The Site Value… A Walk in the Park or USPAP Nightmare?
Recognized methods to determine the site value…
We have all been there, the subject is located in an established neighborhood, no vacant land sales in many years and the lender has requested the site value. USPAP Standard 1-1 states “be aware of, understand and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal.” The other key standard to keep in mind is Standard 2-2a (viii) –
“Summarize the information analyzed, the appraisal methods and techniques employed, and the reasoning that supports the analysis, opinions and conclusions: exclusion of the sales comparison approach, cost approach or income approach must be explained. Other standards do apply, but standards 1-1 and 2-2 address the development and reporting.”
Now think back to your fundamentals class. Sales Comparison, Allocation, and Abstraction are the recognized methods to determine the site value.
- The sales comparison approach… well if you don’t understand this concept, please rethink your profession.
- The allocation method is when a certain percentage of the total value is attributed to the land.
- The abstraction method is when the value of the land is extracted from the sale price, less the depreciated cost of improvements.
Now take a look at some of the sample comments for the site value found on appraisals. Ask yourself, are they USPAP compliant? Please note VaCAP is not singling out any appraiser, we simply want to demonstrate areas that may need more attention when completing appraisals.
Example 1: A newly constructed attached town home located in a town home community.
- Appraiser Comments:
“The estimated site value is based on recent closed land sales of comparable lots in the subjects market area”
Do attached town home lots really sell on the open market to different buyers? Did the appraiser use lots for detached single family homes? This is most likely a canned statement and may not be applicable to a town home lot. Is it misleading? Assuming it is applicable and not misleading, does it comply with Standard 2-2?
Example 2: A historic property built in the 1700’s on 54 acres.The 54 acres is encumbered by a conservation easement.
- Appraiser Comments:
“The site value estimate is based on land assessments provided by the local assessor’s office, land sales throughout the area, and the appraiser’s general knowledge of local areas. Although site/dwelling ratio exceeds typical guidelines. Site to dwelling ratios are typical for the area.”
Is the land assessment a recognized method? Which sales were used? Appraisers knowledge? What information is analyzed? Summarized? Supported? Is there mention of the conservation easement? There are comments about site / dwelling ratios, but where is the data summarized? Is this in compliance with Standards 1-1 and 2-2?
Example 3: A detached single family home located in a subdivision built in the 1950’s.
- Appraiser Comments:
Land Value determined through MLS data when available, and through the evaluation of other online sources such as current tax records when fewer land sales are available. This is to meet the clients request for an estimate of land value. The cost approach was not required nor deemed reliable enough to be produced independently for this report. The entry of data here is requested by the client but should not be considered a part of the cost approach.
Land value determined through MLS when available? Is the appraiser saying he/she does not know if data is available in MLS? Is an evaluation of online tax records a recognized method? Why was the allocation or abstraction method not used? Where is the summary of the data analyzed? Even though the appraiser has stated his opinion of site value is not part of the cost approach, is it still an opinion of value that must comply with USPAP?
Example 4: A single family home located in a subdivision built in 2006.
- Appraiser Comments:
“There were insufficient land sales of similar size subdivision parcels within the past 2 years to complete the sales comparison approach. The site value was obtained by the allocation method utilizing 18% of the value determined in the sales comparison approach. This is supported by the $44,000 value determined by extraction. The opinion of value is additionally supported by the County Real Estate Assessment of $50,000.”
All the recognized approaches are addressed and summarized. Support for the opinion of value has been given. Is this USPAP compliant?
Now that we have looked at some examples of comments concerning the cost approach, would the appraiser have sufficient data and analysis in their work file to defend a complaint for violations of USPAP? Would the statement “the cost approach is not applicable for credible results and the site value was provided at the lenders request” be sufficient to defend a complaint?
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Lenders only make appraisers fill in the cost approach for their own insurance estimate, this is just plain wrong, but that’s the truth of it. As long as you have land sales your good to go, but in a dense urban area or built up neighborhood with no land sales to go on I would refrain. Market extraction is too risky unless you have some tear down properties to go on, other wise I would avoid all together. Thank god most of my work is VA & REO which does not require the cost approach. (This should only be necessary and useful with new construction and ample land sales) other wise, factors of depreciation and lack of land sales can leave you open to question with issues down the line. Just my 2 cents.
Let’s stop this madness.
You have been hired to opine MARKET VALUE. The definition of MARKET VALUE is applicable. IF there are no typical buyers or sellers for a component of the real estate being appraised, there is no MARKET VALUE. In some areas, there are land sales, in some areas there sales of homes that are razed so that new homes can be built, in some areas there are damaged homes that are sold for the land to be rebuilt, and in some areas there are no sales of land, or homes that were razed. Hence there is NO MARKET in those areas for vacant.
A Market might be created, if a tornado or some other natural disaster blew down several homes. But that would be a HYPOTETICAL market if such a thing has not happened.
So after appraisers stop playing yes man, they need to converse with their client WHAT VALUE they are opining for a component parcel of property? Value in Use, via extraction or allocation would be my assumption, if no market exists.
Oh but lenders “need” market value.
Sorry, per the definition of market value, there are no “typical” buyer’s or sellers, regardless to their motivations or knowledge, blah, blah, as of the effective date.
So try again.
Good read. I especially liked the last part when I was given examples of what the writer would identify as compliant and defendable.
Sorry but I don’t buy Example 4. How was the allocation determined to be 18%? “Its in the workfile.” Yeah right, might as well just say “land values based upon extraction”. No land sales in subdivision in prior 2 years. So how was the 18% determined? Is that a 2 year old value no longer related to todays market? In most of the areas I work they’re PUD subdivisions so it never was possible to buy your own lot — instead you had to pay the builder whatever they arbitrarily decided was the lot value or lot premium — and resales, especially in the current market here (historic low # of listings) — rarely support those premiums.
The comment about Extraction also contradicts the “Extraction Has No Traction” blog post that quotes The Dictionary of Real Estate saying “most effective when the improvements contribute little to the total sale price of the property.” Land is 18% so improvements = 82% of value. Sounds like direct contradiction to me.
Lastly, the article still doesn’t answer, or give any assistance to us appraiser’s stuck in the conundrum of lenders mandating the provision of a Site Value, even if the CA is not required, for properties where Site Values really aren’t easily or reliably (especially not within the time/money requirements of lender work) quantifiable or justifiable. So we appraisers remain either penniless (“You should just refuse to work for those lenders”) and out of work if we don’t or damned (USPAP violator & should lose your license) if we do.
I appreciate these blog posts but I could really use additional help solving this real world dilemma. How can I do the work so I can feed my kids while not being at high risk of losing my license.
Don’t know how you feel about this , but
appraisal buzz I believe is allowing comments
Again , Lmfao
Give them a week Jack! Joan Trice & Donald Trump are two birds of the same feather; their vanity and ego are too fragile for criticism.
Yes sir Retired Appraiser if some appraisers would Open there eyes they would see that…….Satan is real.
The article is a timely reminder.
I CHOOSE to use the Cost Approach whenever I can simply because it helps avoid falling into the trap of circular thinking that can result from use of a single approach. Yes, I DO know how to properly apply extraction (abstraction) despite the change in terminology for what used to be two techniques having morphed into one over the years. I don’t care what you call it as long as you perform it properly.
With almost no exceptions, IF I wanted to ‘pick a part’ an appraisal there are two areas that (nearly) universally will NOT be properly completed: (1) Is the highest and best use “analysis”, and (2) is the determination of site value.
Stated another way, there are two areas in which State ‘regulators’ looking for easy money are almost guaranteed easy pickings. Of the two areas the cost approach is the easiest to develop and defend properly. It adds from 1/4 hour to an hour for each report to perform and summarize the results in the form report.
H&BU is a bit trickier. SOMETIMES it can be boiler-plated BUT if you have to ask how then you should NOT use BP for it because you’d likely not recognize those circumstances when the BP is inapplicable and actual analysis with appropriate commentary is needed.
Lastly, don’t forget that just because most of your work may be in a crowded city with no (few) land sales that it means when all of a sudden you do rural work with LOTS of land for sales, that you can use your crowded city extraction or abstraction approach.
Just a couple of the problems associated with ‘one size fits all’ fee arrangements. I charge for the extra time it takes to do it the right way. Its why I’ve done less and less loan production work each year over the past five. So far in 2017 I plan to do NO GSE loan related residential appraisal work.
Keeping my fingers crossed, and wondering if dog food can really taste all that bad?
Thank goodness for the Farmers Dog. Tasty compared to canned my fellow hobo
Extraction is so easy in suburbia. Most land runs assessed at 15% to 30% or there abouts of total MV. Extract the percentage and scale that up or down to your determined current MV, now you have current land value using assessors base figure scaled up to current market. So easy….
Land valuation method and cost approach typically are illuminated as illusionary methods in quickly moving markets. Last year cost approach was how much and now 100k higher market it’s this much more? Did contractors really raise rates that quickly and who drives the cost of service market and ensuing house pricing, the contractors or the purchasers? Answer is the servicers market is reactionary to home pricing market. Contractors need places to live too. So you stick with extraction and scale up the relative proportion of land worth to compensate to some degree, for increasing markets.
A good rule of thumb for site value is that if you’re even remotely close to being over 1/3rd total value in land value, that’s when you need to really put the work in and complete both MV of land and cost to extract reasonable allotments of land value, regardless if that’s in scope of work or not. The failure of cost to build vs land value tables and tools is apparent in the diversity of markets. Many ultra high price markets should have well over half of MV attributed to land. A piece of wood is a piece of wood and costs the same online regardless of your location in the states. Food for thought.
I think if there are no listings, sales or available data to use as a Land Value. Try to look nearby subdivision to represents as your comparable. Then, the appraiser’s analysis, experienced, knowledge and understand ratify the valuation. Using Abstraction or Allocation Method will appreciate your valuation. Although, that is part of valuation. My professional opinion using Market Data or Sales Comparison is reliable source of our valuation.
In addition, do not used hypothetical valuation that resulting into distorted the Market.
Example 5 – An insurance case where the buyer needs a very precise Single Family Home (SFH) value due to the Recoverable Insurance Depreciation equation from the Insurance Company handling the loss of buyer’s SFH (Single Family Home):
To recover the full amount of Recoverable Depreciation, $137K, Loss Victim must buy a SFH of equal, $571K, or greater value. The formula is Closing Amount minus Anything other than SFH in the Appraisal. However, the Appraisal, $666K, calculates the site value, $145K based on sales of empty lots in this built neighborhood. The closing is $658K so the buyer gives up $571K minus $658K-$145K (Closing amount minus Not SFH in Appraisal determines SFH value, $513K) or $58K not recovered by loss victim. The ratio of Site to Total by Appraisal = 22% whereas the assessment for the property is 13% or $87K. The loss victim would recover all of the recoverable Depreciation, $137K since ($658K – $87K) – $571 = $0 not recovered or Equal Value, $571, was attained and all is recovered by victim. Which method would be appropriate in this case? Wouldn’t using the sale of the few empty lots remaining inflate the site value for the built site? Can subtracting a hypothetical teardown expense correct the site value?