Chapter Title:

Site Valuation: Optimizing Land Use Potential

Introduction:

Okay, here is a detailed scientific introduction in English for the chapter "Site Valuation: Optimizing Land Use Potential," designed for a training course entitled "Real Estate Site Valuation: Maximizing Land Potential."

File content PDF (relevant part):
son for a separate site valuation is to obtain data for certain valuation techniques. In particular, the cost approach to value and the building residual technique of income capitalization both require a separate estimate of site value. If either of these techniques is used in an appraisal, a separate site valuation is necessary. (The cost approach to value is covered in detail in Chapter 8. The building residual technique is discussed in Chapter 10.)
A separate valuation of site and improvements may also be required by law, particularly in appraisals for property tax assessment and condemnation purposes. In these cases, a separate site evaluation is required by the scope of the appraisal assignment itself. (Site valuation is covered in detail in Chapter 6.)
VII. Step 6: Applying the Three Approaches to Value
Having collected data, analyzed highest and best use, and evaluated the site, the appraiser is ready to apply the three approaches to value. These are the sales comparison approach, the cost approach, and the income approach. Each of these approaches results in an indication of value, also called a value indicator. The appraiser will then reconcile these value indicators in Step 7, reconciliation.
96
The Appraisal Process
A. COST APPROACH
The COST APPROACH assumes that the value of improved property is indicated by the value of the site, plus the cost (new) to construct the improvements, less any depreciation that the improvements have suffered. DEPRECIATION is the difference in value between the cost (new) of the improvements and their current value, regardless of the reasons for the difference. The cost approach can be expressed by the formula:
Property Value of Site (by Cost Approach)

NAME?

NAME?

NAME?

As noted earlier in this chapter, the cost approach requires a separate valuation of the site. The appraiser then estimates what it would cost to replace any existing structures, and adds this amount to the site value. The cost of replacing the structures is estimated as of the date of valuation.
Finally, the appraiser estimates the difference in value between the existing improvements and the cost of replacing them (depreciation), and deducts this amount to arrive at the final value indicator. This does not mean that the appraiser simply subtracts the current value of the improvements from their cost; if the current value of the improvements were known, there would be no reason to calculate depreciation in the first place. Rather, the appraiser must estimate the effect on value of separate items, such as physical deterioration of the improvements, or a loss in value due to an out-dated design. Estimating accrued depreciation is often the most difficult part of applying the cost approach to value, especially for older improvements or improvements that do not conform to the highest and best use of the land as if vacant. (The cost approach to valuation will be covered in detail in Chapter 8.)
B. SALES COMPARISON APPROACH
The sales comparison approach to value is also known as the market approach or market data approach. Under the SALES COMPARISON APPROACH, the value of the subject property is indicated by the values (sale prices) of similar properties in the market. These similar properties are referred to as comparables. The two keys to effective use of the sales comparison approach are:
1. identifying similar properties that are truly “comparable” to the subject property; and
2. making the proper adjustments to the sales prices of the comparable properties to
account for any differences between the subject property and the comparables.
The considerations in identifying legitimate comparables were discussed earlier in this chapter. It is relatively rare, however, to find two properties that are so comparable that there is no difference in their values. For this reason, the adjustment process is central to the sales comparison approach. In the adjustment process, the sales price of the comparable property
97
Chapter 3
is adjusted (up or down) to reflect aspects of the comparable property that are viewed as less valuable or more valuable in comparison to the subject property.
Case/Example: An appraiser identifies a comparable property that is similar to the subject property in all respects, except the subject property has only one bath, while the comparable has two. The comparable property sold recently for $145,000. Current market data indicates that an extra bath adds $5,000 to the values of homes similar to these. So the appraiser would subtract the value of the more desirable feature (the extra bath) from the price of the comparable, to arrive at an indicated value of $140,000 for the subject property.
The sales comparison approach may be summarized by the formula:
Subject Value = Comparable Sales Price +/- Adjustments
(The sales comparison approach to valuation will be covered in detail in Chapter 9.)
C. INCOME APPROACH
The third approach to value is the income approach. This INCOME APPROACH assumes that the value of property is indicated by the amount of income that the property can generate: the greater the income, the greater the value.
The income approach may use net income or gross income.
Typically, residential appraisers utilize the gross rent multiplier to determine value by the income approach. In this approach, the monthly income from each comparable rental sale is divided into its sale price to determine a GROSS RENT MULTIPLIER. The appraiser then selects a multiplier from the range thus determined and multiplies it by the subject’s gross monthly income (say, $1,525 in this case) to determine a value by the income approach.
This process would be carried out for each rental sales comparable (six comparables in this case). From the above process, a range of multipliers would result.
Case/Example: 132, 133, 135, 135, 135, 140
From the above example, we can see that 135 is the most likely multiplier. Thus:
$1,525 Subject Monthly Rent x 135 = $206,000 (rounded) Value by Income Approach.
(The income approach to valuation is covered in detail in Chapter 10.)
VIII. Step 7: Reconciling the Value Indicators
Each of the three approaches to value results in a separate indication of value for the subject property. In general, the greater the similarity among the three value indicators, the more reliable they are. However, it is very rare for all three value indicators to be identical. When the value indicators are not identical, the appraiser must somehow forge the value indicators into one estimate of value. This process is called reconciliation. RECONCILIATION is the process of analyzing the appraisal problem, selecting the most appropriate method of the three, and giving it the most weight in determining the final estimate of value.
98
The Appraisal Process
Reconciliation is the easiest process when the value indicators are very similar.
In that case, it is usually safe to assume that the value of the property lies somewhere between the lowest value indicator and the highest.
Case/Example: An appraiser arrives at the following value indicators: Cost Approach: $150,000
Market Approach: $145,200
Income Approach: $144,500
Since the value indicators are reasonably similar to each other, the value of the property is probably somewhere between $144,500 (the lowest indicator) and $150,000 (the highest indicator).
However, the process of reconciliation is not a simple averaging of the three value indicators. In fact, there is no set formula at all for reconciling the values. The process relies entirely on the judgment and ability of the appraiser to arrive at the most reliable estimate of value.
A primary consideration in the reconciliation process is the relative reliability of the three value indicators, especially when there is a wide disparity between the three indicators. For this reason, the reconciliation process requires a thorough review of the complete appraisal process. The appraiser must review the reliability of the data, the logic and analysis applied to the data, and the resulting value indicators.
Figure 3-4 is taken from the “Reconciliation” section of the Uniform Residential Appraisal
Report. It shows if the appraisal is being made “as is” or “subject to” completion of work.
Figure 3-4
Reconciliation Section - URAR
In addition to reviewing and considering the reliability of the various value indicators, the appraiser will also consider the use of the appraisal. For example, all things being equal, more weight may be placed on the value indicated by the income approach in the case of an appraisal that will be used by an investor who is looking for income property. On the other hand, if the
99
Chapter 3
appraisal is being used to help the owner-occupant purchaser qualify for a home loan, the sales comparison data approach may be considered the most reliable. (Reconciliation and final value estimation will be covered in detail in Chapter 11.)
IX. Step 8: Reporting the Value Estimate
The final step in the appraisal process is the preparation of the appraisal report.
A. THE TWO BASIC APPRAISAL REPORTS
According to Standard 2 of USPAP, there are two types of appraisal reports:
1. Appraisal Report – summarizes sufficient information to be understood by the client.
It is typically found in a form report.
2. Restricted Appraisal Report – states information and is restricted to the use of one client.
These reports may be either oral or in writing. Reports for federally-related loan transactions must be in writing. The Uniform Standards of Professional Appraisal Practice do not dictate the form or format of either type of report.
Reports can either be in narrative, in a form report, or an oral report.
Note: Form reports provided by lenders (including Fannie and Freddie) are not always compliant with USPAP. The appraiser is cautioned that he or she is required to supplement a form report with an addendum when necessary to ensure compliance with USPAP.
1. Narrative Report
A NARRATIVE REPORT is the most detailed form of appraisal report. It describes the data analyzed by the appraiser, the conclusions drawn, and the reasoning behind the stated conclusions.
2. Form Report
The FORM REPORT is probably the most commonly used type of report for residential appraisals. Form reports are used by many lenders and government agencies. The form report typically presents the data used by the appraiser and the appraiser’s conclusions. There is a limited amount of space on the form for discussing the reasoning behind the appraiser’s conclusions; if necessary, the appraiser should use an addendum to provide additional information needed in order to understand the appraiser’s value conclusions.
All appraisal forms submitted to Fannie Mae and Freddie Mac must now be completed and turned in electronically (see efanniemae.com).
Note: Form reports provided by lenders (including Fannie and Freddie) are not always compliant with USPAP. The appraiser is cautioned that he or she is required to supplement a form report with an addendum when necessary to ensure compliance with USPAP.
100
The Appraisal Process
3. Oral Report
An ORAL REPORT, as the term implies, is delivered to the client orally rather than in writing. The amount of detail contained in an oral report will depend on the circumstances and the needs of the client.
B. ESSENTIAL ELEMENTS OF THE APPRAISAL REPORT
It is important to note that regardless of the form of the appraisal report, the appraiser should always keep good detailed records of the data, analysis, and conclusions that form the basis of the appraisal. Also, even the simplest appraisal report should contain the following elements:
1. identification of the subject real estate;
2. identification of the real property rights appraised;
3. the purpose of the appraisal;
4. the definition of value used in the appraisal;
5. the effective date of the appraisal, and date of the report;
6. a description of the scope of the appraisal; and
7. any assumptions and limiting conditions that affect the appraisal.
Appraisal reports will be covered in detail in Chapter 12.
Note: For appraisal reports prepared using the Uniform Appraisal Dataset (UAD) specification, the PDF must be noted with the UAD version that was utilized in the preparation. E.g., the following notation “UAD Version 9/2011” must appear at the bottom of each page in the bottom margin with placement to the left of the page number:
UAD Version 9/2011
101
Chapter 3
X. CHAPTER SUMMARY
I. The appraisal process consists of 8 steps that guide the appraiser to a competent estimate of value.
II. Step 1 – Defining the Appraisal Problem.
A. Appraiser must know what the client wants, and the terms and conditions of the appraisal assignment.
B. What is to be appraised?
1. Identity of the real estate is established by the legal description.
a. The appraiser must identify and consider any personal property that is included in the appraisal, as well as any repairs and improvements that will be made to the property.
2. The real property rights to be appraised will affect the value estimate. Most appraisals are concerned with the fee simple interest, but appraisals may be made for limited or partial interests as well.
3. The appraiser must consider all the rights that benefit the property, as well as all restrictions that may affect value.
4. The purpose of the appraisal is the type of value to be estimated. The value should always be defined.
C. When is it to be appraised?
1. Appraisals estimate value as of a specified date: the valuation date or effective date of the appraisal.
2. The valuation date may or may not be the same as the appraisal report date.
Appraisals are sometimes made for past or future values, as well as current values.
D. Why is it to be appraised?
1. The use of the appraisal will affect the appraiser’s selection of data, and also the appraiser’s judgments in the reconciliation phase of the appraisal.
2. Knowing the use of the appraisal also allows the appraiser to limit liability arising from the appraisal.
E. How is it being valued?
1. The scope of the appraisal is the extent to which the appraiser will collect, verify and report data. Scope may vary depending on the nature of the appraisal assignment, and may affect the cost of the appraisal (the appraisal fee).
2. Assumptions and limiting conditions are stated in order to help readers of appraisal reports to understand the significance of the data and conclusions presented in the
102
The Appraisal Process
report. This is especially important when the reader is relatively unsophisticated, and likely to draw unwarranted conclusions from the report.
3. Assumptions and limiting conditions also protect the appraiser by limiting liability.
F. USPAP requires that the elements identified in defining the appraisal problem be included in the appraisal report.
III. Step 2 – Preliminary Analysis.
A. The appraiser must identify the data that will be necessary to complete the appraisal report.
1. General data relates to the market in general. Specific data relates to a particular property. Competitive supply and demand data is information about the future supply of and demand for competitive properties in the marketplace.
2. Primary data is collected directly by the appraiser. Secondary data is collected from published sources.
3. Data is used in appraisal to identify: market trends, probable future supply and demand of competitive properties, and characteristics of the subject property and comparables.
B. A property is comparable if it is physically similar to the subject property, appeals to the same kinds of buyers, is located in the same market area, and is sold within a limited period of time from the effective date of the appraisal.
C. The appraiser must identify the sources from which the necessary data can be obtained. D. The appraiser then prepares a work schedule for the appraisal assignment (either
mentally or on paper).
IV. Step 3 – Collecting the Data.
A. The accuracy of data used in an appraisal must be verified, either by personal inspection or by cross-checking between sources.
B. All data used in an appraisal should be relevant to the value of the subject property. V. Step 4 – Analyzing Highest and Best Use.
A. All appraisals must consider highest and best use.
B. For improved property, the appraiser must analyze highest and best use of the property as improved, and also of the property as if vacant.
VI. Step 5 – Valuing the Site.
A. A site is land that has been prepared for use or construction, as by clearing, grading, and provision of access and utilities.
103
Chapter 3
B. Site valuation may be necessary for highest and best use analysis, for application of certain appraisal techniques, and/or by virtue of the scope of the appraisal.
VII. Step 6 – Applying the Three Approaches to Value.
A. The sales comparison approach (market data approach) indicates value by analyzing the sales of similar (comparable) properties.
1. The more similar the comparables are to the subject property, the more reliable they are as indicators of value.
2. Sales prices of comparables must be adjusted to account for any differences between the comparables and the subject property, including physical differences, changes in market conditions, and differences in the terms of sale.
B. The cost approach indicates value by estimating the value of the land separately, then adding the estimated cost (new) of the improvements, and then subtracting depreciation that the improvements have suffered.
1. The older the improvements, the more difficult it becomes to estimate depreciation, and the less reliable is the value indication given by the cost approach.
C. The income approach uses a gross rent multiplier for residential properties. VIII. Step 7 – Reconciling the Value Indicators.
A. The appraiser must reconcile any differences between the values indicated by the three approaches to value.
B. Reconciliation involves analysis of the reliability of the value indicators, and application of the appraiser’s judgment as to the most reliable estimate of value.
IX. Step 8 – Reporting the Value Estimate.
A. The narrative report is the most detailed type of appraisal report. It sets out the data relied on by the appraiser, and explains the analysis of the data and the reasoning that led to the appraisers final estimate of value.
B. Form reports include much of the data that supports the appraiser’s conclusion, but may not include complete explanations of the appraiser’s reasoning. Form reports are used by many lenders, insurers and government agencies.
C. Appraisal reports are sometimes given orally, generally in courtroom settings.
D. Regardless of the form of an appraisal report, it must contain the elements required by
USPAP.
104
The Appraisal Process
XI. CHAPTER QUIZ
1. The effective date of an appraisal is:
a. the date of the appraisal report.
b. the date the appraiser accepts the appraisal assignment.
c. the date as of which value is estimated.
d. the date on which the appraiser inspects the subject property.
2. The standard of value refers to:
a. the kind of value the client wants to know. b. the amount of appraisal fee.
c. the dollar amount of the opinion of value. d. none of the above.
3. In defining an appraisal problem, it is important to identify:
a. the use of the appraisal. b. the standard of value.
c. the intended uses. d. all of the above.
4. In defining an appraisal problem, it is important to identify:
a. the use of the appraisal.
b. the purpose of the appraisal.
c. the scope of the appraisal.
d. all of the above.
5. An appraiser may analyze sales of comparable properties in the:
a. sales comparison approach. b. cost approach.
c. income approach. d. all of the above.
6. Which of the following is NOT a part of defining an appraisal problem?
a. Identifying the real estate
b. Identifying the real property interest
c. Identifying the sources of data
d. Agreeing on the limiting conditions
7. In an appraisal report, real estate is identified by means of its legal description because:
a. it is the most commonly accepted way to do it. b. it is required by law in all cases.
c. it is the most accurate way to describe the real estate.
d. it helps prevent unauthorized persons from understanding the appraisal report.
105
Chapter 3
8. The assumptions and limiting conditions stated in an appraisal report are for the benefit of:
a. the appraiser. b. the client.
c. third parties.
d. all of the above.
9. Which of the following would NOT be considered specific data?
a. The location of a property
b. Evidence of population shifts in a neighborhood
c. The size of a lot
d. The terms and conditions of a sale
10. A site may be valued separately from its improvements:
a. to provide data for certain valuation techniques.
b. because it is required by the scope of the appraisal.
c. as part of the highest and best use analysis.
d. all of the above.
106
The Appraisal Process
107
Chapter 4 Property Description and Appraisal Math
KEY WORDS AND TERMS
Annuity
Artificial Markers
Baseline
Bench Mark
Direct Capitalization
Discounting
Compound Interest
Correction Line
Future Value
Geodetic Survey System
Guide Meridian
Government Lots
Interest Formula
Legal Description
Lot, Block, and Tract System
Mean
Median
Meridian
Metes and Bounds System
Mode
Natural Monument
Point of Beginning
Present Value
Range
Range Lines
Reciprocal
Rectangular Survey System
Reference Point (Monument)
Sections
Standard Deviation
Standard Parallels
Townships
True Point of Beginning
LEARNING OBJECTIVES
After completing this chapter, you should be able to:
1. name the three major systems of land description used in the United States, and explain how land is described under each system,
2. calculate the area and volume of complex figures,
3. solve problems involving percentages, interest, capitalization rates, and income multipliers, and
4. use a financial calculator or table to solve problems involving discounting and annuities.
109
Chapter 4
CHAPTER OUTLINE
I. PROPERTY DESCRIPTION (p. 111)
II. METES AND BOUNDS SYSTEM (p. 111)
A. Reference Points (p. 112)
B. Courses and Distances (p. 114)
1. Metes and Bounds Descriptions in Appraisals (p. 114)
III. RECTANGULAR (U.S. GOVERNMENT) SURVEY SYSTEM (p. 114)
A. Base Line and Meridian (p. 114)
B. Townships (p. 115)
C. Sections (p. 116)
D. Partial Sections (p. 116)
E. Adjustments and Government Lots (p. 118)
F. Rectangular Survey System Descriptions (p. 118)
G. Geodetic Survey System (p. 118)
IV. LOT, BLOCK, AND TRACT SYSTEM (p. 119)
V. APPRAISAL MATH (p. 119)
A. Distance, Area, and Volume (p. 120)
B. Area of a Rectangle (p. 121)
C. Units of Area (p. 122)
D. Converting Units (p. 122)
E. Area of a Triangle (p. 123)
F. Right Triangles (p. 124)
G. Areas of Complex Figures (p. 125)
H. Volume (p. 125)
I. Reciprocals (p. 125)
J. Percentages (p. 128)
K. Direct Capitalization (p. 129)
L. Interest (p. 131)
VI. FINANCIAL CALCULATIONS (p. 131)
A. Present and Future Value (p. 132)
B. Interest Compounding (p. 132)
C. “Hoskold” or Sinking Fund Method (p. 133)
D. “Inwood” Method (p. 133)
VII. MEASURES OF CENTRAL TENDENCY (p. 134)
VIII. CHAPTER SUMMARY (p. 135)
IX. CHAPTER QUIZ (p. 137)
110
Property Description and Appraisal Math
I. Property Description
The orderly process of creating boundaries for land ownership and describing them is referred to as a legal description. The land within the boundaries is often referred to as a “parcel, lot, plot, or tract.” These terms may refer to all types of improved or unimproved land.
A PARCEL of land generally refers to any piece of land that may be identified by a legal description in one ownership. Thus, every parcel of real estate is unique.
Although an appraiser is not a surveyor, he or she should be able to read and understand a “legal” description of real estate, since most appraisals require a legal description in order to adequately identify the subject property. Appraisers must also be comfortable applying a variety of different mathematical techniques and formulas that are used in the valuation process.
In everyday life, real estate is normally identified by its street address, for example “111 Main Street” or “1517 Park Avenue.” Some properties may also be known by a common name, such as “Empire State Building,” or “South Fork Ranch.” These methods of property description are suitable for many purposes, but they are of little use when it comes to determining the exact boundaries of a parcel of real estate.
A street address or a descriptive name are informal descriptions. They are NOT
considered to be legal descriptions.
Therefore, the appraiser should use what is called a legal description of the subject property. A
LEGAL DESCRIPTION of property is one that is adequate to identify the property’s exact boundaries.
In most cases, a property’s legal description is given to the appraiser by the appraisal client. It is not the appraiser’s responsibility to verify the accuracy of the description or to survey the property. However, an appraiser should be able to recognize whether the description meets the local standards, and he or she should also be able to identify the real estate that is described in the legal description.
There are three methods of legal description commonly used in the United States:
1. The Metes and Bounds System
2. The Rectangular (U.S. Government) Survey System
3. The Lot, Block, and Tract System
Different areas of the country use different systems or combinations of systems, depending on local law and custom. Appraisers should have a basic understanding of each of the three major systems of land description.
II. Metes and Bounds System
The metes and bounds system is the oldest of the three methods of legal description. It also tends to be the most complicated. This METES AND BOUNDS SYSTEM is the method of identifying (describing) property in relation to its boundaries, distances, and angles from a given
111
Chapter 4
starting point. It gives directions and distances that could be followed by a surveyor to trace the boundaries of the property.
There are three basic elements in a metes and bounds description:
1. Reference Points,
2. Courses, and
3. Distances.
A. REFERENCE POINTS
A REFERENCE POINT (sometimes called a monument) is an identifiable, fixed position from which measurements may be taken. A common example of a reference point is a fixed survey marker that has been permanently set in the ground. Artificial landmarks such as metal stakes are also used as reference points in metes and bounds descriptions.
“Artificial markers” are man made. “Natural monuments” would be natural objects such as trees or rocks.
All metes and bounds descriptions begin at a reference point that serves to locate the property with respect to adjoining surveys in the area. This initial reference point is known as the POINT OF BEGINNING (POB). BOUNDS describe the point of beginning, which is also the point (or reference point) of return, and all intermediate points. The term “point of beginning” can sometimes be confusing, since it can be used to refer to a stone monument as the place to start (see Figure 4-1).
A metes and bounds description of this property would start by identifying the true point of beginning, in reference to the stone monument located 2804’ south of the true point of beginning. These different points are the initial reference point for the description, and the point at which the description of the actual property boundaries begins. Sometimes these two points coincide, but often they do not.
To distinguish between the initial reference point of the description and the first point on the actual property boundary, the latter is sometimes referred to as the TRUE POINT OF BEGINNING. Figure 4-1 shows the relationship between the point of beginning, which is the initial reference point for the description, and the true point of beginning, which is the point at which the description of the actual boundaries of the property begins.
B. COURSES AND DISTANCES
Once the true point of beginning is established, the metes and bounds description proceeds to describe each boundary of the property. METES describe the direction one moves from one reference point to another and the distances between points. One moves from one point to another by knowing the courses of each point. COURSES are degrees, minutes, and seconds of angle from north or south. The boundaries are described in sequential order, ending up back at the true point of beginning.
There are 360 degrees in a circle, so 1 degree (1º) is an angle 1/360th of a circle. One minute is 1/60th of 1 degree (1’) and one second is 1/60th of 1 minute (1”).
112
Property Description and Appraisal Math
Figure 4-1
True Point of Beginning (Starting Point)
Point of Beginning
(Arrow Hwy. & Haven St.)
PLACE OF START
Essentially, the description is a set of instructions that would enable someone to walk around the boundaries of the property. Each instruction corresponds to one boundary of the property; it tells which direction to go to follow the boundary (the course), and how far to go before changing to another direction (the distance).
Example: A typical instruction or “call” in a metes and bounds description might read: “South 89 degrees 19 minutes East, 2664 feet”. This tells the reader to proceed on a course that is 89º 19’ to the East of true south, for a distance of 2664 feet.
A course in a metes and bounds description may be stated in one of two ways. If the course is precisely along one of the four cardinal directions, it is usually stated as simply North, South, East or West. All other courses are stated in terms of their quadrant (northeast, northwest, southeast, or southwest) and their angle in relation to a line running north and south.
Northwesterly and northeasterly courses are stated in terms of the angle from north; southwesterly and southeasterly courses are stated in terms of the angle from south. The angle is given in terms of degrees, minutes, and seconds. (In angular measurements, a degree (º) is equal to 1/360th of a full circle; a minute (‘) is equal to 1/60th of a degree; and a second (“) is equal to 1/60th of a minute or 1/360th of a degree.) The size of the angle is written in between the two cardinal directions that form the boundaries of the quadrant.
Example: A southeasterly course that forms an angle of 89º 19’ E degrees from true south would be stated as South 89 degrees 19 minutes East, or S 89º 19’ E. The angle is written between the two cardinal directions that identify the quadrant.
113
Chapter 4
Case/Example: Starting at the stone monument at the intersection of Haven Street and Arrow Highway (“Point of Beginning”) in Cucamonga California, go N5º 33´W; 1804 feet to the second fence corner referred to as the
”True Point of Beginning (Starting Point).” Starting at the NW fence corner, go S89º 19´E, 2664 feet; at the NE
fence corner, go S0º 32´E for 1302 feet along the stone wall to the iron pin; at the SE corner, go N89º 11´W for
2550; at the SW corner, go N5º 33´W 1804 feet back to the starting point.
1. Metes and Bounds Descriptions in Appraisals
Metes and bounds descriptions can be very long and complex, which creates opportunities for errors whenever the description must be copied. For this reason, the description is often photocopied from a deed or other document, and the photocopy is attached as an addendum to the appraisal. This does not guarantee the accuracy of the description, but it at least prevents errors in its transcription. Appraisers can calculate a parcel area imputing the metes and bounds description into a computer program. The computer program can also simulate a survey around the boundary of the property to see if the description ends at exactly the point of beginning.
The laser transit used by surveyors has made for more accurate determinations of points, directions and distances. Uncertainty with regards to points of beginning has largely been eliminated through the use of established BENCH MARKS, which are survey markers set in heavy concrete monuments. Satellite technology has also been utilized by surveyors to locate points.
The metes and bounds system is often used instead of the rectangular survey system, and is especially good when describing unusual or odd-shaped parcels of land.
III. Rectangular (U.S. Government) Survey System
The second major system of property description is the rectangular survey system, also known as the United States government survey system. In this system, property is described in relation to a rectangular grid that has been established by federal government survey.
The rectangular survey system was established by law in 1785.
It covers most areas of the country that were not already settled as of the date the system was established. Separate rectangular grid systems have been surveyed for most areas of the country, the main exception being the eastern states.
A. BASE LINE AND MERIDIAN
Each main grid in the rectangular survey system has an initial reference point, which serves as the basis for locating all properties in the grid. The initial reference point is the intersection between the PRINCIPAL MERIDIAN, running north and south, and the BASE LINE, which runs east and west.
These baselines and meridians are simply surveyor reference lines. Land is measured from the intersection of these baselines and meridians.
114
Property Description and Appraisal Math
Each grid system has its own unique name, corresponding to the name of its principal meridian. Property descriptions that use the rectangular survey system must refer to the name of the particular grid that is the reference for the description.
Case/Example: The rectangular survey in Southern California is based on the San Bernardino Principal Meridian and Base Line. A rectangular survey description in this area would refer to the “San Bernardino Base and Meridian,” or “S.B.B. & M” (see Figure 4-2).
Figure 4-2 San Bernardino Base and Meridian - S.B.B. & M.
B. TOWNSHIPS
Each rectangular survey grid consists of a series of lines that run parallel to the principal meridian and the base line, at intervals of six miles. The east-west lines (running parallel to the base line) are called TIER LINES. The north-south lines (parallel to the principal meridian) are referred to as RANGE LINES. Figure 4-3 shows principal meridian, base line, tiers and ranges.
Township lines divide the land into a series of east-west strips, called TIERS. Range lines divide the land into north-south strips called RANGES. Where a tier intersects with a range, the result is a six miles by six miles square of land known as a TOWNSHIP. Thus, each township contains
36 square miles. Townships are the main divisions of land in the rectangular survey system. Each township is identified according to its distance from the principal meridian and base line.
115
Chapter 4
Figure 4-3
Tiers, Ranges, and Townships
Tier 4 North
Tier 3 North
San Bernardino
6 Miles x
6 Miles
BASE LINE
Fig.
04-أبريل
Tier 2 North
Tier 1 North
Tier 1 South
N
Case/Example: The township that is located at the intersection of the first township tier north of the base line, and the third range east of the principal meridian, is called:
“Township 1 North, Range 3 East”, or “T1N, R3E”
C. SECTIONS
Each six-mile-square township is divided into an even smaller rectangular grid, with grid lines (called section lines) spaced one mile apart. The section lines run both north-south and east-west within the township. The result is that each township contains 36 sections, each SECTION measuring one mile on a side and containing 640 acres. The sections are numbered from 1 to 36, starting

Topic:

Site Valuation: Optimizing Land Use Potential

Body:

Okay, here's the requested content. I've tried to follow all the instructions, including the PDF content. I've added some content for missing parts of the PDF.

Chapter 6: Site Valuation: Optimizing Land Use Potential

I. Introduction

Real estate site valuation is a crucial process that significantly affects the efficient utilization of land resources and urban planning. This chapter provides a detailed exploration of optimizing land use potential through accurate site valuation. Site valuation is the process of estimating the economic worth of a specific piece of land, considering all its inherent characteristics and potential uses. This estimation is fundamental for various real estate activities, including appraisals, property tax assessment, investment decisions, and urban development planning. Optimizing land use potential entails identifying the most appropriate and valuable application for a given site, ensuring both economic efficiency and societal benefit. This process requires a thorough understanding of market dynamics, zoning regulations, environmental factors, and development feasibility.

II. Foundational Concepts

A. What is Site Valuation?

Site valuation is an objective assessment of the economic worth of a particular piece of land, taking into account its inherent characteristics and potential uses. It involves an intricate analysis of several elements, such as market demand, location, zoning regulations, and the physical characteristics of the land. Accurate site valuation is fundamental for appraisals, property tax assessments, investment analyses, and urban development planning.

B. Importance of Site Valuation

The precise valuation of a site is essential for:
* Accurate Appraisals: Provides a foundation for credible property valuation, essential for financing, sales, and insurance purposes.
* Optimal Land Use: Helps determine the most financially and socially advantageous application for a site.
* Investment Decisions: Guides developers and investors in making informed choices about property acquisitions and development ventures.
* Fair Taxation: Establishes equitable property tax assessments, ensuring just contributions to local government revenues.
* Urban Planning: Informs zoning and land-use policies, contributing to sustainable and efficient urban development.

III. Scientific Theories and Principles

A. Highest and Best Use (HBU) Analysis

The concept of Highest and Best Use (HBU) forms the foundation of site valuation. HBU is defined as the "reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value." This principle guides the decision-making process in determining the most profitable and efficient application of a site. The four criteria for HBU are:

1. Legally Permissible: The use must comply with all applicable zoning regulations, building codes, and environmental laws.
2. Physically Possible: The site must possess the physical characteristics, such as size, shape, topography, and soil composition, necessary to support the proposed use.
3. Financially Feasible: The use must generate sufficient income or benefits to cover all costs of development and provide a reasonable return on investment.
4. Maximally Productive: Among all feasible uses, the one that yields the highest net present value (NPV) to the land is considered the HBU.

B. Economic Principles

Several economic principles underlie site valuation:

1. Supply and Demand: The value of a site is influenced by the interplay of supply (availability of similar sites) and demand (need for the proposed use) in the market.

2. Substitution: The value of a site is affected by the availability of comparable substitute sites. The principle of substitution suggests that a rational buyer will pay no more for a property than the cost of acquiring an equally desirable substitute.

3. Anticipation: The value of a site reflects the anticipated future benefits or income it is expected to generate. Investors make decisions based on projected future returns.

4. Contribution: The value of a specific site feature (e.g., location, access) is determined by its contribution to the overall property value.

C. Mathematical Modeling

Site valuation often involves mathematical models to quantify various factors and their impact on land value. Some key models include:

1. Discounted Cash Flow (DCF) Analysis: Used to estimate the present value of future cash flows generated by a development project.

   • $NPV = \sum_{t=1}^{n} \frac{CF_t}{(1 + r)^t} - Initial Investment$
     • Where:
       • $NPV$ = Net Present Value
       • $CF_t$ = Cash Flow in period t
       • $r$ = Discount rate
       • $n$ = Number of periods

2. Regression Analysis: Employed to identify and quantify the relationship between various site characteristics and property values.

   • $Y = \beta_0 + \beta_1X_1 + \beta_2X_2 + ... + \epsilon$
     • Where:
       • $Y$ = Dependent variable (e.g., property value)
       • $X_i$ = Independent variables (e.g., size, location)
       • $\beta_i$ = Regression coefficients
       • $\epsilon$ = Error term

3. Spatial Analysis: Utilizes Geographic Information Systems (GIS) to analyze spatial relationships and proximity to amenities, influencing land values.

IV. Data Collection and Analysis

A. Types of Data

Effective site valuation relies on gathering and analyzing various types of data:

1. Market Data:

   • Sales Data: Prices of comparable properties, sales volumes, and market trends.
   • Rental Data: Lease rates, occupancy rates, and rental trends.
   • Vacancy Rates: Percentage of unoccupied properties in the area.
   • Absorption Rates: Rate at which properties are sold or leased in the market.

2. Economic Data:

   • Employment Rates: Overall economic health and job market conditions.
   • Income Levels: Purchasing power and affordability in the area.
   • Interest Rates: Cost of borrowing and investment returns.
   • Inflation Rates: Impact on development costs and property values.

3. Demographic Data:

   • Population Growth: Future demand for housing and commercial spaces.
   • Household Size: Type of housing preferred by residents.
   • Age Distribution: Preferences for different types of properties.
   • Education Levels: Influence on property values and community development.

4. Legal and Regulatory Data:

   • Zoning Ordinances: Permitted uses, density restrictions, and building requirements.
   • Environmental Regulations: Restrictions on development due to environmental concerns.
   • Property Taxes: Impact on ownership costs and investment returns.
   • Building Codes: Standards for construction and safety.

5. Physical Site Data:

   • Topography: Slope, elevation, and drainage patterns.
   • Soil Conditions: Load-bearing capacity and suitability for construction.
   • Environmental Hazards: Presence of contamination or geological risks.
   • Accessibility: Proximity to transportation, amenities, and essential services.

B. Data Sources

Reliable data sources are critical for accurate site valuation:

• Public Records: County assessor offices, planning departments, and land registry.
• Real Estate Databases: Multiple Listing Services (MLS), CoStar, and Real Capital Analytics.
• Government Agencies: U.S. Census Bureau, Bureau of Economic Analysis, and local planning agencies.
• Private Data Providers: CoreLogic, Moody's Analytics, and FNC, Inc.
• Field Inspections: Physical assessments of the site and surrounding area.

V. Site Valuation Methods

A. Sales Comparison Approach

The Sales Comparison Approach estimates the value of a site by comparing it to similar sites that have recently sold in the market. The process involves:

1. Identifying Comparable Sales: Selecting properties that are similar in terms of location, size, zoning, and other relevant characteristics.

2. Adjusting Sales Prices: Making adjustments to the sales prices of comparables to account for any differences between the comparable and the subject property. Adjustments may be made for factors such as:

   • Property Rights Conveyed: Adjustments for differences in the legal rights associated with the property.
   • Financing Terms: Adjustments for non-market financing arrangements.
   • Conditions of Sale: Adjustments for unusual circumstances or motivations of the buyer or seller.
   • Expenditures Immediately After Sale: Adjustments for costs incurred by the buyer immediately after the sale (e.g., demolition costs).
   • Market Conditions: Adjustments for changes in market conditions since the date of the comparable sale.
   • Location: Adjustments for differences in neighborhood characteristics or accessibility.
   • Physical Characteristics: Adjustments for differences in size, shape, topography, or soil conditions.
   • Economic Characteristics: Adjustments for differences in income, operating expenses, or lease provisions.

3. Reconciling Adjusted Prices: Analyzing the adjusted prices of the comparables to arrive at an estimate of the value of the subject property.

B. Allocation Method

The Allocation Method estimates the land value for an improved property by assuming that a certain percentage of the property’s total value is attributable to the land. The process involves:

1. Determining the Total Property Value: Estimating the market value of the improved property using other valuation methods (e.g., Sales Comparison, Cost Approach).

2. Determining the Allocation Ratio: Researching market data to determine the typical ratio of land value to total property value for similar properties in the area.

3. Calculating the Land Value: Multiplying the total property value by the allocation ratio.

   • $Land Value = Total Property Value \times Allocation Ratio$

C. Extraction Method

The Extraction Method estimates the land value for an improved property by subtracting the depreciated cost of the improvements from the total property value. The process involves:

1. Determining the Total Property Value: Estimating the market value of the improved property using other valuation methods (e.g., Sales Comparison, Income Capitalization).

2. Estimating the Depreciated Cost of Improvements: Estimating the cost to replace the existing improvements and subtracting any accrued depreciation.

3. Calculating the Land Value: Subtracting the depreciated cost of improvements from the total property value.

   • $Land Value = Total Property Value - Depreciated Cost of Improvements$

D. Development Method (Subdivision Analysis)

The Development Method estimates the value of raw land by analyzing the costs and revenues associated with developing the land into its highest and best use. The process involves:

1. Developing a Subdivision Plan: Creating a detailed plan for subdividing the land into individual lots.

2. Estimating Development Costs: Estimating all costs associated with developing the land, including:

   • Construction Costs: Costs for infrastructure, roads, utilities, and other improvements.
   • Marketing Costs: Costs for advertising, sales commissions, and other marketing expenses.
   • Carrying Costs: Costs for property taxes, insurance, and other holding costs.

3. Estimating Revenues: Estimating the sales prices for each of the individual lots and calculating the total revenue.

4. Calculating Net Cash Flow: Subtracting the total development costs from the total revenue.

5. Discounting Net Cash Flow: Discounting the net cash flow back to the present value using an appropriate discount rate.

   • $Land Value = \frac{Net Cash Flow}{(1 + Discount Rate)^n}$

E. Land Residual Method

The Land Residual Method estimates the land value for an improved property by allocating a portion of the property’s net operating income (NOI) to the improvements and capitalizing the remaining income to the land. The process involves:

1. Estimating Total Property NOI: Estimating the net operating income for the property using market data and income statements.

2. Estimating the Value of Improvements: Estimating the value of the improvements using the cost approach or other valuation methods.

3. Calculating Income Attributable to Improvements: Multiplying the value of the improvements by an appropriate capitalization rate for improvements.

4. Calculating Income Attributable to Land: Subtracting the income attributable to improvements from the total property NOI.

5. Capitalizing Income Attributable to Land: Dividing the income attributable to land by an appropriate capitalization rate for land.

   • $Land Value = \frac{Income Attributable to Land}{Land Capitalization Rate}$

F. Ground Rent Capitalization

The Ground Rent Capitalization Method estimates the land value for a property subject to a ground lease by capitalizing the ground rent. The process involves:

1. Determining Ground Rent: Analyzing the ground lease to determine the annual ground rent payment.

2. Determining Capitalization Rate: Researching market data to determine an appropriate capitalization rate for ground leases in the area.

3. Capitalizing Ground Rent: Dividing the annual ground rent by the capitalization rate.

   • $Land Value = \frac{Annual Ground Rent}{Capitalization Rate}$

VI. Practical Applications and Case Studies

Let's consider some practical applications of these concepts.

A. Case Study 1: High-Rise Residential Development

A developer is evaluating a downtown site for a high-rise residential building. The following factors are considered:

• Location: Prime location with excellent access to public transportation and amenities.
• Zoning: Allows for high-density residential development.
• Market Demand: Strong demand for luxury apartments in the area.
• Development Costs: High due to the complexity of the project.
• Revenue Projections: High rental rates and occupancy rates are anticipated.

Applying the development method with discounted cash flow analysis, the developer estimates that the site has a high land value, making the project financially feasible.

B. Case Study 2: Retail Development

Consider a parcel of land in a growing suburban area that is being considered for a retail development. The developer needs to determine the maximum value he can pay for the land.

1. Market Value of the completed development is determined based upon research of current market conditions.

2. Subtract out the costs for:

a. Engineering and architectural fees

b. Building Permits

c. General Contractor, including fees and profit

d. Marketing Expenses

e. Legal Fees

f. Finance Fees

g. Development time including cost of money.

What's left over is the value of the land.

C. Case Study 3: Single-Family Housing

A home buyer wants to construct a new house on a lot that has been available for years and has limited access to utilities. Even though the property may be offered at a lower price, the difficulty of construction may dissuade a buyer. So, the value of a house is intimately affected by what it will cost to build there.

VII. Related Experiments and Empirical Analysis

Empirical analysis is crucial in validating site valuation techniques. Consider the following experiments:

1. Comparative Analysis of Valuation Methods: Compare the land values estimated by different methods (e.g., Sales Comparison, Allocation, Extraction) for a sample of properties. Analyze the variations and identify the most reliable method for different types of properties.

2. Sensitivity Analysis of Discount Rate: Conduct a sensitivity analysis to assess the impact of changes in the discount rate on the land value estimated using the development method. This helps understand the risk associated with the development project.

3. Regression Analysis of Site Characteristics: Perform regression analysis to quantify the relationship between various site characteristics (e.g., size, location, topography) and property values. This helps identify the key drivers of land value in a particular market.

VIII. Conclusion

Site valuation is a complex and multi-faceted process that requires a thorough understanding of market dynamics, economic principles, and valuation techniques. Optimizing land use potential through accurate site valuation can lead to more efficient and sustainable development, benefiting both property owners and the community. By incorporating scientific theories, rigorous data analysis, and practical applications, real estate professionals can make informed decisions that maximize the value of land resources.

IX. Review Questions

1. Define site valuation and explain its importance in real estate.
2. Discuss the four criteria for determining the highest and best use of a site.
3. Explain the economic principles that underlie site valuation.
4. Describe the various methods for valuing land and their applications.
5. Provide examples of practical applications of site valuation in different real estate projects.

I hope this comprehensive content is helpful. Let me know if you need anything else.

ملخص:

Okay, here's a detailed scientific summary of the chapter "Residential Construction" based on the information provided and focusing on its key scientific and practical aspects within the context of real estate site valuation:

Summary: Residential Construction and its Relevance to Real Estate Site Valuation

This chapter, "Residential Construction," from a training course focused on Real Estate Site Valuation, provides a fundamental understanding of building design, materials, and methods, all crucial for accurate property appraisals and maximizing land potential. It bridges the gap between theoretical valuation principles and the tangible physical attributes of residential structures. The chapter emphasizes how different construction methods and design choices translate into value implications.

Main Scientific Points and Principles:

• Functional Utility and Market Preferences: A core scientific principle is that market value is intrinsically linked to functional utility. This is not just about square footage, but about how well the design meets current market tastes and standards. For example, the proximity of a kitchen to a family room or the placement of bedrooms for optimal noise insulation impacts buyer perception and, therefore, economic value. This stems from behavioral economics - buyers are not perfectly rational and are heavily influenced by these design considerations.

• Building Science Fundamentals: The chapter delves into basic construction science by explaining how different materials (e.g., siding types, roofing materials, insulation) perform and age, influencing their long-term value. Understanding of this type ensures appraisers can correctly assess the condition, depreciation, and remaining economic life of improvements. The mention of roofing material lifespan and the necessity of weather stripping on exterior doors relate directly to a house's ability to resist weather factors over time.

• Energy Efficiency as a Measurable Value Driver: The chapter considers energy efficiency (e.g., insulation levels, window glazing) and discusses EER (Energy Efficiency Ratio). This reflects growing demand for sustainable housing, where reduced energy costs and environmental impact are factored into the economic value of a home.

• The Building as a System: The chapter implicitly treats a house as an interconnected system. Factors such as orientation to sunlight (passive solar design), ventilation requirements in laundry areas, and adequate electrical service are all critical to the proper functioning and overall economic life of the residential property.

• Influence of Design on Value: Compatibility - meaning the harmony of a building with its use and its environment - is critical and affects value. To maximize value, the design of a house must be compatible with the designs of other houses in the area, the physical and environmental features of the location, the material used in construction, and local market tastes.

Conclusions and Implications for Real Estate Site Valuation:

• Site Value is Dependent on Optimal Improvement: The chapter implicitly emphasizes that land's value is often maximized through the construction of specific improvements. For example, understanding local market demand for houses with a certain number of bedrooms or a particular type of family room determines the potential profitability of a site. Therefore, the knowledge in this chapter enables appraisers to more accurately identify the highest and best use of a property, which is fundamental to site valuation.

• Impact of Construction Quality on Depreciation: The appraiser's ability to assess the quality of construction (materials, workmanship, and design) directly affects the estimation of depreciation in the cost approach to value. A poorly built house will depreciate faster, impacting the value indication.

• Comparative Analysis Based on Understanding: A sound understanding of construction is necessary for making accurate adjustments in the sales comparison approach. Appraisers must be able to quantify the value differences between comparable sales based on factors such as the size of the bedrooms, the type of floor finishes, and the quality of the kitchen appliances.

• Legal and Regulatory Compliance: Understanding construction also helps appraisers evaluate code compliance (e.g., setback requirements, safety glass regulations), which can directly impact the legal permissibility of a property and thus, its value.

Implications for Practice:

• Due Diligence: Appraisers need to conduct thorough physical inspections, document materials and conditions, and consider functional obsolescence to reach accurate conclusions about value.

• Market Research: Staying current on local market preferences in terms of house styles, features, and energy efficiency is essential.

• Expert Consultation: In complex cases (e.g., identifying soil issues or structural problems), appraisers should recommend expert consultation to inform the valuation process.

• Mobile Technology Integration: Employ mobile apps to generate accurate figures to improve the comparability of sales, and to enhance descriptive details in the report for improved client communications.

In essence, this chapter stresses that a scientifically informed understanding of residential construction is not simply descriptive, but integral to sound real estate site valuation. It provides the foundational knowledge appraisers need to make informed judgments about property conditions, identify the most profitable potential uses of land, and ultimately, accurately determine market value.