The various techniques used to value a property’s land
Land valuation is directly related to a better and higher use analysis. The comparison between the best and highest use and the land or land value will show whether an existing use is the best and highest use of the land.
The valuation of the land plays a very important role in the total valuation of the value of the property or real estate. Appraisers will often create a land value estimate separate from other real estate features, such as building improvements. The value of the land and the value of the construction will change at different rates depending on the improvements and their corresponding depreciation factors. For many real estate valuation estimates, a separate figure for land is the best way to assess perceived value.
Although the estimate of total ownership can be obtained from direct comparison or income methods without separating the value of the land and the value of the construction, it may be necessary to value the land separately to separate the figure of the land from the total value of real estate. In the cost approach, it is an absolute necessity to estimate the land and improvements separately.
The creation of an opinion on the value of the land can present itself as an independent obstacle in the valuation process. You can use several techniques to obtain an expression for the value of land, including the following:
– Direct comparison
– Extraction
– Residual land
– Capitalization of Land Rent
– Subdivision development
– Assignment
Generally, the most accurate and effective technique for obtaining a land value is the direct comparison method. However, when a limited number of sales are available or when the estimate produced needs additional support, other techniques could be used to support the comparison approach, such as those mentioned above. With technical allocation, the sale transactions of improved properties can be analyzed or the total prices paid would be allocated between the land and the improvements. Comparable development sites can also be analyzed and the cost of completed properties should be allocated between the land and the improvements or buildings. Under the extraction technique, the value of the land is determined by subtracting the estimated value of the depreciated improvements from the known sale price of the property.
The other land valuation methods mentioned all use income compounding. The use of these techniques is subject to more limitations and they are used less frequently in land estimation. The subdivision development technique is a special method useful in specific land use cases. The residual land technique is most often used as the best and highest use analysis to test the feasibility of different uses to value land as part of traditional valuation approaches. Land rent capitalization can be used when land rent and land capitalization rates are available in the market or target area. Then a comparison of that information will be compared to the land in question that needs an estimate.