The valuation of the land has a direct relationship with an analysis of greater and better use. The comparison between the highest and best use and the land or land value will show whether an existing use is the highest and best 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. Land value and building value 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.
While the estimate of total ownership can be obtained from direct comparison or income approaches without separating the values of land and buildings, it may be necessary to value the land separately to separate the land figure from the total value of the property. In the cost approach, it is absolutely necessary to estimate land and improvements separately.
Creating an opinion about land value can present itself as a separate hurdle in the valuation process. You can use several techniques to derive an expression of land value, including the following:
– Direct comparison
– Extraction
– Residual Land
– Land Rent Capitalization
– Subdivision development
– Assignment
Generally, the most accurate and effective technique for deriving land value is the direct comparison approach. However, when there are a limited number of sales available or when the estimate produced needs additional support, other techniques can be used to support the comparison approach, such as those mentioned above. With technical allocation, improved property sale transactions can be analyzed or the total prices paid would be apportioned between the land and the improvements. Comparable sites under development may also be analyzed and the cost of completed properties allocated between land and improvements or buildings. Under the pull technique, the value of land is determined by subtracting the estimated value of depreciated improvements from the known sale price of the property.
The other land valuation methods mentioned use Capitalization of Income. The use of these techniques is subject to more limitations and is used less frequently in land estimation. The subdivision development technique is a special method useful in specific cases of land use. The residual land technique is more often used as highest and best use analysis to test the viability of different uses than to value land as part of traditional valuation approaches. Land rent capitalization can be used when land rents and land capitalization rates are available in the market or targeted area. A comparison of that information will then be crossed with the land in question that needs an estimate.
