Which of these is not a recognized method for estimating site value?

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We’ve all been there (at least those of us who are residential appraisers) – we are engaged to perform a residential appraisal and part of the agreed scope of work is to include an estimate of the subject’s site value ‘as if unimproved’ (we’ll consider why this is such an important element in the scope of work in a later article). In a Utopian world, we would be able to analyze a meaningful number of vacant site sales that (a) have recently sold, (b) have similar influence as the subject, and (c) are within a reasonable proximity to the subject. Most often, however, we do not live in a Utopian world. What to do then?... 

According to The Appraisal of Real Estate (my edition is the 12th), there are four recognized methodologies for estimating site value. They include the sales comparison procedure, the extraction procedure, the allocation procedure, and the capitalization procedure (which is actually further broken down into the land residual technique, the ground rent capitalization technique, and the yield capitalization technique). We’ve already determined that we are not in a Utopian world, so sales comparison analysis is not an option. In addition, we’ve already stated that it is a residential assignment, so it’s improbable that we would have enough data to derive a land value estimate via ground rent capitalization, so we are left with two options – extraction or allocation. 

For those who may be a bit rusty on the difference, extraction is, essentially building a cost approach for the depreciated improvements and site amenities, and subtracting that number from the sales price (or appraised value) to obtain an estimate for the site value. Allocation is the development of a ratio of land to property value utilizing several comparable sales.  So which of the two offer a more defensible, or accurate, estimate of land/site value? Well, it doesn’t hurt to look again to The Appraisal of Real Estate, wherein we see that the author(s) state the following about the allocation procedure: “The Allocation method does not produce conclusive indications and is rarely used as the primary land valuation technique.” In essence, then, we are left with the extraction method to fulfill our obligation(s) to our client as regards development of a meaningful estimate of site/land value.

It has been my experience that the average appraiser is slightly uncomfortable talking about, or attempting to perform, an extraction procedure and, while I agree that the sales comparison approach is always the preferred method of estimating land/site value, as stated earlier, finding truly comparable vacant site sales if often just not possible. In those cases, it seems to me that extraction is (a) a fairly intuitive and simple process to perform, and (b) is the alternative method that will provide the most meaningful results.

Intuitive and simple, you say??? And again I say – yes. If you’ve ever performed a cost approach, you’ve performed extraction. And, if you’ve performed a cost approach on the majority of your assignments, then you’ve also performed extraction on the majority of your assignments. The only difference is, instead of ‘starting’ with estimating the site value, you’re ‘starting’ with estimating the depreciated value of improvements. In other words, you’re simply performing a cost approach ‘backwards’. If the value of a parcel of real property consists of the value of the land plus the value of the improvements, then (a) if you subtract the value of the land from the overall value, you are left with the depreciated value of improvements, and (b) If you subtract the depreciated value of improvements from the overall value, you’re left with the value of the land. As my grandson would say, easy peazy, lemon squeezy.