Land valuation

Land valuation

Land, in an economic sense, is defined as the entire material universe outside of people themselves and the products of people Everything that is freely supplied by nature, and not made by man, is categorized as land.

Land has no cost of production. It is nature's gift to mankind, which enables life to continue and prosper.

The rent of land, however, serves no such incentive function, because the supply of land is fixed. The same amount is available no matter how high or low the price.

Economic rent is the only source of revenue that could be taken for community purposes without having any negative effect on the productive potential of the economy. Economists consider rent to be a surplus payment which is unnecessary to ensure that land is available.

Land Market Value is the land rental value, minus land taxes, divided by a capitalization rate.

  1. Land Rental Value is the annual fee individuals are willing to pay for the exclusive right to use a land site for a period of time. This may include a speculative opportunity cost.
  2. Land Taxes is the portion of the land rental value that is claimed for the community.
  3. Capitalization Rate is a market determined rate of return that would attract individuals to invest in the use of land, considering all of the risks and benefits which could be realized.
  4. Land Market Value is the land rental value, minus land taxes, divided by a capitalization rate.

The mathematical relationship is then:

The mathematical relationship is then: =
Land Rental Value - Land Taxes
Capitalization Rate

Land Rental Value = Market Value x Capitalization Rate + Land Taxes

For example, assume that the land rent for a site is $1,800, the land taxes are $300 and the capitalization rate is 6%, what would the land market value be?

The mathematical relationship is then: =
Land Rental Value - Land Taxes
Capitalization Rate

Land Market Value =
$1,800 - $300
6%
=
$1,500
6%
= $25,000

What would result if a larger portion of the land rent were collected? Let's consider $1,650 rather than $300.

Land Market Value =
$1,800 - $1,650
6%
=
$150
6%
= $2500

The formula indicates how simple it would be to translate market value to rental value or vice versa, depending upon the policy of any nation.

In the United States and most other countries, land values are estimated and assessed. Land taxes, however, are a portion of land rent. The balance of this paper will explain how land values are estimated.

An appraisal is essentially an expert opinion of the market value of a site; the assessor must present one that is supportable and comprehensible.

Every nation imposes certain public limitations on land ownership and use for the common good of all citizens. Four forms of governmental control include:

Taxation — Power to tax the land to provide public revenue and to return to the community the costs incurred to pay for the various public benefits, services and environmental protection, which are provided by the government.

Eminent Domain — Right to use, hold or take land for common public uses and benefits.

Police Power — Right to regulate land use for the welfare of the public, in the areas of safety, health, morals, general welfare, zoning, building codes, traffic regulations and sanitary regulations.

Escheat — Right to have land reverts to the public's agent, the government, when taxes are not paid or when there are no legal heirs.

Procedures for Land Assessment

An assessment (or an appraisal) is essentially an opinion of value made by an experienced knowledgeable person. Specialists are known as assessors who base their estimate of land market value, upon basic economic principles which serve as the foundation of the valuation process. Anyone can learn how to do this and learn to do it better.

The assessment or appraisal process is an organized procedural analysis of data. This procedure involves six specific phases, each of which contains numerous procedures.

  1. Defining the Assignment
  2. Determining the Data Required and Its Source
  3. Collecting and Recording the Data
  4. Verifying the Data
  5. Analyzing and Interpreting the Data
  6. Estimating the Market Values
  7. Public Examination and Analysis of the Land Market Values
  8. Periodic Updating of Assessments

Valuation Methods

Valuation of the land involves first determining the highest and best use of the site, estimating the value by current appraisal theory, and reconciling to a final estimate of value.

There are three standard approaches to estimating market value that form the foundation for current appraisal theory:

1. The cost approach
Is based upon the principle that the informed purchaser would pay no more than the cost to produce a substitute property with the same utility as the subject property. It is particularly applicable when the property being appraised involves relatively new improvements which represent the highest and best use of the land or when relatively unique or specialized improvements are located on the site and for which there exists no comparable properties on the market.

2. The sales comparison approach
Utilizes prices paid in actual market transactions of similar properties to estimate the value of the site. This appraisal technique is dependent upon utilizing truly comparable market or sales data which have occurred near enough in time to reflect market conditions relative to the time period of the appraisal. This method could also be used to estimate the rental value.

3. The income capitalization approach
Is widely applied in appraising income-producing properties. Anticipated present and future net operating income, as well as any future reversions, are discounted to a present worth figure through the capitalization process. This approach also relies upon market data to establish current market values and expense levels to arrive at an expected net operating income.

In the valuation process the land value estimate is a separate step accomplished by applying either sales comparison or income capitalization techniques. The most reliable way to estimate land value is by sales comparison. When few sales are available or when the value indications produced through sales comparison require substantiation, other procedures may be used to value land.

In all, seven procedures can be used to obtain land value indications.

  1. Sales comparison
  2. Proportional Relationship
  3. Land Residual Technique
  4. Allocation
  5. Extraction
  6. Ground Rent Capitalization
  7. Subdivision Development

Land markets can be estimated on the basis of a certain value per unit and the unit is often one of the following:

  1. Per Dwelling Unit site
  2. Per square-foot
  3. Per acre
  4. Per front-foot

The selection of the most appropriate unit, or combination of units, is important. It is a decision which can only be made after a careful analysis of the market and the available data.

Land is not always sold on the same basis, but rather on the value in the eyes of the user. No amount of mathematics can override the main objective of achieving fair economic value, as reflected by market behavior. The measure can be used to assist in the interpretation of market evidence for a few sites (the sample), so that all of the sites can be properly estimated (the population).

After the base value has been estimated, the individual sites must be considered. Some sites have unique advantages or disadvantages compared to other sites. Actual real estate market values vary for each site and are dependent upon numerous individual features, qualities, characteristics and restrictions such as:

location utilities topography traffic zoning use density river regulations site view transportation noise access frontage parks utilities

For example, if a site were better than the standard in a district because of distance to downtown of 5% ($4.000), site size of 5% ($4,000), location of transportation 10% ($8,000) and convenience of recreation of 5% ($4,000), the site being appraised would be 25% ($20,000) superior to the standard site. In reality most sites have many small differences both positive and negative from a standard site.

Per dwelling unit site

VARIABLE = STANDARD > SUPERIOR < INFERIOR
Base Value - $ $80,000 $80,000 $80,000
Downtown - miles 5 0 3 + 4,000 7 - 4,000
Size - square feet 10,000 0 12,000 + 4,000 8,000 - 4,000
Transport - blocks 3 0 1 + 8,000 6 - 6,000
Recreation - blocks 6 0 3 + 4,000 10 - 3,000
Adjusted value - $ $80,000 $100,000 $63,000

Per Square-Foot — The value per square-foot unit of measure has application in estimating value for commercial and industrial lands where the applied rate will be more constant over the entire site. The size of the site limits or enhances the use and market value of a site. The application of a market value per square-foot to residential lands is not common.

Per Acre — Beyond the limits of the urban area, there will be those parcels that are so much larger that they will not respond well or at all to dwelling unit site value, a square-foot or front-foot unit measure. Where these larger parcels are the norm, the unit of measure can best be expressed as a value per acre. They might relate to agricultural benefits, such as soil fertility, distance to markets or water supply.

Per Front-Foot — This method has been useful in the downtown portion of intensely developed cities where people pay a premium for exposure to customers. For those sites that are not identical to the standard site, it will be necessary to make appropriate adjustments for variations in width, depth and other attributes that differ from the standard site. The total departures from standard front-foot market can be expressed as an adjusted frontage.

There is a principle of commerce that commodities are cheaper by the dozen. By the same token it could be that frontage feet are cheaper per unit when the total exceeds the average, or standard width. A width table is a series of percentage adjustments greater or less than 1.0 needed to adjust the actual Market per Front-Foot of any site and equate it to the Front-Foot value of the adopted Standard Site.

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