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VALUATION OF LAND USING MARKET BASED TECHNIQUES

Presented By Group- 4 Gaurav | Rajkamal | Sumeet | Sushil | Tarun

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Group- 4 Land Valuation

AGENDA

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Sales comparison method Comparative unit method Base lot method Allocation method Income method Residual method Anticipated use/ cost of development
Group- 4 Land Valuation

Market Based Approach of Land Valuation

Three standard approach

Cost approach - Informed purchaser would pay no more than the cost to produce a substitute property with the same utility as the subject property

Sales comparison approach - utilizes prices paid in actual market transactions of similar properties to estimate the value of the site

Income approach - Anticipated present and future net operating income, as well as any future reversions, are discounted to a present worth figure through the capitalization process

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Group- 4 Land Valuation

Sales Comparison Method

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Group- 4 Land Valuation

Procedure
Standard Units of Measure Land markets can be estimated on the basis of a certain value per unit and the unit is often one of the following: Per Dwelling Unit site Per square-foot Per acre Per front-foot

The standard residential site may respond well to a value Per Dwelling Unit Site. A commercial use may be better estimated by using a value Per Square-Foot or Per Front-Foot. A farm or rural site may be better estimated by using a value Per Acre.

Once the market value per unit of measure has been established for the standard site representative of the area, the value will become a base to which all other sites can be compared

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Group- 4 Land Valuation

Example
Sales comparison Price Pool Garage Size Adjustments Pool Garage Size Adjusted Price weightage Estimated Price 5/3/12 -4000 0 -6000 70,000 35% 73550 Group- 4 Land Valuation 0 2000 0 77,000 40% -4000 2000 -3000 73,000 25% No Yes 4000 Subject Plot 1 80,000 Yes Yes 5000 Plot 2 75,000 No No 4000 Plot 3 78,000 Yes No 4500

Comparative Unit Method - Example

Property Sales price Acreage Front feet 1 2 3 4 5 6 7 8 9 10 Minimum Maximum % Differenc e 7700000 575000 990000 675000 300000 367500 300000 2200000 775000 2145000 300000 7700000 96% 23.2 2.01 3.9 2.64 1.19 0.91 0.98 8.59 2.11 5.15 2150 60 480 270 165 111 100 1000 225 355 Price/acre 331896.55 286069.65 253846.15 255681.82 252100.84 403846.15 306122.45 256111.76 367298.58 416504.85 252100.84 416504.85 39% Price/Front foot 3581.40 9583.33 2062.50 2500.00 1818.18 3310.81 3000.00 2200.00 3444.44 6042.25 1818.18 9583.33 81%

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Group- 4 Land Valuation

ALLOCATION METHOD

Based on premise constant relationship exist between the land value and total property value

Useful in estimating land value in areas where land sales are scarce, but improved property sales are readily available

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Group- 4 Land Valuation

ALLOCATION METHOD Example 1

Subject Neighbourhood A B C

Typical lot price in neighbourhood Typical improved property (home) price

NA 4500000

1865000 6100000 31%

1750000 5400000 32%

2675000 7000000 38%

Analysis of sales indicates that 31% to 38% of the price is for the residential site Value Most weight was given to say sale in Neighbourhood A because its total property price is most similar to the subject's 5/3/12 Group- 4 Land Valuation The probable value of the subject site is $4500000 x

ALLOCATION METHOD Example 2

Subject
Neighbourhood A Neighbourhood B Neighbourhood C

Typical lot price in neighbourhood Typical improved property (home) price

NA 160000

45000 225000 20%

30000 140000 21.43%

61000 250000 24.40%

Analysis of sales indicates that 20.00% to 24.40% of the price is for the residential site value Most weight was given to the sale in Neighbourhood B because its total property price is most similar to the subject's 5/3/12 Group- 4 Land Valuation The probable value of the subject site is $160,000 x 21%

BASE LOT METHOD

Provides standard of comparison to value other pieces of land Adjustment is made for differences in property characteristics It establishes the benchmark based on the property of land adjustment is made based on the priority
Land Base Value Downtown (miles) Size ( Sq feet) Transport (Blocks) Recreation (Blocks) Adjusted Value ($)

Standard 80000

10000

7 3 + 4000 10 - 3000

80000

Superior 3 12000 1 Adjustmen 80000 + 4000 + 4000 + 4000 ts Inferior 7 8000 6 Adjustmen 80000 - 4000 - 4000 - 6000 5/3/12 Group- 4 Land Valuation ts

96000

63000

BASE LOT METHOD - Example

LAND Plot 1 PRICE 5800000 LOCATION 2 side Roads -3% Plot 2 3000000 1 side Road (Base) Plot 3 840000 No road 3% Plot 4 5100000 2 side Roads -3% Plot 5 3000000 1 side Mainroad -8% TUBEWELL Present in adjoining plot 0% Present in adjoining plot (Base) Present in adjoining plot 0% No 10% No 8% SIZE(SQUARE FOOT) 96000 -50% 48000 (Base) 21000 229% 90000 -53% 48000 0% ADJUSTED DEVIATION SALES PRICE FROM BASE 2726000 -53% 3000000 (Base) 2785200 232% 2737000 -46% 3000000 0% Avg Deviation In % terms 150360 5.01% 0 263000 214800 0 274000

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Group- 4 Land Valuation

Advantages of Base Lot Method

Accurate and Supportable Benchmarks degree of explicability to taxpayer superiority, when appraiser needs to

High

Exhibits

adjust for many differences in property characteristics

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INCOME APPROACH

For valuation of land which has the capacity to produce monetary income

use to estimate the value of income producing real estate premise of anticipation i.e., the expectation of future benefits Income is calculated by accounting source of revenue and deducting for expenses

valuation relates value to two things: [1] the "market rent" that a property can be expected to earn and, [2] the "reversion" (resale) when a property is sold

Growth rate in property prices for long term should be used for arriving at value of property
Group- 4 Land Valuation

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Methods for valuation using Income capitalization

Direct Capitalization Yield Capitalization

Depends on Timing and regularity of cash flows

q Capitalization rates are Net Operating income = whether or not longof extracted from "sales" term leases are involved Income Effective Gross similar investment Operating Expenses q properties Value of Property = Net Applied to the net income operating 5/3/12a subject property to 4 Land Valuation Groupof Income/Capitalization Rate

period of time the investment is held

Direct Capitalization vs. Yield capitalization

Direct

Capitalization

Yield

Capitalization

Involves the analysis of a single years net income Resultant "NOI" is capitalized by an overall capitalization rate to derive value Does not require explicit projections of income Assumes that expectations for future income are similar for the subject and comparables

Considers income stream for several years Requires explicit projections of income, holding period, and property reversion Doesnt rely on comparable sales, requires selecton of appropriate discount rate Considers timing of recapture

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Group- 4 Land Valuation

Direct Capitalization INCOME APPROACH Example

HEADS Income Rent Value Expenses Property Tax Water Charges Maintenance cost Building Depreciation Total Expenses Net Income Capitalized @ 12% Value of property
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RENT/MONTH 15000 160 200 300 50 710 14290

TOTAL 180000 0 1920 2400 3600 600 8520 0 171480 .12 1429000

Group- 4 Land Valuation

RESIDUAL METHOD

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Group- 4 Land Valuation

Different Approaches for valuation using Residual Method

Land Residual Approach

Subtracts value of building from overall land cost Building Value estimated in terms of replacement cost or Depreciated value Replacement cost leaves little land value Depreciation cost leaves higher residual land value

Building - Residual Approach

starts by valuing the land, and treats the difference as representing the building's value land value map for the district or city is constructed Most of the variations in property prices around this normalized map will be for structures

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Group- 4 Land Valuation

LAND RESIDUAL METHOD - Example

A property generates $10,000 net operating income ($15,000 rent less $5,000 operating expenses). The improvements cost $70,000 to construct and claim a 12% rate of return (10% interest plus 2% depreciation), which is $8,400. The remaining $1,600 income is capitalized at a 10% rate (divided by .10) to result in a $16,000 land value using the land residual technique
Pa rticula rs Land rent Operating expenses NOI Building capitalization rate Claim Income Land capitalzation rate or ROI Cost in Rs. 1 5000 5000 1 0000 1 2% 8400 1 600 1 0% 1 6000

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La va (res Land Valuation nd Group- 4 l) lue idua

ANTICIPATED USE/ COST OF DEVELOPMENT METHOD

Provides basis for estimating the sale price of unimproved land Approach taken by developers considering new uses for land Most suitable for valuing undeveloped land for residential subdivisions

Appropriate for purchasers or developers of individual parcels, Not feasible for annual assessments for all parcels in a taxing jurisdiction

Appraiser hypothetically develops the vacant site Some speculation, and the projected improvements must represent the most probable use of the land
Group- 4 Land Valuation

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ANTICIPATED USE/ COST OF DEVELOPMENT METHOD

Price a prudent developer will pay for land in its present undeveloped condition by subtracting the total development costs from the projected sales prices of the lots as if developed

Appraiser calculates the residual land value after the satisfaction of labor, capital, and management

Value of completed project less total development costs = value of the property in its present condition

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Group- 4 Land Valuation

EXAMPLE
Projected sales of 100 acre of land Site development: Land leveling pond irrigation site preparation planning Overhead and sales expense Profit, interest, and entrepreneurial profit Less estimated total development costs Indicated value of undeveloped land 5/3/12 Group- 4 Land Valuation
100,000 100,000 100,000 100,000 100,000 900,000 500,000 900,000 900,000 2,300,000 1,300,000 3,600,000

PROS AND CONS

Serves as a backup method to substantiate the direct sales comparison method. Cost of development method falls under criticism primarily because of its hypothetical nature Appraisers must not arbitrarily select percentage of projected sale price as the indicated value of the raw land. In order to defend the land values generated from this method, the appraiser must perform a study of the market, and solicit the necessary technical assistance to develop a reliable percentage of projected sale price Serves as a substitute only when the subject market area lacks sufficient land sales to employ the direct sales comparison method

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Group- 4 Land Valuation

ABSTRACTION METHOD

This method of estimating the value of property uses similar properties available in the same market to extract the value of a parcel of land A value is allocated to an improvement in a recent sale of another property and after subtracting this value from the overall price, the remainder is attributed to the land it subtracts the depreciated replacement cost of improvement value from the sales price to get the residual land value estimate Sales with newer improvements make it easier to estimate depreciationbetter residual land value estimate Land + Improvements(less depreciations) = Total Value Though imprecise, this method can be used to appraise property when there are few sales for comparison (rural)

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Group- 4 Land Valuation

EXAMPLES
Particulars Sale price of property Replacement cost new estimate Less accrued depreciation Estimated value of improvements Indicated land value 200,000 Cost & Depreciation Value 180,000

Particulars
Sale Price Replacement Cost Physical Depreciation $280,000 30% 0% 0% ($280,000 x 70% 196,00 $34,000 $230,000

50,000

Functional Obsolescence Economic Obsolescence 150,000 Estimated Value of Improvements Indicated Land Value ($230,000 - $196,000

30,000

This method is not as desirable or accurate as the sales comparison method and should be used only when 5/3/12 vacant land sales Group- 4 Land Valuation are not available

Thank You !!

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Group- 4 Land Valuation