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Vacant Land Appraisal - Existing Building Demolition Adjustments

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Rare_LaFlare

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Apr 12, 2017
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State
Washington
In a recent vacant land appraisal, the lender required an explanation for no adjustments being made to comparable sales for the demolition of existing structures. The subject is a vacant lot with no existing structures while a few comparable sales have existing buildings on the lot. Are adjustments warranted for the demolition of an existing building? What could be an explanation as to why no adjustments were made.
 
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hastalavista

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May 16, 2005
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Certified General Appraiser
State
California
It depends on the dynamic of the specific market. Many times it is a function of the relationship between the value of the site and the cost of demolition.

For example, in Palo Alto (a city in the heart of Silicon Valley), a 8,000sf lot may sell for $1,500,000 with a tear down on it. The demolition may cost $15k (1%). Do market participants deduct this from their pricing decision? Many do not.
On the other hand, if a site were worth $100k and it cost $15k to demo the existing improvement, that would likely impact the price paid by a buyer.

If you used comparables with existing improvements on them, you should (best practices) confirm with the agents/market participants if demolition impacted the price, and if so, by how much? It still isn't too late.

Finding out the above will allow you to address the lender's question (and their question is reasonable). If your research indicates that demolition costs did impact the price, you should consider amending your report to reflect that condition. Obviously, in the future, the thing to do is address this in the report up front.

Good luck!
 

Michigan CG

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Michigan
What could be an explanation as to why no adjustments were made.

Denis gives a good answer about high dollar properties. Here in the mid-west the only explanation is that the appraiser was not taught correctly.
 

Michael S

Senior Member
Joined
Mar 18, 2009
Professional Status
Certified General Appraiser
State
New Mexico
Sometimes the seller is responsible for the demolition and therefore there is no effect on the price. Or it could be something like an old metal building where a scrap dealer may haul it away for free in return for the value of the salvaged material. It could also be that the demolition of a small old house on a large site is lost in the cost of the other site work that might be required and is basically invisible to the buyer.

The most likely explanation is the appraiser was lazy or ignorant if they had multiple comparables with teardowns and made no deduction for demolition costs on any of them.
 

JTip

Elite Member
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Oct 12, 2004
Professional Status
Certified Residential Appraiser
State
Pennsylvania
Demo costs money. Been there, done that. The Amish will come take your wood but won't break out the dozer to make the site ready.

Check M&S for costs..
 

Terrel L. Shields

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Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
Here in the mid-west the only explanation is that the appraiser was not taught correctly.
I see many vacant tracts where it wasn't possible to differentiate unit pricing when a dwelling v vacant lot is involved. Especially true for a highly sought location.
 
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Deleted member 128537

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Also one has to consider if the property could have an interim use. If it is a crap shack; then I deduct for demolishing it. If there is an interim use because the structure is still decent I may not deduct for it, but I would explain that in the report. In my area it sometimes is hard to know the motivations. On one occassion I simply asked the buyer what their intended use was. They said they were going to remodel the existing structure, and 5 YEARS from now they were going to tear it down and build their retirement home. There you go. They really were only buying the lot, but they saw some value to the improvements. Deduct tear down costs? I wouldn't. But I also wouldn't give any value to the existing improvements.
 

Restrain

Elite Member
Joined
Jan 22, 2002
Professional Status
Certified General Appraiser
State
Florida
I have see plenty of sales wherè the property sells at $X with an existing structure, later structure is demolished. The buyer is factoring the cost into the site prep for the new structure. This is especially true in areas that are fully developed, being revitalized, etc. If there are sufficient sales of vacant lots where a determination can be made of improved vs vacant sales (impact of demo of existing structure) then an adjustment can be made. Most times however, demo costs are just factored into the new construction costs or as a savings in taxes due to removal of existing structure.
 

Mark K

Elite Member
Joined
Jan 27, 2004
Professional Status
Certified Residential Appraiser
State
Indiana
Sometimes the remaining land improvements like driveway, well, septic, have value that offset the demo cost for residential use. Or the fact that an otherwise unbuildable lot can still be used if the new owner incorporates part of the foundation into the new building for res or comm use. The site may have unseen existing drainage or utility features or existing permits usable by the buyer.

Lot of reasons for no adjustment; no reason for lack of explanation.
 
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