The Student Handbook to T HE A PPRAISAL OF R EAL E STATE 1 Chapter 16 Land and Site Valuation

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 2 Relation to Appraisal Principles Value concepts and principles Property rights and public controls Physical characteristics and site improvements Highest and best use

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 3 Applicability and Limitations of Valuation Techniques Sales comparison Market extraction Allocation Direct capitalization: land residual Direct capitalization: ground rent capitalization Yield capitalization: discounted cash flow analysis

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 4 Sales Comparison Preferred method Sequence of adjustments Gross and net adjustments Bracketing the subject property Adjustments for items of dissimilarity  Comparable inferior, add (CIA)  Comparable superior, subtract (CSS)

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 5 Sales Comparison Grid

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 6 Paired Data Sales Analysis Example

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 7 Paired Data Sales Analysis Example – Answers The subject property is a lot in the middle of the block on Main Street (#15) and the comparable sales are equal to the subject in all other elements of comparison. What is the value? The answer is listed in the table below. The fact that the answers are all the same is not an accident or because of how the data was created; it is the process. Measuring the difference in sale price to explain the difference in the properties should narrow the range of indicated values.

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 8 Alternative Techniques Market extraction  Commonly used to estimate land values when comparable sales are not available  Land value is the net result of subtracting the value of the improvements by the cost approach from the sale price of an improved property.

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter 16 9 Land Value via Market Extraction

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Page 235

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Alternative Techniques, continued Allocation  Uses land-to-building or land-to-property-value ratios in improved areas to support a land value in the subject area when no land sales are available  Subject and comparable properties must be improved to their highest and best use or this technique is less applicable.  The ratio from one area and price range is not necessarily transferable to another area or price range.

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Land Value via the Allocation Method

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Alternative Techniques, continued Direct capitalization: ground rent capitalization  Establishes a ratio of income to value in the comparable properties and then uses that ratio for the subject property  Can be an excellent method if the market thinks this way  Requires very similar expenses and upside potential to be accurate  Can be incorrect if the risk is not the same in comparable properties and the subject property

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Extraction and Application of Overall Capitalization Example of extraction and application of overall capitalization of a single year’s income

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Alternative Techniques, continued Direct capitalization: land residual technique  Uses the income capitalization approach to isolate income to the land by segregating income from the building from overall income  Requires capitalization rates for both land and building, which are difficult to get with similar risk and income patterns  This is a theoretical technique because buyers and sellers do not buy land and buildings, rather they buy rights in realty (e.g., the leased fee and leasehold interests).

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Alternative Techniques, continued Yield capitalization: discounted cash flow analysis  Not used in some markets at all but quite applicable in others  Assumes land value is based on development potential, not on alternative properties  Does not consider other listings but only that it is feasible to develop the project

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Land Value by Discounted Cash Flow Analysis

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Problems Suggested solutions begin on page 426.

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Problem 12—Suggested Solution

Student Handbook to T HE A PPRAISAL OF R EAL E STATE Chapter Problem 13—Suggested Solution