches).

To logically create a subgroup one must look at additional qualities that a portion of the group has, not qualities that a portion of the group does not have. Looking at qualities that are not present creates another group, not a subgroup.

 

[CANative]

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

Excess and Surplus Land

At times, an appraiser is called on to appraise improved properties that have an above-average amount of land. These assignments may either be for single-family residential or commercial and industrial parcels. Two questions arise in such assignments. What is excess land and how should it be appraised?

Excess Land is land that is not needed to support the use of existing or probable future improvements. There are two variations of excess land. Soime housing agencies and residential mortgage lenders will not lend on an additional lot or acreage that is judged to be beyond the needs of a typical borrower (or common and customary for a particular area). That is, if a half-acre lot is typical for homes of a particular price in a suburbant neighborhood, then an extra lot would be excluded from the transaction and the borrower would have to acquire it with cash. The appraiser would only appraise the underlying home site and buiding. However, if it were necessary to appraise the additional lot or land, it could be done readily and without any discount in unit value because it has value as a separate economic entity.

I've snipped out several paragraphs concerning income-producing properties.

Land that is in excess of typical parcel size may not be excessive if it supports the primary land use activity on the parcel. For example, parking lots and reserve septic system drain fields are necessary for a primary use. These areas are not excess land because they support the major activity.

Surplus Land relates only to existing improvements, not proposed or hypothetical structures. It exists when a structure(s) is so situated on a parcel that it encumbers the entire site. Surplus land does not support or is not necessary for the highest and best use of an existing improvement, but due to its location relative to the building, it cannot be marketed as a separate entity. For example, a dwelling is placed in the middle of two lots. Suppose that lots in this neighborhood are selling for about $125,000. Would the combined two lots be worth $250,000? It is unlikely that the two lots would be worth the full value because in the combined state they comprise just one lot, albeit twice the size of a typical lot. Moreover, neither of the subject's two lots can be sold separately because part of the house rests on each lot.

James H. Boykin, PhD, MAE, SREA, CRE
Land Valuation - Adjustment Procedures and Assignments, Chapter 5, Pages 43 and 44.
Appraisal Institute.

 

[Webbed Feet]

James H. Boykin, PhD, MAE, SREA, CRE
Land Valuation - Adjustment Procedures and Assignments, Chapter 5, Pages 43 and 44.
Appraisal Institute.

Mr. Boyd,

What's an "MAE" ? If you can find a definition for me I'd like to buy the book!

Barry Dayton

 

[Fred]

What's an "MAE"

Member of the Appraisal Enstitute.

 

[Randolph Kinney]

Mr. Dayton, the definition of excess and surplus land can be found in several of the publications by the Appraisal Institute. It can be found, in addition to the one Greg has cited, The Appraisal of Real Estate, 12th Edition, page 198 in the chapter on Land or Site Analysis, chapter 9.

It makes a point that excess land may have value at the prevailing neighborhood land values. Surplus land does not have an independent HBU and may contribute minimally for value where excess land can have an independent HBU.

Although not used in the book as an example, consider a lot where it is 25,000 SF with zoning of a minimum lot size of 6,000 SF and a house placed near one edge of the lot, the flat or near level area of the lot facing the street. The lot may have 9,000 SF that is usable because the rest of the lot has a 40 degree slope up to the neighboring lot and cannot be used without affecting the neighboring lot. The additional land size over and above the minimum for zoning that is not usable and is land lock is surplus land and will not contribute much in the way of value.

OTOH, same lot that is entirely flat and level with same zoning and has access on two sides. It can be split into two or more lots. That would be excess land.

If the neighborhood had typical land area that were, say 15,000 SF and zoning was minimum 13,000 SF, regardless of building placement, the lot size of 25,000 may not be excess nor surplus.

 

[Webbed Feet]

To All on the book references,

I appreciate all the feedback on this. It gave me an idea. I have not seen a thread devoted to suggested excellent reading for appraisers. So I started a thread in the "Appraisal Education" section for this. Xmas is coming and I thought it would be a valuable thread.

I welcome and encourage any additions to that thread for good books with perhaps a short review of them if anyone would be so kind. I hope it to be a good reference thread for everyone to hear about the favorite library items of other appraisers.



Barry Dayton

 

[Fred]

Donny,
It doesn’t seem anyone is addressing the question.

The first thing you ought to consider is the cost approach is far more trouble than it’s worth and the sooner stop doing it the better off you’ll be. Put the time and energy into mastering the different variations of sales comparison.

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

Are you sure? I find it hard to believe the larger property would not command at least $1 more than the smaller one.

when doing the cost approach and locating lot sales, the site value for such a large lot is estimated to be more.

Do you actually have sales in both sizes? Are there other vacant sites available like subject? If the sales don’t include oversize parcels and oversize parcels are not available in the land supply, then you might consider using the value of the sites on which a replacement could actually be built. Of course you might consider doing that anyway.

 

[Steve Owen]

It doesn’t seem anyone is addressing the question.

Looked to me like that was done in post #2 and #3.

The first thing you ought to consider is the cost approach is far more trouble than it’s worth and the sooner stop doing it the better off you’ll be. Put the time and energy into mastering the different variations of sales comparison.

The first thing you should consider is paying attention to what ASB, every state board, and just about every appraisal school says about the cost approach and ignore any advice on this Forum to the contrary.

Are you sure? I find it hard to believe the larger property would not command at least $1 more than the smaller one.

I've seen lots of examples of that. I've seen examples where a larger lot would command even less than a smaller one; but, the more typical situation in this marketing area is for them to be equal. That is not always the case, of course, and in fact it is not usually the case, but it is not particularly rare either. Guess that knowledge is one of the advantages of frequently doing the cost approach and separately valuing the site.

There can be different reasons why a smaller lot could be equal or more valuable for residential use. However, one of the most common is simply the market segment most interested in the improved property. If that market segment is a family with pets, the larger lot is likely to be more desirable. If the primary market segment for the house is retired people who don't like to do a lot of mowing, then the smaller lot is likely to be more desirable. What usually happens around here is that several market segments could be interested in the property and larger and smaller lots are equal; or, more typically, the larger lot is slightly more desirable. Each case must be evaluated on its own merits to make this determination.

 

[Fred]

I've seen examples where a larger lot would command even less than a smaller one;

Not unless there is another variable affecting value and nothing like that has been suggested by the original poster.

Guess that knowledge is one of the advantages of frequently doing the cost approach and separately valuing the site.

Not at all. Land valuation is a science unto itself. It is independent of the cost approach, where the land value is often rectally extracted. The only 1004 I ever saw with ANY land comps was part of a demo report.

The first thing you should consider is paying attention to what ASB, every state board, and just about every appraisal school says about the cost approach and ignore any advice on this Forum to the contrary.

The last time the ASB mentioned the cost approach; they answered a question about “unreliable” cost approaches. And I would take this forum over those mickey-mouse appraisal “schools."

 

[CANative]

The only 1004 I ever saw with ANY land comps was part of a demo report.

I can't imagine submitting a 1004 without a land sales grid when I've done a cost approach. Maybe I'm working too hard.