OTHER LAND VALUATION TECHNIQUES
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Land and Improvements are frequently valued separately, thus the trends affecting each other can be studied.
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But the final analysis for an improved property must be as a unit-with the same highest and best use both fpr land and improvements.
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The sales comparison approach is the most reliable method of land valuation. It involves comparisons and assumes that market evidence is avaiIable. Unfortunately, good, reliable sale data are sometimes unavailable, It is advisable to the appraiser/assessor to resort to other methods of evaluation.
SALES COMPARISON METHOD/TECHNIQUE ď‚Ą A sales comparison technique for land valuation
involves direct comparison of the subject property with similar land parcels for which actual data on recent market transaction area available,
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Although sales are the most important, analysis of listings and prices offered for similar parcels that compete with the subject property may contribute to greater understanding of the market.
The alternative methods of Land Valuation are:
Allocation
Abstraction
Anticipated use or development
Ground Rent, and
Land Residual capitalization
Allocation Technique ď‚Ą
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Where direct land comparisons are not available. The allocation technique can be applied with caution. Allocation is an indirect comparison technique that develops a ratio between land value and improvement value or some other relationship between property components. The result is a measure that allocates a total market price between the land and improvements for comparative purposes.
The Allocation Method
Helpful when no sales of vacant land is available for comparison,
Based on the principle of balance ( land is one of the agents of production).
Land should have a logical value relationship to real property value.
Fair allowance is estimated based on knowledge of the market for properties of the class being appraised.
The Allocation Method Typical relationship are established from sales of improved properties. Establish proper ratios, as follows: 1, Site values in previous years. 2. Land-to-improvement ratios in similar neighborhoods. 3. Analysis of new construction on classified sites.
similarly
The Allocation Method Employs elements of the cost approach in the analysis of improved property sale. ď‚Ą
Involves subtracting the depreciated replacement cost of improvements from the sales price of an improved property.
Example:
Assume that sites should represent about 20 percent of the total property in a given area. Classified as single family residential. The allocation is 1:3- one part land and three parts improvements. For a Php500,000., land represent one fourth or 25% of the total and should be valued as follows:
Php 500,000. x 25% = Php 125,000.00
EXTRACTION/ABSTRACTION METHOD / TECHNIQUE ď‚Ą
Extraction is another indirect comparison technique ( sometimes called abstraction). It provides a value estimate of improvements by applying a cost lest depreciation analysis and extracting the resullt from the total price of otherwise comparable properties. The residual is an indication of possible land value.
SALES VALUES: ABSTRACTION METHOD
Example:
Similar analysis with several sales of improved properties in a neighborhoodSALES may yield aVALUES pattern :of ABSTRACTI site values; METHOD ON Sale No. 1
Sales Price Rplcmnt Cost New
Accrued Depr.
Imprmnt Value
Indicative Site Value
P400,000.
P300,000.
P70,000.
P230,000.
P170,000.
P600,000.
P500,000.
P100,000.
P400,000
P200,000.
P450,000.
P350,000
P80,000.
P270,000.
P180,000.
HYPOTHETICAL/SUBDIVISION DEVELOPMENT
A subdivision Development or sometimes known as Hypothetical Development technique may also be applied to land valuation.
This process entails projecting the subdivision of a particular property into a series of lots, developing incomes and expenses associated with the process, and discounting the resulting net incomes into an indication of value. This technique may be supportable in some situations, but is subject to a number of assumptions that may be exceedingly ion difficult to associate with the market value definition. Caution is advised in the development of supportable assumptions, of which the valuer is advised to make full disclosure.
The Anticipated Use or Development Method ď‚Ą
May be considered when there are inssuficient sales data.
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Used primarily to value land in transitione.g. agricultural to residential, commercial ,or industrial use.
The anticipated use or development method: ď‚Ą
Example:
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Assume a 2-hectare tract is within a zoned area for single-family residential, which is also its highest and best use. The tract may be developed 125 parcels to a hectare , including streets. Analysis of supply and demand and of the purchasing price of typical homesite indicates a selling price of Php 150,000 per lot . Compute for the total sales price.
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125 parcels/hec. X 2 hectares = 250 parcels
250 parcel x P150,000 per parcel =P37,500,000.
The anticipated use or development method:
Technical assistance/study shows the following distribution of costs:
1. 25% for site development, including streets, water service, and planning,
2. 25% for overhead and sales expense, accounting and legal expense.
3. 25% for profit and interest costs during the development period and an allowance for entrepreneurial profit for the developer.
4. The remaining 25% of lot sales can be attributed to the contributory value of the raw land.
Calculating the per square meter.
Thus: Ph 37,500,000. x 25% = Php 9,375,000.
Php 9,375,000. /2 has =Php4,687,500.
Php 4,687,500/10000 = Php 468.75
say Php 470.00 per sq.m.
This method helps substantiate a value developed by the direct sales comparison method.
A substitute when reliable/useful sales data are not available.
Criticized because of its hypothetical nature.
Selecting an arbitrary percentage of projected sale price as the indicated value of the raw land ( practitioners may fall into indefensible situation).
Many of the development costs are relatively constant regardless of the value of the land.
Two examples to illustrate as follows: 1. Projected sale price ( Php150,000 x 250 parcels) = Php 37,500,000.
Less: Site development,streets,sewers,etc.
9,375,000.
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Overhead and sales expense
9,375,000.
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Profit, Interest,% Entrepreneural profit
9,375,000.
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Indicative value of underdeveloped land
28,125,000, 9,375,000.
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Indicative Value of 1 hectare
4,687,000.
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Indicative value per SAY
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468.70 470.00
2.-Assume another two hectare of higher quality, better located land available for development ( many development costs would remain the same) Others would be directly related to the projected sale price of develop lots. Projected sale price of lots (Php200,000. x d 250 lots) = Php 50,000,000.
Less: Site development, streets, water,etc.Php 9,375,000. Overhead and sales expense Profit, interests,and entr.profit
12,500,000. 12,500,000. 34,375,000.
Indicative value of undevelop land
Php15,625,000.
Php 15,625,000./ 50.000,000. =31.25%
GROUND RENT CAPITALIZATION APPROACH
Land can also land be valued by ground rent capitalization. If the land is capable of independently producing a ground rental , that rent may be capitalized into Market Value indication where sufficient market data are available. Care must be taken, however, not to misled by special conditions in the ground leases that may not necessarily be representative of the particular market.
In addition, since ground leases may have been drawn up many years before the valuation date, the rents quoted herein may be outdated, and current income capitalization rates may be hard to obtain.
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CAPITALIZATION OF GROUND RENT The capitalization of Ground rent method employs the income approach to value, which is based on the premise that the value is the present worth of future benefits of property ownership. The method may be desirable in central business districts where no vacant land sales can be found. If there are market data available to estimate the income potential of area of parking lots, for example , this income can be converted or capitalized, into an expression of value.
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Agricultural land may be leased on a hectare basis. Once the market rent is established, a net income is calculated and a capitalization rate is selected.
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The method is only as reliable as the estimate of highest and best use. Market rent, and correct capitalization rate for the subject property.
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Assume that comparable rental data indicate That the subject site would rent or lease for a net operating income of Php 80,000.00 per year to the owner. If the capitalization rate is 8% ,the income is capitalized into a value as follows:
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Php80,000.00 /,o8 = Php 1,000,000.00
RESIDUAL TECHNIQUE / METHOD ď‚Ą
The residual technique for land valuation also applies income and expense data as elements in its analysis .
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A financial analysis is made of the net income that can be obtained by an income producing use and a deduction from the net income is made for the financial return required by the improvements. The remaining income is considered residual to the land and is capitalized into a value indication.
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The method is limited to income producing properties and is most applicable to newer properties for which fewer assumptions are required.
Land Residual Capitalization
LAND RESIDUAL CAPITALIZATION
1. Applicable only to income producing properties.
2. Well-supported improvement value can be developed.
The practioners must be able to develop the annual net operating income.
Develop a land and building capitalization rate.
Deduct from the total annual income the net operating income attributable to the improvement.
The residual amount (remaining income) attributables to land is then capitalized into a value indicator for the land.
Example:
Annual net operating income
Improvement Value
Land Capitalization Rate
10%
Improvement Capitalization Rate
12%
Net operating Income Less: Income to improvement
Income attributable to land
Php100,000,00 600,000.00
100,000.00 72,000.00 28,000.00
Indicative land value Php 28,000.00 /0.10=s P280,000.00
RECONCILIATION OF VALUE: INDICATIONS AND FINAL VALUE ESTIMATE ď‚Ą
The three approaches to value are independent of one another even though each approach is based on the same economic principles. All three approaches are intended to develop an indication of value, but the final value conclusion depends on consideration of all data and processes employed and the reconciliation of value indications derived from different approaches into final estimate of value.
The selection of and reliance of the appropriate approaches, methods, and procedures depend on the judgement of the valuer. The valuer must use judgement when determining the relative weight to be given to each of the value estimates during the valuation process.He should provide the rationale and justification for the valuation methods used and the weighing of the methods relied on in reaching the value reconciliation when requested. ď‚Ą
Conclusion of Value shall be based upon: Definition of Value Purpose and Intended Use of the Valuation Relevant Information as of the Valuation Date Value Estimates from the valuation methods performed
Strengths and Weaknesses of Each Valuation Approach: COST APPRAOCH is most appropriate when earnings are poor;
INCOME APPROACH is useful if the cash flow is very stable, however, value is significantly affected by the property’s financial leverage and assumptions about discount rates;
SALES comparables transactions analysis is very useful, however reliable data is extremely difficult to obtain, particularly for small privately held businesses;
No two property or transactions are the same.
FOR REAL PROPERTY TAXATION PURPOSES Real property shall be valued for taxation purposes on the basis of the Schedule of Fair Market values prepared for the provinces, city or municipality , As far as applicable , such schedule shall be controlling except where the property to be assessed is not of the same kind as classified in the schedule or where the value is not fixed. The same shall be valued at its market value independent of said schedule. ď‚Ą
MV= UBMV x Area Adj.MV= MV +/- AF AV = Adj.MV x AL TAX DUE = AV x BTR
MV- Market Value
UBMV- Unit Base Market Value
Area – in square meter/ Hectares
Adjustment Factor
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Corner influence
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Depth Factor
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Cost of Filling
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=others
AV = Assessed Value AL -
SEF = AV x 1%
Assessment Level
SEF –Spcl Educational Fund
FOR INTERNAL REVENUE PURPOSES
Section 6E) of the National Internal Revenue Code of 1997 provides: For purposes of computing the internal revenue tax, the value of the property shall either the zonal value ,the value in the schedule of fair market value s of the provincial/city Assessor, or the amount of consideration as reflected in the Deed of Conveyance, whichever is higher There are four types of taxes that can be collected from the transfer m exchange, disposition of real properties. These are the CAPITAL GAINS TAX ESTATE TAX DONOR’S TAX and DOCUMENTARY STAMP TAX.
Formula
CGT = ZV or FMV or DOC x 6% DST = ZV or FMV or DOC x 1.5%
Where: Capital Gains Tax
CGT –
DST= Documentary Stamp Tax
ZV= Zonal Value
FMV= Fair Market Value
DOC= Amount of Consideration in the Deed of Conveyance
DT = Donor’s Tax
ET = Estate Tax
END OF THE TOPIC ON OTHER LAND VALUATION TECHNIQUES:
Any Questions ?