Real Estate Business

 

A comparison between the highest and best use and the value of the land or lot will show whether the existing use is the highest and best use of the land.

Land valuation plays a huge role in the overall appreciation of the value of a property or real estate. Appraisers often create an estimate of land value separately from other property features, such as building improvements. The value of the land and the value of the building will change at different rates depending on the improvements and their corresponding depreciation factors. For many property valuations, the best way to evaluate perceived value is as a stand-alone figure.

Although a total property valuation can be derived from a direct comparison or from income approaches without separating land and building values, it may be necessary to value the land separately to separate the land value from the total property value. In the cost approach, it is absolutely necessary to value land and improvements separately.

Creating a land valuation can be presented as a separate hurdle in the valuation process. There are several techniques you can use to express the value of land, including the following:

- Direct comparison

- Extraction

- Residual land

- Capitalization of rent

- Development of division

- Allocation

Usually the most accurate and efficient of the techniques for deriving land value is the direct comparison approach. However, if a limited number of sales are available, or if the estimate produced requires additional support, other techniques such as those discussed above can be used to support the comparative approach. Using the allocation technique, either the sales transactions of the improved properties can be analysed or the total prices paid would be divided between the land and the improvements. Comparable sites under construction can also be analysed and the cost of completed properties should be allocated between land and improvements or buildings. As part of the mining technique, the value of the land is determined by subtracting the estimated value of the depreciated appreciation from the known sale price of the property.

All the other land valuation methods that have been mentioned use revenue capitalization. The use of these techniques is subject to more limitations and is used less frequently in soil estimation. The residual land technique is most often used as a highest and best use analysis to test the feasibility of different land uses as part of traditional valuation approaches. Land rent capitalization can be used when land rents and land capitalization rates are available in the target market or area. A comparison of this information will then be cross-referenced to the subject land in need of an estimate.

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