What is the key distinction between 'excess land' and 'surplus land' in site valuation?

Chapter Title:

Site Valuation: Mastering Land Appraisal Techniques

Introduction:

Okay, here is a detailed scientific introduction for your chapter, based on the book content you provided and tailored to fit the course description:

Site Valuation: Mastering Land Appraisal Techniques

Introduction

The Uniform Standards of Professional Appraisal Practice (USPAP) mandates competent, accurate, and ethical real estate valuation, necessitating a robust understanding of individual property components. This chapter focuses on site valuation, a critical skill for appraisers seeking professional excellence and adherence to USPAP. Site valuation, or land appraisal, is the process of estimating the market value of a parcel of land, separate from any existing improvements. While seemingly straightforward, accurate site valuation forms the scientific basis for several appraisal methodologies, most notably the cost approach and, to a lesser extent, income capitalization techniques such as the building residual method. As emphasized throughout this "USPAP Essentials" course, understanding the scope of work and specific requirements of an appraisal assignment is paramount. Legal and regulatory requirements, particularly in property tax assessment and condemnation proceedings, often necessitate separate site valuations, highlighting their practical significance.

The scientific importance of site valuation stems from its influence on overall property valuation. The cost approach, predicated on the principle of substitution, directly utilizes a separate estimate of site value. The accuracy of the final value indicator derived from the cost approach is therefore directly dependent on the accuracy of the site valuation. Similarly, the income approach, particularly via building residual techniques, relies on isolating the income attributable to the land to determine its value. Furthermore, site valuation is intrinsically linked to highest and best use analysis, a foundational element of sound appraisal practice. The indicated value of a property derived from all three approaches, sales comparison, cost, and income, are reconciled to a final value opinion. Each of these approaches are an important indicators of value, or a value indicator. A site valuation’s correctness influences the entire reconciliation process.

This chapter will provide a detailed examination of the established techniques for site valuation, equipping appraisers with the tools necessary to navigate complex valuation scenarios. Key topics include: a comprehensive review of highest and best use principles as they apply to land, detailed explanations of the sales comparison, allocation, extraction, development, land residual, and ground rent capitalization methods, and practical considerations for applying these methods in accordance with USPAP standards. This chapter's goal is to enhance appraisal competency, thereby promoting accurate and ethical valuations that meet client needs, regulatory expectations, and ultimately, the demands of the real estate market.

Topic:

Site Valuation: Mastering Land Appraisal Techniques

Body:

Site Valuation: Mastering Land Appraisal Techniques

Chapter Goal: This chapter aims to equip trainees with a comprehensive understanding of site valuation techniques, emphasizing their relevance within the USPAP framework and their application to various appraisal scenarios. Mastering these techniques is essential for ensuring accurate, ethical, and defensible valuations, aligning with the core principles of the "USPAP Essentials: Mastering Appraisal Standards" course.

I. The Foundation: Highest and Best Use (HBU)

A. Defining HBU: The Cornerstone of Site Valuation

1. Concept: HBU represents the most probable and legal use of a property, yielding the highest present value. It's not just the most profitable, but the optimally profitable use considering all constraints. This aligns with USPAP's emphasis on competency and credible results.

2. USPAP Relevance: A proper HBU analysis forms the basis of the scope of work decision. Failure to adequately consider and analyze HBU can lead to a misleading appraisal report.

B. The Four Pillars of HBU: A Scientific Approach to Determination

1. Legally Permissible: The use must comply with all applicable laws, zoning regulations, private restrictions (easements, deed restrictions), and environmental regulations.

   • Scientific Principle: Compliance ensures the use can legally exist and operate.
   • Experiment/Application: Conduct a thorough zoning ordinance review, consult with local authorities, and investigate any encumbrances on the title. Example: Investigating setback requirements.

2. Physically Possible: The site must possess the physical characteristics (size, shape, topography, soil conditions, access, utilities) capable of supporting the proposed use.

   • Scientific Principle: Determines if the site's inherent properties can accommodate the improvements.
   • Experiment/Application: Conduct a site inspection, analyze topographical maps, and perform soil tests. Example: Assessing soil bearing capacity.

3. Financially Feasible: The use must generate sufficient revenue to cover all operating expenses, debt service, and provide a reasonable return on investment.

   • Scientific Principle: Evaluates economic viability based on market data and financial analysis. Utilizes the principle of Anticipation from Economics.
   • Experiment/Application: Perform a market analysis, project income and expenses, and calculate relevant financial ratios. This links to income capitalization methods later.
   • Formula: Net Operating Income (NOI) > Total Expenses (Operating Expenses + Debt Service)

4. Maximally Productive: Among all feasible uses, this is the use that generates the highest net return or present value.

   • Scientific Principle: Optimizes the site's utility to maximize its value.
   • Experiment/Application: Compare different potential uses based on their projected cash flows and present values, considering the principle of substitution.
     • Formula: Present Value (PV) = CF1/(1+r) + CF2/(1+r)^2 + ... CFn/(1+r)^n where CF = Cash Flow, r = discount rate, and n = number of years.

C. HBU and the Principle of Anticipation

1. Importance: The principle of anticipation states that value reflects anticipated future benefits. HBU considers not just the present, but potential future uses.
2. Application: Anticipate future zoning changes, market trends, and infrastructure improvements that may affect HBU.

D. Interim Uses: Balancing Present and Future

1. Concept: A temporary use while awaiting a higher, future use.
2. Relevance: Recognize interim uses and their impact on current value.

II. Vacant vs. Improved Land: A Critical Distinction

A. HBU as Vacant vs. Improved: A Two-Pronged Approach

1. HBU as Vacant: Determines the optimal use assuming the land is bare and unencumbered.
2. HBU as Improved: Considers the existing improvements and their contribution to value. This is closely tied to USPAP's Scope of Work Rule - particularly in regards to identifying the problem.
   • Example: A building might be economically obsolete but physically sound.

B. Legal Nonconforming Uses: Navigating Legal Boundaries

1. Concept: Uses that were legally established but no longer conform to current zoning.
2. Impact: Impacts HBU and requires careful analysis.

C. The Principle of Consistent Use: A Valuation Requirement

1. Concept: Land and improvements must be valued consistently, reflecting the same HBU. This is crucial for accurate cost approach calculations as described in the book content.
2. Relevance: Prevents inconsistent valuations and ensures logical appraisal reports.

D. Excess vs. Surplus Land: Distinguishing Unnecessary Portions

1. Excess Land: Land that can be sold separately and has its own HBU.
2. Surplus Land: Land that contributes to the primary use but cannot be sold separately.

E. Plottage Value: The Synergistic Effect of Combining Parcels

1. Concept: Increased value from combining adjacent parcels.
2. Importance: Identify and quantify plottage value where applicable.

F. HBU in Residential Appraisals: A Simplified Approach

1. Assumption: Often, the current residential use is assumed to be the HBU if the property's value as improved is greater than its value as vacant and the improvements are typical for the market.
2. However: Appraisers must always verify these assumptions.

III. Mastering Site Valuation Methods

A. The Sales Comparison Method: The Gold Standard

1. USPAP Importance: This method aligns with USPAP's emphasis on market-based evidence.
2. Process: Analyze sales of comparable vacant land, adjusting for differences.
3. Elements of Comparison: Crucial Adjustments Required.

   • Real Property Rights Conveyed: Fee Simple vs. Leased Fee.

     • Adjustments: Adjust if you compare a Fee Simple transaction with a Leased Fee transaction. You will need a present value formula.

     • Experiment/Application: Consult property records to ascertain property right.

     • Formula: Present Value (PV) = CF1/(1+r) + CF2/(1+r)^2 + ... CFn/(1+r)^n where CF = Cash Flow, r = discount rate, and n = number of years.

       • Financing Terms: Seller Financing vs. Cash.

     • Adjustments: Adjust for non-cash equivalency transactions.

     • Experiment/Application: Consult contracts to ascertain property right.

       • Conditions of Sale: Arm's length vs. Forced sale.

     • Adjustments: Adjust for sales where a third party was under duress, or a transaction between family members or otherwise was not arms length.

     • Experiment/Application: Interview agents, buyers and sellers to determine if a sale occurred due to some special circumstance.

       • Expenditures Immediately After Sale: Cost to Cure defects such as cost to mitigate a code violation.

     • Adjustments: Sales price must be adjusted to reflect cost to cure issues such as violations, remediation, etc.

     • Experiment/Application: Consult local authorities and contractors to estimate cost to cure issues.

     • Formula: Market Value = Sales Price - Cost to Cure

       • Market Conditions Adjustment: Changes over time in terms of market conditions.

     • Adjustments: Adjust for market conditions if transaction is not recent enough.

     • Experiment/Application: Evaluate sales and trends over time and extract trend via regression. This can be achieved through use of mobile apps.

     • Formula: Market Value = Sales Price - Price Fluctuation over Time

       • Location Adjustments: Adjustments to compare one location to another.

     • Adjustments: Adjust for location if parcels do not have identical desirability.

     • Experiment/Application: Research data to determine if parcels are in different neighborhoods.

       • Physical Characteristics: Different physical characteristics such as size, shape, soil and water.

     • Adjustments: Adjust for physical characteristics if physical characteristics are different.

     • Experiment/Application: Research if size, shape, soil and water are similar between parcels.

     • Formula: Market Value = Sales Price + Size, Shape, Soil and Water Adjustments

       • Economic Characteristics: Economic trends are different in different locations.

     • Adjustments: Adjust for economic trends if economic trends are different.

     • Experiment/Application: Research if economic trends are similar between parcels.

     • Formula: Market Value = Sales Price + Economic Condition Adjustment

     • Comparable Sale Price Adjustments: The appraiser should be cognizant of the elements of comparison and apply said techniques where applicable.

       • Adjust the price of the comparable, NOT the subject.
       • If a comparable is superior, its price is adjusted downward.
       • If a comparable is inferior, its price is adjusted upward.

     • Experiment/Application: If parcels are identical in everyway, no adjustments should be made.

       • Mobile Technology: This can be used to gather comparable data that will assist the appraiser in formulating adjustments.
       • Remember to consider all elements in context with USPAP.
       • Important: The book content mentions adjustments to comparable properties. Be sure to reference USPAP Standard 1 when selecting comparables, documenting the analysis, and adjusting sale prices of comparable properties.

B. Allocation: Understanding the Land Value Percentage

1. USPAP Caveat: This is less reliable than the sales comparison approach and relies on a similar allocation of total property value between land and buildings (improvements). This falls under USPAP competency requirement, an appraiser should not perform this approach if they are not competent.
2. Application: Use the prevailing allocation percentages for comparable sales properties in the market.
3. Process: Land Value = Total Property Value * Land Allocation Percentage
4. Formula: Land Value = Total Property Value x Land Percentage
   • Experiment/Application: Appraisers must always determine the HBU prior to applying allocation methods.

C. Extraction: Isolating Land Value through Subtraction

1. USPAP Consideration: Similar to Allocation, this approach should only be used in situations where the extraction process is reliable.
2. Process: Land Value = Total Property Value - Depreciated Cost of Improvements. The "cost approach to value" in reverse.
3. Formula: Land Value = Total Property Value - Depreciated Value of Improvements
   • Requires accurate estimation of depreciation.

D. Development Method: Unveiling Land Value through Projected Subdivision Analysis

1. USPAP Relevance: Complex method requiring careful due diligence and realistic assumptions. This aligns with USPAP's Competency Rule and Scope of Work Rule.
2. Process: Project cash flows from the sale of developed lots, deduct costs of development, and discount to present value.
   • Requires careful market analysis, cost estimation, and discount rate selection.
3. Formula: PV = (Sales Price - Development Costs) / (1 + Discount Rate)^n where n = number of time periods
   • Experiment/Application: Appraisers can use a table of reversion factors as suggested by the author or build a financial model based upon discounted cash flow.

E. Land Residual Method: Isolating Land Income

1. USPAP Guidance: Reliance on income data necessitates thorough verification and market support to comply with USPAP.

2. Process: Determine land value based on the portion of net operating income (NOI) attributable to the land.

   • Requires estimating the income attributable to the building.
3. Formulas:
   • Income Attributable to Land = Total NOI - (Building Value x Building Cap Rate)
   • Land Value = Income Attributable to Land / Land Cap Rate

F. Ground Rent Capitalization: Linking Value to Rental Income

1. Application: Used when land is subject to a ground lease (long-term lease of land).
2. Process: Capitalize the ground rent to estimate land value.
3. Formula: Land Value = Ground Rent / Capitalization Rate

G. Depth Tables: Valuing Portions of Land

1. The author makes the important notation that this technique is not accurate and should be considered a "ballpark" estimation technique.
2. Formulas: If we assume the front half of a parcel has a Market Value of $100,000.00, the rear half of the parcel would only be $50,000.00.
   • Front Half Parcel: Value = Original Parcel Value * .667
     • Experiment/Application: To determine why this occurs, ask an appraiser to show you the difference between front and rear parcels.
   • Rear Half Parcel: Value = Original Parcel Value * .333
     • Experiment/Application: To determine why this occurs, ask an appraiser to show you the difference between front and rear parcels.

IV. USPAP and Ethical Considerations

A. Competency: Only use valuation methods for which you have adequate knowledge and experience.
B. Scope of Work: The choice of valuation method must be appropriate for the assignment and adequately supported by data.
C. Ethics: Provide credible and unbiased opinions of value.
D. Report: The report must accurately disclose the data and methodology used.

V. Conclusion

Mastering site valuation techniques is paramount for all real estate appraisers. This chapter provided a scientific foundation and understanding of techniques for accurate, ethical, and USPAP-compliant valuations, advancing you toward professional excellence in the field.

ملخص:

4. list the factors that influence proper siting of a house on its lot,
5. describe the three basic activity zones of a house and describe their relationships to each other;
6. describe the characteristics that affect functional utility in the various rooms of a house,
7. identify the characteristics of various building components that can affect value, and
8. understand the technical terminology used to describe residential construction.

      I. Classification of Houses (p. 215)
      A. Types of Houses (p. 215)
      1. One-Story House (p. 216)
      2. One and One-Half Story House (p. 217)
      3. Two-Story House (p. 217)
      4. Split-Level House (p. 217)
      5. Bi-Level House (p. 218)
      II. Architectural Styles (p. 218)
      A. Compatibility (p. 220)
      III. Elements of House Design (p. 221)
      A. Siting (p. 221)
      B. Interior Functional Zone (p. 222)
      C. Room Characteristics (p. 224)
      1. Kitchens (p. 224)
      2. Laundry/Utility Rooms (p. 225)
      3. Living Rooms (p. 225)
      4. Family Rooms (p. 225)
      5. Dining Rooms (p. 226)
      6. Bedrooms (p. 226)
      7. Bathrooms (p. 226)
      IV. Construction Methods and Materials (p. 227)
      A. Foundations (p. 227)
      1. Types of Foundations (p. 227)
      2. Foundation Materials (p. 229)
      B. Framing and Sheathing (p. 229)
      1. Framing Lumber (p. 230)
      2. Framing Terminology (p. 232)
      3. Framing Methods (p. 232)
      a. Roof Framing (p. 233)
      b. Chimneys, Stacks, and Vents (p. 235)
      4. Sheathing (p. 235)
      C. Exterior Finishes (p. 235)
      D. Doors and Windows (p. 236)
      1. Doors (p. 236)
      2. Windows (p. 236)
      E. Insulation (p. 239)
      F. Ventilation (p. 239)
      G. Interior Finishes (p. 240)
      1. Wall Finishes (p. 240)
      2. Floor Finishes (p. 240)
      3. Cabinets and Countertops (p. 240)
      4. Interior Trim (p. 241)
      H. Plumbing (p. 241)
      1. Green Machines (Tankless Water Heaters) (p. 242)
      I. Heating and Air Conditioning (p. 242)
      J. Electrical (p. 242)
      K. Quality (p. 243)
      V. CHAPTER SUMMARY (p. 244)
      VI. CHAPTER QUIZ (p. 247)
   
      **Scientific Summary:**
   
      This chapter, "Residential Construction," within the training course "USPAP Essentials: Mastering Appraisal Standards," provides a foundational understanding of residential building practices. The course aims to elevate appraisal careers by ensuring accurate and ethical valuations. This chapter is crucial for mastering appraisal standards, particularly those relating to competency, scope of work, and reporting requirements concerning the physical characteristics of the appraised property. The main scientific points, conclusions, and implications are:
   
      1.  **Classification and Styles:** The chapter establishes a standardized system for classifying houses based on structural type (one-story, etc.) and architectural style. This enables appraisers to objectively categorize and compare properties, contributing to accurate valuation. It implies that understanding these classifications enhances the appraiser's ability to identify comparable properties, a key component of the Sales Comparison Approach.
   
      2.  **Design Elements and Functional Utility:** It emphasizes the importance of house design, including siting and the separation of interior functional zones (living, working, sleeping), and room characteristics. This framework allows appraisers to assess how a property's design contributes to or detracts from its functional utility, aligning with USPAP's requirement for competent analysis. This informs the appraiser's judgment regarding depreciation (functional obsolescence) and contributes to accurate application of the Cost Approach.
   
      3.  **Construction Methods and Materials:** The chapter provides detailed information on residential construction methods and materials, including foundations, framing, exterior and interior finishes, plumbing, HVAC, and electrical systems. This knowledge base enables appraisers to assess construction quality and identify potential issues affecting value, again demonstrating competency. Understanding these elements is critical for identifying physical deterioration and accurately estimating replacement costs in the Cost Approach. The chapter highlights the impact of “Green Machines (Tankless Water Heaters)” on green technology providing a more accurate approach to valuing residential homes with green technology.
   
      4.  **Compatibility and Market Preferences:** This chapter acknowledges that architectural compatibility with the neighborhood and broader market preferences significantly influences value. This point is directly relevant to the Sales Comparison Approach, where adjustments must be made for differences in architectural style and perceived desirability.
   
      5.  **Quality Assessment:** The chapter stresses the role of design and quality of construction. The knowledge of design and material quality equips appraisers to make informed judgments about a property's condition and overall market appeal which enables appraisers to complete the reports that comply with USPAP.
   
      **Relevance to Course Description:**
   
      This "Residential Construction" chapter directly addresses the course description's aims:
   
      *   **Competency:** Provides the essential knowledge of construction, design, and materials required for competent appraisal practice.
   
      *   **Scope of Work:** Informs the scope of work for appraisals, outlining the necessary physical inspections and data collection related to the subject property's construction.
   
      *   **Reporting Requirements:** Equips appraisers with the terminology and understanding to accurately describe and analyze the construction aspects of a property in their appraisal reports, meeting USPAP standards.
   
      *   **Accurate Valuations:** The chapter’s content on construction methods, materials, and functional utility helps appraisers conduct more accurate and supportable valuations, particularly when using the cost approach or sales comparison approach that require adjustments for physical differences.
   
      *   **Complex Appraisal Scenarios:** By detailing different types of construction and design elements, the chapter prepares appraisers to navigate complex appraisal scenarios involving unique or unconventional properties.
      *   **Ensuring Accurate and Ethical Valuations:** By instilling understanding of construction and compatibility enables appraisers to avoid biases related to aesthetics or personal preferences, focusing instead on objective market-driven valuation principles.