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Data Collection and Analysis for Site Valuation
Chapter 6: Data Collection and Analysis for Site Valuation
Introduction:
This chapter, “Data Collection and Analysis for Site Valuation,” is an integral part of the training course “Mastering Property Valuation: Cost & Sales Comparison Approaches.” As highlighted in the course description, a separate site valuation is crucial for several valuation techniques, especially the Cost Approach❓❓ and the building residual technique within the income capitalization approach. Further, appraisals for property tax assessment and condemnation often legally necessitate a distinct site evaluation. This chapter will equip you with the knowledge and skills to confidently collect, analyze, and apply data for accurate site valuations, essential for both cost and sales comparison methodologies.
I. The Importance of Site Valuation
A. Separate valuation of site and improvements is required for:
1. **Cost Approach:** As detailed in the book content, the cost approach to value estimates property value by adding the site value to the replacement cost of improvements, less depreciation. Site value is, therefore, a fundamental component of this approach. (See Chapter 8 of Book content.)
* Formula:
* `Property Value (Cost Approach) = Site Value + Replacement Cost - Depreciation`
* Where:
* `Property Value = Site (by Cost Approach) + Cost of improvements(new) - Depreciation`
2. **Income Capitalization Approach (Building Residual Technique):** The book mentions the building residual technique, which, while less common in residential appraisal, necessitates a separate site value estimate to isolate the income attributable to the improvements. (See Chapter 10 of Book content.)
3. **Legal Mandates:** Property tax assessments and condemnation proceedings often legally mandate a separate site valuation, emphasizing its importance beyond valuation methodologies.
B. Highest and Best Use Analysis: Site valuation is inherently intertwined with highest and best use analysis, as a vacant land evaluation may need to be considered. The value of the land will affect what use is considered the highest and best.
C. Reconciliation: Site valuation informs the reconciliation stage, where different value indications from the cost, sales comparison, and income approaches are weighted. A well-supported site value strengthens the reliability of the cost approach and potentially influences the final value estimate.
II. Data Collection for Site Valuation: A Scientific Approach
A. General Data: Collect data related to the macro-economic environment impacting land values.
1. Economic Trends: Document inflation rates, interest rates, employment statistics, and regional economic growth (or decline) to ascertain broad market value movements. Utilize regression analysis to understand the relationship between macro-economic variable and land prices over time.
2. **Government Regulations:** Record zoning ordinances, building codes, environmental regulations, and property tax laws, as these dictate land use potential and carrying costs. Analyze the impact of zoning changes on land values in the area, considering theoretical models like bid-rent theory.
3. **Demographic Shifts:** Analyze population growth, age distribution, household income, and migration patterns to gauge future demand for different land uses.
B. Specific Data: Gather detailed data related to the subject site and comparable parcels.
1. Subject Site Characteristics:
* Legal Description: Use metes and bounds, rectangular survey, or lot and block systems. Convert the legal description to verifiable spatial data. Confirm using Geographic Information System (GIS) tools. (See Chapter 4 of Book content.)
* **Physical Characteristics:**
* **Topography:** Quantify the slope and elevation changes using contour maps and survey data. Analyze the influence of topography on <a data-bs-toggle="modal" data-bs-target="#questionModal-370044" role="button" aria-label="Open Question" class="keyword-wrapper question-trigger"><span class="keyword-container">construction</span><span class="flag-trigger">❓</span></a> costs and land use potential.
* Formula: `Slope (%) = (Vertical Rise / Horizontal Run) * 100`
* **Soil Conditions:** Acquire soil reports, including load-bearing capacity, drainage properties, and presence of contaminants. Evaluate the impact on foundation design and development costs.
* **Environmental Hazards:** Assess <a data-bs-toggle="modal" data-bs-target="#questionModal-370036" role="button" aria-label="Open Question" class="keyword-wrapper question-trigger"><span class="keyword-container">flood zone status</span><span class="flag-trigger">❓</span></a> (FEMA maps), seismic risk (USGS data), and presence of hazardous materials. Quantify the costs associated with mitigation or remediation.
* **Utilities and Access:** Verify the availability and capacity of water, sewer, electricity, and natural gas connections. Document road access, traffic volume, and proximity to public transportation.
2. **Comparable Land Sales:** Thorough data collection is paramount.
* **Sales Price and Date:** Record the date of the sale and the verified transaction price. Adjust for time using paired sales analysis or repeat sales analysis.
* **Location Attributes:** Quantify the proximity to amenities (schools, parks, shopping) and disamenities (noise, pollution, traffic). Conduct spatial autocorrelation tests to verify locational impact.
* **Legal/Zoning Attributes:** Match comparable sales that have similarly zoned land. Understand the influence of development restrictions (e.g., set-backs) and permitted land uses on market value.
* **Physical Attributes:** Document lot size, shape, frontage, topography, and soil conditions of comparables.
* **Sales Conditions:** Examine sales documents and question parties to ensure the transaction was at arm's length.
III. Data Analysis for Site Valuation: Applying Scientific Principles
A. Sales Comparison Approach (as discussed in chapter 3 and 9):
1. Comparable Selection: Identify several truly comparable sales. Evaluate for similarity using statistical measures such as correlation coefficients, standard deviation, etc. to assure the reliability of sale value adjustments.
2. **Adjustment Process:** Adjustments are scientifically sound and should be based on demonstrable market behavior.
* Formula: `Subject Value = Comparable Sales Price +/- Adjustments`
* **Quantitative Adjustments:** Use paired sales analysis to determine the value of specific differences, e.g., the value of extra frontage, better view, and more usable land.
* Example:
* Sales Price Comp. A = $ 200,000 , Comp. B = $190,000.
* All other attributes are equal, except Comp. A has desirable utility upgrade.
* Adjustment value for Comp. B is then $10,000.
* **Qualitative Adjustments:** Use sensitivity analysis and bracketing techniques when quantitative data is limited. Assess the upper and lower bounds of potential adjustments.
* Case Study Example: If comparable property sold for $145,000, but market data indicates that an extra bath adds $5,000 to the values of homes similar to these, 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.
B. Allocation Method
1. **Rationale:** Based on the ratio of land value to total property value.
2. **Empirical Derivation:** Analyze numerous comparable sales to determine the typical land ratio in the specific market segment. Employ statistical methods to compute measures of central tendency (mean, median, mode) and dispersion (standard deviation) to validate the derived ratio.
C. Extraction Method:
1. Cost Estimation: Estimate the replacement or reproduction cost of the existing improvements using reliable cost data sources, e.g., Marshall & Swift, or industry benchmarks.
* Replacement and Reproduction Costs
2. **Depreciation Analysis:**
* Calculate depreciation (physical deterioration, functional obsolescence, and external obsolescence). See Chapters 3 and 8.
* Employ age-life method, market extraction method, or cost-to-cure method to quantify depreciation.
* Formula: `Depreciation = (Effective Age / Total Economic Life) * Reproduction Cost`
* Validate depreciation estimates with market data.
D. Additional method: Data Considerations for the Income Approach
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Rental Rates: Gather data on comparable rental properties to estimate gross rent multipliers (GRM), essential in income-based valuations. The GRM approach uses monthly income from comparable rental sales divided by sale price to determine GRM.
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Calculation: Use a gross rent multiplier to determine value by the income approach.
- Case example: If six comparables, used by the appraiser, show multipliers of 132, 133, 135, 135, 135, 140; and the subject property shows monthly rent to be $1,525; and the most likely multiplier is 135, then income approach value estimate = $1,525 Subject Monthly Rent x 135 = $206,000.
IV. Technological Aids and Tools for Data Collection and Analysis
A. GIS Software: Utilize GIS software for spatial analysis, identifying comparable properties, and mapping environmental hazards. Conduct buffer analysis to assess the impact of nearby features on site values.
B. Statistical Software: Employ statistical software to analyze sales data, conduct regression analysis, and validate adjustment factors. Identify outliers and assess data reliability.
C. Mobile Appraisal Applications: Utilize mobile appraisal applications (e.g., a la mode, inc.® Total for Mobile) to efficiently collect site data, generate sketches, capture photos, and access comparable sales information in the field. (See Chapter 5 for more detail.)
V. Conclusion:
Accurate site valuation is a cornerstone of sound property valuation. By applying a rigorous, scientifically grounded approach to data collection and analysis, and leveraging technological advancements, you can enhance the reliability and defensibility of your appraisal reports and valuation expertise, supporting both the cost and sales comparison methodologies as well as income capitalization techniques.
Chapter Summary
- list the factors that influence proper siting of a house on its lot,
- describe the three basic activity zones of a house and describe their relationships to each other,
- describe the characteristics that affect functional utility in the various rooms of a
house, - identify the characteristics of various building components that can affect value, and
- understand the technical terminology used to describe residential construction.
I. Classification of Houses
This section introduces the basic classifications of houses based on units, attachment, stories, and architectural style. It is important for appraisers to be able to differentiate between different types of houses, e.g. Single-family vs. apartment buildings, Detached vs. Attached, for accurate valuation purposes. Five primary house types based on story count are identified:
-One-Story
-One and One-Half Story
-Two-Story
-Split-Level
-Bi-Level
II. Architectural Styles
This section stresses that while location historically influenced architectural style, modern methods allow greater stylistic flexibility. More important than any specific style is the concept of compatibility. A compatible design aligns with neighborhood styles, site characteristics, materials used, and, most importantly, the preferences of the local market. Mismatching architectural styles within a neighborhood or failing to account for market preferences can negatively impact❓ property value.
III. Elements of House Design
This portion focuses on the core elements that influence the utility and desirability of a home, which is crucial for accurate appraisal. The chapter divides these elements into 3 aspects: Siting, Interior Functional Zone, Room Characteristics.
**A. Siting:**
Good siting considers:
-Orientation to the Sun: Optimizing light and heat gain.
-Prevailing Winds: Minimizing exposure.
-Views: Maximizing desirable views.
-Functional Zones: Dividing the lot into public, private, and service areas.
**B. Interior Functional Zone:**
Focuses on the efficient use of space and separation of different activities:
-Living Zone: Public areas (living, dining, family rooms).
-Working Zone: Kitchen and utility areas.
-Sleeping Zone: Bedrooms and private baths.
-Circulation Zone: Hallways and entryways connecting areas. A well thought-out Floor Plan (room layout) is key to maximize value.
**C. Room Characteristics:**
This part describes the desirable characteristics of each main room type in a house. Considerations include location, size, layout, lighting, and ventilation. Here are some key takeaways:
-Kitchens: Central to home functionality, efficient "work triangle" (sink, refrigerator, range), accessibility.
-Bedrooms: Adequate size, separation for privacy. The number of bedrooms, rather than total square feet, has a greater effect on value.
-Bathrooms: Located within the "sleeping zone", or at least adjacent to it.
IV. Construction Methods and Materials
This section provides an overview of common residential construction methods and materials, covering aspects from foundations to interior finishes. Key points include:
-Foundations: Types (basement, slab, crawlspace), material types (concrete).
-Framing: Methods (platform, balloon), materials, sheathing.
-Exterior Finishes: Siding, roofing, doors, windows (materials, energy efficiency).
-Insulation and Ventilation: Crucial for energy efficiency and moisture control.
-Interior Finishes: Walls, floors, cabinets.
-Plumbing, Heating/Cooling, and Electrical: Systems must be adequate and functional.
-Quality: The value of construction materials varies widely.
V. Summary and Conclusions
Accurate appraisal involves considering all elements of residential construction. Appraisers should focus on design compatibility, efficiency of layout, selection of construction materials, construction quality, and construction date.
Relating to Course Description:
This chapter is critically relevant to the “Mastering Property Valuation: Cost & sales❓ Comparison Approaches” training course as it provides essential knowledge for effectively applying both approaches:
-Cost Approach: Detailed understanding of construction methods, materials, and <a data-bs-toggle="modal" data-bs-target="#questionModal-370039" role="button" aria-label="Open Question" class="keyword-wrapper question-trigger"><span class="keyword-container">depreciation</span><span class="flag-trigger">❓</span></a> is essential for accurately estimating the reproduction or replacement cost of the improvements, as well as accrued depreciation.
-Sales Comparison Approach: Knowledge of architectural styles, functional utility, and construction quality enables appraisers to identify comparable properties, make meaningful adjustments for differences, and determine the overall market appeal of the subject property, as outlined in the COURSE DESCRIPTION.
