Every December I make a pilgrimage to Orlando, Florida
to observe the Florida Real Estate Appraisal Board (FREAB) hearings. This
past year (2011) something happened that surprised even me.
Land Value: Extraction Method
By Philip G Spool, ASA
Every December I make a pilgrimage to Orlando, Florida
to observe the Florida Real Estate Appraisal Board (FREAB) hearings. This past
year (2011) something happened that surprised even me.
One appraiser who was brought up on various charges was asked a very simple
question pertaining to the cost approach in the appraisal report. One of the
FREAB panel members asked how the appraiser arrived at the site value.The appraiser hesitated and then replied that the land value was based on
the cost new arrived at from
Marshall & Swift, then deducted that from the market value of the
subject property, arrived at from the Sales Comparison Approach.As an instructor of real estate appraisal courses and continuing
education classes, I almost bolted from my seat to immediately correct the
appraiser. Fortunately, one of the panel members politely corrected the
appraiser. I was surprised that the FREAB panel did not require additional
educational courses, beyond what the appraiser was required to do as a result of
performing a faulty appraisal.
I have reviewed many appraisal reports where the
appraiser performs the Cost Approach just because the client requests it, even
though it is not considered a credible approach to the market value of the
subject property.I see some of the same
boilerplate statements in these reports, such as “due to the lack of land sales,
the appraiser utilized the extraction (or abstraction) method.”(By the way, both “extraction” and “abstraction” are correct. For
purposes of this article, I will call it the extraction method.)
An extraction method is utilized if there are no land sales to arrive at the
site (land) value.Again, land and site in this article are
interchangeable, but technically land represents the undeveloped parcel, while
site represents the parcel as if ready to be built on.
Going back to the appraiser’s reply to the FREAB
panel, two distinct statements the appraiser made are blatantly wrong. The first
is subtracting the replacement cost new and the second mistake is subtracting
the improvement cost from the value arrived by the Sales Comparison Approach.How do you calculate the site value?The three most common methods to calculate
site value are (1) sales comparison method; (2) allocation method; and (3)
extraction (abstraction) method.I will briefly discuss the first two methods
then explain the subject of the article: the
Sales Comparison Method
The Sales Comparison Method is probably the most preferred and
reliable method for estimating site value. This method is similar to valuing an
existing house, comparing the subject to recently closed sales of vacant lots.As no two houses are the same typically, no
two vacant lots are the same. The most common differences include the size,
width and depth of lot, location, and if the comparable lot is cleared or in
need of clearing trees, shrubs, and leveling the land.All of these differences must be taken into
Once the sales price per
square foot is determined for each comparable sale, the reconciliation process
begins. Probably the most important comparison is the lot size differential.
Basic appraisal theory indicates that smaller lots tend to sell for a higher
price per square foot than larger lots, just as larger lots tend to sell for a
lower price per square foot than smaller lots.However, one should consider the most ideal
lot size for the end use, in this case a single family residence.
For example, if the average lot size is 15,000 sq.
ft., would a 10,000 sq. ft. site cost or be worth more per square foot than the
15,000 site?Not in all cases. One has to consider the
demand for the 10,000 site versus the 15,000, just as one has to consider the
demand for a 20,000 site. If the ideal house size is best reflected on a 15,000
sq. ft. lot in the area, then perhaps a 10,000 would reflect an inferior
designed house, representing less demand for the smaller lot. If the lot size is
20,000, then the extra
5,000 sq. ft. of land could represent surplus land.
Many appraisers confuse the difference between
surplus land and
excess land.Surplus land is land that cannot be sold off
separately, while excess land can be. In many cases, a large lot that is
considered to have excess land is worth more than a large lot that has surplus
land due to the fact that two buildable lots are worth more than one buildable
lot.All of these situations have to be taken into
consideration when reconciling the value of the subject’s lot.
Allocation Method The Allocation method is not commonly used,
but if a newly constructed home is built on a site that was purchased recently,
it can be effective. The Allocation method can be applied as a percentage or
proportion of the total value of an improved property. For a comparable improved
sale, either the land or building portion must be determined. If the house is
relatively new, estimating the cost of improvements and dividing the costs by
the sales price of the house will give you the percentage of the improvements to
the purchase price of the comparable.The allocation method is not as reliable to
apply on an older house because estimating accrued depreciation is too
subjective. If new developments are being constructed nearby, consultation with
the developers is helpful if the developers can provide the building costs
associated with the houses being sold. This includes site improvements, such as
landscaping, driveway, open patios, and swimming pools.
For example, a relatively new
house sells for $300,000 and you determine the cost of the building improvements
and site improvements to be $200,000. The improvements represent 66.7 percent of
the overall purchase price. That leaves 33.3 percent attributable to the land.If houses that are recently sold nearby the
subject property range from $270,000 to $320,000 and are overall similar to the
subject improvements (land-to-building ratio, age/condition and extra features),
applying the 33 percent would indicate a land value ranging from $89,900 to
$106,600, rounded. While an allocation as a ratio of land to total sale price
indicates a ratio of one to three in this example (land portion is
$100,000/total sale price $300,000), it is easier to apply the allocation method
as a percentage of land to total sale price.
Extraction Method In a
nutshell, site value is the difference between the sale price of a property and
the contributory value of its improvements. So how do you determine the
contributory value of the improvements? There are several ways to do this. The
contributory value of the improvements is the same as the depreciated value of
the improvements as observed in the market. In other words, it can be construed
as cost new, less the accrued depreciation. Accrued depreciation is calculated
as the effective age divided by the total economic life of the improvements. If
you still have your appraisal books from your basic appraising course, look up
An excellent reference book you should always have is The Appraisal of Real
Estate, currently the Thirteenth Edition, by the Appraisal Institute.
When valuing the subject property the appraiser calculates the effective age by
an onsite visit to the property and observes any physical deterioration in order
to arrive at the effective age. However, the appraiser does not have the luxury
of visiting the interior of a comparable sale or even walking around the outside
of the comparable sale that is a good candidate for the site value by the
abstraction method. But if the property is listed on the Multiple Listing
Service, there is a possibility that there are photographs of the interior and
exterior of the property. You can also contact the listing agent to get
additional information regarding the physical condition of the improvements to
arrive at a more supportable effective age. Remember, effective age of a
property is based on the appraiser’s judgment and observation.
Therefore, the proper
procedure would be for the appraiser to calculate the replacement cost new of
the improvements first and then subtract the depreciated value (contributory
value) of the improvements. But what about the site improvements such as the
swimming pool, driveway, landscaping, etc? Yes, that too has to be subtracted
from the replacement cost new of the improvements.Where do you get your replacement cost
figures?There are several sources.One is Marshall & Swift (also referred to as
Marshall Valuation Service). The other is Building-Cost.net, which is free.
Another method, though one
that is not supportable, is to obtain the
Property Assessor’s estimate of the
depreciated value of the improvements of a recently closed sale. The land value
would be the sales price less the property assessor’s estimate of the
depreciated value of the improvements.I indicate that this is not supportable
because an owner can have their property assessment successfully appealed
resulting in a reduction in the improvement portion of the assessment while
another recently sold house may not have had their property assessment appealed,
resulting in no reduction.Just remember assessments are based on the
mass appraisal system and not looked at individually.
You can prepare a chart to
fill out and maintain in your workfile.A good example would be as follows:
100 Prospect Drive
230 Albondigas Ave.
Date of Sale
Sale Price (A)
Replacement Cost New
Less: Depreciation of Improvements
Depreciated Value of Improvements (B)
Site Value (A less B)
15,000 sq. ft.
12,000 sq. ft.
Site Value per Sq. Ft.
*Based on Building-Cost.net **Based on an
Effective Age of 15 years and a Total Economic Life of 60 years (15/60 = 25%) ***Based on an Effective Age of 20 years and a
Total Economic Life of 60 years (20/60 = 33.3%)
In conclusion, the next time you explain how you arrived at your site value in
your appraisal report and you state that you utilized the Extraction or
Abstraction Method, be sure you use the correct procedure in addition to having
your support in your workfile, or better yet, indicated in detail within the
text addendum of your appraisal report.
About the Author
Philip G. Spool, ASA, is a State-Certified General Real Estate Appraiser in
Florida, appraising since 1973. Formerly the Chief Appraiser of Flagler Federal
Savings and Loan Association, he has been self-employed for the past 20 years.
In addition to appraising, he is an instructor with Miami Dade College, teaching
appraisal courses and continuing education classes. He is also the Vice
President and Chairman of real estate programs with the Greater Miami Chapter of
the American Society of Appraisers. He can be reached at
ATTENTION: You are receiving WRE Online News because you opted in at WorkingRE.com or purchased E&O insurance from OREP. WRE Online News Edition provides news-oriented content twice a month. The content for WRE Special Offer Editions is provided by paid sponsors. If you no longer wish to receive these emails from Working RE, please use the link found at the bottom of this newsletter to be removed from our mailing list.