MAAO Land Value Determinations ECF Text 1-2022 PDF

State Tax Commission Land Value Determinations and Economic Condition Factors Michigan Advanced Assessing Officer (MAAO) Course January, 2022 All rights reserved. This material may not be published, broadcast, rewritten or redistributed in whole or part without the express written permission of th...

State Tax Commission Land Value Determinations and Economic Condition Factors Michigan Advanced Assessing Officer (MAAO) Course January, 2022 All rights reserved. This material may not be published, broadcast, rewritten or redistributed in whole or part without the express written permission of the State Tax Commission LAND VALUE DETERMINATIONS AND ECONOMIC CONDITION FACTORS Introduction An assessor is responsible for determining the land value for every vacant taxable parcel of property as well as every improved taxable parcel which is appraised using the cost approach. To accomplish this, an assessor must work in a mass appraisal environment. Whereas fee or single-property appraisal, normally deals with only a particular property as of a given date, mass appraisal is the systematic appraisal of groups of properties as of a given date using standardized procedures and statistical testing. The value of the land which is non-wasting is determined separately from buildings and improvements which are the wasting or deteriorating part of real estate. The appraised or true cash value of a parcel is the sum of these two values. Similarly, County Equalization Departments must also establish land values to appraise parcels included in equalization appraisal studies. In establishing land values, you must consider the general forces (economic, social, environmental, and governmental – zoning and deed restrictions) that affect the parcels’ value as well as the parcels physical characteristics. These characteristics include location, size, view, frontage on a lake or river, topography, shape, existing vegetation, soil (whether the soil perks, etc.), available utilities, and unusual site preparation costs. Several methods are available for the land valuation process, including the sales comparison, allocation, extraction, and subdivision development methods, as well as several income capitalization techniques. Land values should generally be applied as calculated and an assessor or Equalization Director should be prepared to explain any departures from the calculated land values. It is very important annually to keep land values and supporting documentation related to the development of land values up to date. Economically, land can be defined as the entire material universe outside of people themselves and the products of people, including all natural resources. Therefore, everything that is supplied by nature such as air, soil, minerals, water, etc. is included in the definition of land. Land is fixed in supply (meaning it cannot be manufactured or reproduced) and is required, directly or indirectly in the production of all goods and services. In this respect, land is unique in nature. 1 Determinants of Land Value To create the demand necessary to confer value, land must possess the elements of scarcity, utility, and desirability backed by effective purchasing power. Since the supply of land is fixed, demand is the sole determinant of value. Scarcity is defined as the present or anticipated supply of an item in relation to the demand for it. In other words, it must not be readily available. Air, for example, is not scarce because there is an abundant supply of it. Because of its unlimited abundance, no one is willing to pay for it. Land, on the other hand, may appear to be abundant but is in fact scarce because its supply is fixed (no one is creating more of it because it can’t be reproduced). Utility is a subjective concept relating to an item’s ability to satisfy a need or desire (or to excite a desire for possession). Land, for instance, may satisfy a need or desire for shelter, income or amenities. Desirability must be present for something to have value. Scarcity and utility alone cannot confer value on land. Although a commodity may be scarce and satisfies a need, it must also be desired by enough consumers with the purchasing power necessary to participate economically in the market. This is called effective purchasing power and must be present for value to be achieved. A consumer who desires a commodity and can afford it is called a demand unit. Demand is therefore created when a potential user with the ability to pay (demand unit) has a desire to possess land based on its desirability. The value of land will vary directly with demand, and demand is created by desirability. General Factors Affecting Land Value There are four general factors which are in a constant state of change - interweaving with one another to affect the scarcity, utility and desirability of land and its value. An understanding and analysis of these factors by the assessor or appraiser can provide a clearer picture of why land values trend the way they do in a given area. Economic Factors: Economic variables can vary markedly from one area to another. Supply variables would include the quantity of available land, development, and financing costs. Demand variables would include employment levels, income levels, availability of money and credit, and interest rates. Social Factors: Social factors affecting land use and values include variables such as population growth or decline, changes in family size and ages, education and crime. In addition, the cost and prestige of certain locations may motivate the demand for one location over another by some. 2 Governmental Factors: Local, regional, and national governmental or political policies may affect the demand for land in a given location and drive land values. In other words, the effect of these policies can either be hastened land development or retarded growth and demand. Taxation and building and zoning restrictions are examples of local and regional policies affecting demand. Local policies affecting amenities such as schools, public transportation and police and fire protection can also influence the demand for land. National fiscal policies affecting the availability and cost of money can also influence the demand locally for land. Environmental and Physical Factors: Environmental and physical factors are of a local nature and can be separated into two attribute categories – site and situation. Site attributes are physical in nature and affect land value through the resources and features which are inherent with the land, such as size, shape, soil, topography and view. Situation attributes are external in nature and can have a positive or negative influence on the demand for land depending on the accessibility or proximity of a parcel to external resources such as shopping centers, schools, transportation, sewage treatment plants, freeways, etc. The Process of Land Valuation The process of determining and assigning land values involves three separate phases: Identification and Description: The first phase of any land appraisal is to identify the parcel to be appraised as well as those parcels being analyzed from the sale data collected. The assessor must not only determine the size and location of the subject parcel, but also those parcels from the sales data which will be analyzed and compared with the subject parcel later in the process. Tax maps, which are covered in detail later in this chapter, are an invaluable tool for this task as they provide a tangible, visual delineation of legal land descriptions and provide a means of identifying land related data such as location, size, shape, view, etc. Aerial maps are another useful tool which can provide additional information about the physical characteristics of land and its proximity to amenities which may influence market value such as bodies of water, shopping centers, etc. Site Analysis: The second phase of land appraisal involves the classification of land according to its current use. For the purpose of appraisal and comparative analysis, the land being valued should be classified as residential, commercial, industrial, agricultural, timber-cutover or developmental. Site data related to land attributes is collected during this phase. This would include attributes such as frontage, width, depth, area, topography, drainage and soil condition and off-site improvements (e.g. available utilities, sidewalks, streets, streetlights, curbs, gutters, etc.). 3 Land Valuation Methods: There are several generally accepted methods or techniques which may be used to value land. In general, land value can be estimated by methods which encompass either direct sales comparison or income capitalization techniques. The sales comparison or comparative sales approach is the preferred valuation method because it involves direct comparisons with actual market transactions of similar properties. The reliability of this appraisal method depends on using truly comparable sales which have occurred during a time near enough to the appraisal date as to reflect market conditions relative to that date. When good reliable sales data is unavailable or limited for a particular area or classification of property, the assessing officer must rely on other accepted methods of valuation. The choice of which method to use in making a value estimate will depend on the availability of reliable sales data and usefulness of the method employed. Sales Comparison Method The most direct and reliable method for valuing land is the Sales Comparison Method which is based on the principal of substitution which states that a buyer will not pay more for one property than they would for another that is equally desirable. Two principal applications of the sales comparison approach used in mass appraisal are the Comparative Unit Method and the Base Lot Method. 1 Both methods involve the stratification or sorting of sales and other market data into homogenous groups which share similar characteristics and market influences. The use of either method requires that information regarding sales of similar vacant land is collected, verified, analyzed, and adjusted to give an indication of value of the property being assessed. The first step in this process is the collection of vacant land sales data. The verification of sales information is essential before recording the information on maps or in a spreadsheet format for analysis as part of the mass appraisal process (or in a standard adjustment grid in single-property applications). Hearsay evidence is insufficient and should not be used to qualify the bona fide nature of a comparable sale. The process of comparing the land to be appraised with other like properties in the market involves two components – elements of comparison and units of comparison. When determining comparability, the assessor must recognize similarities and dissimilarities between the subject property and comparable properties which have sold. Comparing apples with oranges - such as using a vacant commercial parcel for a comparable when appraising a vacant residential lot – is neither useful nor acceptable. Property Appraisal and Assessment Administration, ed. Eckert (The International Association of Assessing Officers, 1990) 1 4 The elements of comparison used for determining comparability are categorized as follows: 1. 2. 3. 4. 5. Trends and factors Time and date of sale Physical characteristics Location Conditions of sale Trends and Factors: Properties that are influenced to similar extent by the general factors affecting land value (e.g. economic, social, governmental and physical) will have the greatest degree of comparability. Basic to the analysis of trends and factors is the classification of land and determination of highest and best use. Zoning data is one of the more important factors when determining classification and highest and best use. Because zoning ordinances usually describe in detail what uses are permitted for a particular parcel, they often assist in pre-determining highest and best use for the parcel. Time and Date of Sale: This element in the comparative process recognizes that market conditions do change from time to time. It must be determined if the comparable sale occurred under the same or similar market conditions prevailing at the date of appraisal. If market conditions have remained stable for the period of time between the date of sale and date of appraisal, no adjustment would be necessary. However, if the assessor recognizes that market conditions have varied appreciably between the two dates, then an adjustment must be made. As an example, consider a situation where a residential lot sold one year ago in a normal market environment after a reasonable listing period. Then it sold again just three months ago under similar circumstances for $1,000 more than the earlier price. This simple example illustrates a change in the market between two time periods as expressed by the difference in the two sale prices. Physical Characteristics: Only significant physical similarities and differences are identified and considered with this element of the comparative process. Because people tend to pay additional value for property with advantages and less for property with disadvantages, actual real estate values will vary depending on a number of individual features and characteristics including but not limited to: • Location – whether a lot is situated on a corner or inside may influence value. Traffic patterns can positively or negatively influence value. Consider the effect traffic flow may have in a residential area due to noise and traffic hazards. An interior lot may therefore be of higher value than an exterior lot fronting a busy street or highway. • Utilities – availability of utilities such as water, gas, electricity and sewer influence value. Better neighborhoods generally have underground utilities. 5 • Size – the area of a parcel is one of the most significant characteristics affecting value. Because zoning and deed restrictions affect usable land for improvements, important consideration should be given to the effective area or that area within which a building may be constructed. • Shape – the irregular configuration of a parcel may have an effect on the parcel’s usefulness and therefore may have a direct influence on its value. • Topography – will often determine the use for which a site may be put. Location and type of construction will be dictated by the topography of a site. Depending on the highest and best use, value may be influenced by whether a property is flat, gently rolling, hilly or wooded. • View – defined as the scene visible from a specific location which may affect the value of the site or property 2, this characteristic can be an advantage or disadvantage to a property. Views which may command a value premium include scenic views of lakes, rivers, golf courses, natural areas, etc. Views which may diminish value include highways and other infrastructures, high voltage lines, rooftops, salvage yards, etc. • Off-Site Improvements – the value of a lot can be strongly influenced by the presence of off-site improvements such as streets, sidewalks, street lighting, municipal water and sewer, etc. So that the assessor is reasonably well-informed regarding the physical characteristics of comparable sites, each comparable should be physically inspected. This is essential to ensure that justifiable adjustments can be made between the comparables and the property being appraised. If there are a great number of differences in physical characteristics between a comparable and the subject property, it is generally best to exclude it from comparison. As with the other elements of comparison, the same procedure should be used to determine the amount of adjustment for differences in physical characteristics. The most relied upon technique is the “paired sales” analysis in which dollar or percentage amounts for differences are extracted from the local market. This technique will be discussed and demonstrated later in the chapter. Location: As the fourth element of comparison, location refers to the neighborhood influence on the marketability of lots, parcels or sites. If a comparable site is located in the same neighborhood as the property being appraised, then no location adjustment is generally necessary provided that neighborhoods have been properly identified by the assessor and differences in schools or other important neighborhood characteristics are unlikely. Appraisal Institute, The Dictionary of Real Estate Appraisal, 6th Edition (Chicago, Illinois: Appraisal Institute, 2015), page 246. 2 6 If a comparable is located in a different neighborhood than that of the property being appraised, then a careful analysis must be made of the possible differences between the two neighborhoods. It is possible that the two neighborhoods may be homogeneous or similar in all respects requiring no adjustment for location. If, however there are significant differences between the two, appropriate adjustments must be determined and applied. For example, a vacant lot being appraised may be in a neighborhood located within an excellent school district. In contrast, the comparable lot may be located in a neighborhood that is served by a less desirable school district. The market will typically recognize this factor and assign value accordingly. Once again, the paired sales technique can be used to determine an adjustment for the difference in value due to this variation. That is, the comparable from the neighborhood located within the less desirable school district is “paired” with an identical site that has sold in the subject’s neighborhood. If the former has a lower sale price, this is an indication that the market recognizes the difference between the two neighborhoods due to the disparity in school districts. Assuming no other differences, a dollar or percentage amount can then be extracted from the pairing or matching of these sales to be used as a location adjustment. Conditions of Sale: This element of comparison is often difficult to extract from the market for determining an appropriate adjustment for differences relating to the condition of sale. Condition of sale refers to the circumstances under which the decision is made by the buyer and seller to purchase or sell a specific property. Market value, by definition, requires a knowledgeable and able buyer and a knowledgeable and willing seller, with no relationship to one-another - each acting in their own self-interest. Unusual pressure on the buyer to buy or the seller to sell is likely to be reflected in the conditions of sale. An example of this from the seller’s position might be concessions forced by a pending foreclosure or bankruptcy. From the buyer’s position an example might be an inability to obtain conventional financing requiring some form of seller assisted financing or concessions. Financing conditions, which include the amount of interest charged, length of the mortgage or contract, and loan to value ratio, are an important consideration with the condition of sale element. For example, if conventional financing is typical for the type of property being appraised, comparables that have sold with a type of financing other than conventional (100% financing, conditional sales contracts, seller assisted financing), require careful analysis and judgment. If these conditions produce a different sale price than would have been paid with conventional financing, an adjustment must be made. 7 Because a parcel’s utility and market value can be limited or enhanced by the size and shape of the parcel, an important part of the analysis is the use of an appropriate unit of comparison. Five basic units of comparison are used to value land: 1. 2. 3. 4. 5. Front Foot Square Foot Acre Site or Lot Units Buildable By analyzing the terms or circumstances by which parcels are bought and sold in the market, an assessor can ascertain the appropriate unit or units of comparison to use. Value per front foot is a common unit of comparison for residential properties. The value per front foot unit of comparison is most useful where a premium is placed on exposure to customers or where frontage significantly contributes to value, such as commercial retail properties or residential and commercial waterfront properties. “Frontage” is the lineal distance that a lot (usually referring to an urban or suburban lot) borders a street or water and is typically expressed in feet. A front foot is a one foot wide strip of land fronting a street, highway or body of water and extending to the rear of the parcel. When using the value per front foot unit of comparison, it will be necessary to adjust the actual frontage for variations in size, shape and depth. Formulas, tables and rules 3 have been established to help the assessing officer adjust for these differences. When applying the front foot unit of comparison to irregular lots, it is necessary to adjust the frontage by converting the actual frontage of an irregular lot to effective front footage. This adjustment is premised on the 65/35 rule which states that a right angle triangular-shaped lot with its base on the front of a parcel (along a street or body of water) has 65 percent of the value of a rectangular lot and that the same triangularshaped lot with its apex on the front of the parcel has 35 percent of the value of a rectangular lot. In the following example, Parcel A which is a rectangular lot with 100 feet of actual frontage will also have 100 feet of effective front footage. Parcel B, which is a triangular-shaped lot with 100 feet along its base (on the street) will have an effective front footage of 65 feet (100 feet actual frontage x 65 percent). Parcel C, which is also a triangular-shaped lot but with the 100 feet to the back of the lot will have an effective front footage of 35 feet (100 feet actual frontage x 35 percent). 3 Site valuation rules relate site value to a measure of size by expressing the mathematical relationship between the depth, frontage, or area of a lot or parcel and its value. 8 Figure 1 100 100 Rear C A 45 110 D E 75 50 B 100 100 Front A variance of the 65/35 rule is also be applied to irregular shaped parcels that are not triangular in shape as illustrated with parcels D and E in Figure 1. Where the actual frontage along the front of a parcel differs from that along the rear, the rule is to use 1/3 the sum of the back plus twice the front (or ((2 X front feet) + rear feet) ÷ 3) to determine the effective front footage. For example, the effective front footage for Parcel D would be 65 feet (45 feet + 150 feet = 195 / 3 = 65) and the effective front footage for Parcel E would be 70 feet (110 feet + 100 feet = 210 / 3 = 70). Once the effective front footage is determined, a depth factor (described in detail below) is applied to adjust for variances in depth. The adjusted frontage is called equivalent front footage. It is against this adjusted frontage that the value per front foot is applied. A depth factor is used, usually in urban or suburban settings, to adjust land value for differences in the actual depth of a parcel compared to the standard or typical depth for an area. A lot that is deeper than the standard depth lot will usually have more value and a lot that has less depth than the standard lot will usually have less value. Depth factors allow for a uniform amount per front foot to be used to value parcels of different depths by adjusting for differences in depth. This is done by converting actual frontage into equivalent front feet. This equivalent frontage, multiplied by the established front foot value, gives the appraised value of the lot. Depth factors account for differences between lots with a standard depth and lots with depths that vary from the standard lot depth. A lot is of standard depth when it has a depth that is common for most other lots in the area. In the drawing below, lots 5 and 7 do not have standard depths while the remaining lots do have a standard depth. If several of these lots have recently sold, an amount per front foot can be developed: 9 Figure 2 5 1 2 3 4 6 8 7 Rose Street Lot Number Sale Price Front Feet (FF) Sale Price Per FF 2 $16,500 80 $206 4 $12,000 60 $200 6 $14,500 70 $207 Indicated Value Per Front Foot: $205 From this information, $205 per front foot is appropriate for lots within this subdivision and all of the lots that have sold are standard depth lots. If the front foot rate of $205 is applied to all of the lots in Figure 2, will it be representative of the market value of each lot? Most people would probably argue that lot 5 should sell for more per front foot because of the additional depth, and lot 7 should sell for less. As you will see from the exercise below, to compensate for the differences in depth, the application of a depth factor will adjust the front footage, that the adopted per front foot value is applied against, for Lots 5 and 7. Observing the lots in Figure 2 above, assume that the standard depth of the lots is 120 feet. Lot 5 is 140 feet deep and lot 7 is 60 feet deep. Using the depth factor table provided, locate the column for standard depth of lot, 120 feet. Lot 5 is 140 feet deep, so go to the left-hand column which has a heading of “Actual Depth of Lot”; following across to the right to the column 120 feet, the depth factor is 108. Do the same exercise for the 60 feet actual depth for lot 7, the depth factor is 71. The next step is to apply the depth factor to the actual front feet and then value the lots using the calculated front foot rate from the table above. Lot 5 actual frontage = 60 X 108% = 64.8; 64.8 X $205 = $13,284 or $13,300 rounded Lot 7 actual frontage = 60 X 71% = 42.6; 42.6 X $205 = $8,733 or $8,700 rounded . Depth factor = √actual lot depth ÷ standard lot depth 10 Example: 150 feet actual lot depth ÷ 120 feet standard lot depth = 1.25, 1.25 = 1.12 Depth factor tables can be used instead of calculating individual depth factors for each parcel being valued. If a depth factor table is used, the resulting values should be checked against market information to ensure that the table is appropriate for the area being valued. When using a depth factor table, it should be kept in mind that a given depth factor table will not work in all valuation situations. The advent of depth factor tables occurred during the late nineteenth and early twentieth centuries when various depth rules were being established by appraisers, judges and assessors to provide a means by which to analyze the declining marginal contribution of depth to value and provide for more standardized assessments. 4 Using actual market data, early twentieth century (1900-1930) depth curves were being developed and modified by tax departments in major cities such London, New York, Cleveland, Chicago, Milwaukee and Baltimore, all of which graphically demonstrated that value was a concave function of depth – meaning that as depth increased, value increased at a decreasing rate or said another way, although value increases with depth, it does not increase proportionately, but rather marginally. During this period, a strip of land that was one foot wide and one hundred feet deep with its end abutting on a street was considered to be a standard unit of area upon which all valuations were to be based - one hundred feet simply being a convenient length for calculations. Once the value of this unit of area was determined, it was then possible to express the value of a similar one-foot wide strip of land at a different depth as a percentage of “unit” value. The percentages were arranged by depth and plotted on a graph. 5 The resulting curve was commonly known as a depth curve. Depth tables, which were a tabular representation of these depth curves, provided a uniform and standardized means by which to adjust for depth influences when estimating site values. The use of present depth tables (see table on following page) is rooted in the same premise. Peter F. Colwell and Tim F. Scheu, A History of Site Valuation Rules: Functions and Empirical Evidence, (Journal of Real Estate Research, 1994) 5 King, The Variation of Urban Realty, (Bulletin of the University of Wisconsin, 1913) 4 11 Value per square foot as a unit of comparison is commonly used when estimating the value of commercial and industrial parcels where the rate will be applied more constant over the entire site and frontage is not a dominant factor. Because it is an area measurement, it considers all the land in a parcel and can be used to value any and all types of land and is especially adapted for valuing parcels with irregular shapes. However, application of the value per square foot unit to residential parcels is not common. Value per acre is the most appropriate unit of comparison for parcels which are significantly larger than those found within the limits of urban or suburban areas (e.g., farms, pastures, timber lands, recreational lands, etc.). Agricultural land is typically 12 valued on a per acre basis. Adjustment factors for this unit of comparison will be different however and will relate to land attributes, soil fertility, accessibility, etc. Site or lot values are another option for residential properties, especially in platted subdivisions or site condominiums. Site value, as a unit of comparison, can be used when market analysis indicates that there is no change in value even when lot or site sizes differ. Units buildable can be used as a unit of comparison when land sells on a unit capacity basis. An example of this would be apartment property which is sold by buildable apartment units. This unit of comparison may be useful in an area of zoned apartment or multiple family properties where usefulness is determined according to the capacity of dwelling units allowed. Selecting the proper unit of comparison is important in gaining an understanding of how the market is behaving. Conversely, selection of an inappropriate unit of comparison can lead to faulty appraisal results. For example, it would generally not be a good idea to use front foot values to appraise land which has an agricultural use. In the mass appraisal process, regardless of the unit of comparison selected, you must also consider adjustments for positive or negative influences in setting the land value for a parcel. Influences such as corner lots in residential settings, high traffic volumes (generally a positive influence for commercial parcels but generally a negative influence for residential parcels), unusual shape, unusual topography, nearby nuisances, etc. should be given consideration for possible adjustment. To the extent possible, adjustments should be derived from the market. For example, the market would likely recognize that a parcel in a residential area that has an unusual formation of bedrock just beneath the surface of the land (which would prevent a normal basement from being constructed) is worth less than normal for the neighborhood. In such a case, an assessing officer should determine an appropriate negative adjustment from available sales information and apply that adjustment to the neighborhood’s front foot rate (or square foot rate or site value) for the affected parcel. Regardless of the unit of comparison that is selected for use, it is important to note that, for assessment purposes, land lying under a public right-of-way is exempt and should not be considered in a parcel’s area. In other words, the surface area over which public rights-of-way for roads, highways, streets, drains, or drainage ditches are located should be excluded from the parcel’s area when determining a parcel’s value per acre. Corner Influence: When a corner lot is more or less valuable than an inside lot, the difference in value is termed corner influence. In a residential area for instance, a corner configuration can be advantageous due to rarity and demand or disadvantageous due to practical concerns over traffic, noise, and less privacy. 13 Corner influence will vary in different locations depending on the character of the neighborhood. For instance, a corner lot in a commercial retail district will be more valuable due to greater accessibility, increased pedestrian traffic, and better visibility from two street locations. It is not recommended appraisal practice to assign a value adjustment for a corner location unless market sales in the area indicate a preference for such a location. When all other land characteristics are similar, corner influence (CI) can be determined by the following formula: CI = Sale Price of Corner Lot * -------------------------------- = Corner Adjustment Sale Price of Interior Lot * *The unit of comparison can be front foot, square foot, or unit CI = Sale Price Lot 1 = $42,000 --------------------- ---------- = 1.05 or 5% higher than interior Sale Price Lot 5 = $40,000 Lot Sizing: Nearly all irregular shaped lots can be converted to triangles and rectangles, making it easier for you to calculate by the front foot or square foot method. There are two basic rules to follow when applying this technique to irregular shaped lots: 1. Rear land may be exchanged for rear land and front land for front land, but never front for rear. 2. Depth is always determined from a right angle to the street line. Following are some examples of this technique: 14 A 160 120 B 80 Figure 3 The example shown in Figure 3 has parallel sides but not equal depth. You can exchange rear land for rear land by placing triangle A in triangle B. The lot can now be re-configured as an 80’ x 140’ rectangle. 140 90 100 B A Figure 4 The same theory applies in Figure 4 as in Figure 3 except that front for front is being exchanged resulting in a 100’ x 115’ rectangle. When using this technique, frontage should never be calculated on a diagonal line. 15 LINE A 144 96 120 38 80 Figure 5 The lot configuration shown in Figure 5 above must first be divided to form two right angles to the street. To do this, we must add line A. This now allows us to re-configure the lot into a triangle and a rectangle by exchanging land for land as previously demonstrated in Figures 3 and 4. The lot can now be sized and calculated as an 80’ x 132’ rectangle and a triangle having its apex on the street (or 0’ front) and a rear width and depth of 38’ and 96’ respectively. X Y Figure 6 Circle streets or lots fronting cul-de-sacs typically present more complexity when lot sizing. It is common to square-off rounded corners and take or exclude small niches of land when the amount is insignificant as illustrated with Lot 1 in Figure 6. In this example, the lot size of Lot 1 would be 100’ x 140’. Lot 2 shown in Figure 6 is slightly more complicated as we must first establish parallel lines for the front and rear of the lot. In this example we exchange a little front for front by squaring-off that portion of the lot fronting the cul-de-sac with line A. 16 Next, we establish two lines that are at right angles to line A at its extremities (Lines B and C) thereby producing a 68’ x 112’ rectangle and two right triangles (X and Y) – both of which have their apex at the street (or 0’ front) and a depth of 112’. Triangle X has a 45’ rear width or base and triangle Y has a 75’ rear width or base. The effective front feet of this lot can now be determined by calculating the rectangle and two triangles separately and adding the amounts together or by simply using a front width of 68 feet and a rear width of 188 feet. Either method of calculation will result in 108 effective front feet (as illustrated below). Remember that when the actual frontage along the front of a parcel differs from the rear of the parcel, the rule is to use 1/3 the sum of the back plus twice the front to determine the effective front footage. Triangle X Triangle Y Rectangle (0+0+45)/3 = 15 (0+0+75)/3 = 25 68 108 Effective Front Feet Two times the front width (68 + 68) + rear width (188) = 324/3 = 108 Effective Front Feet Sales Comparative Unit Method The comparative unit method can be used to appraise land parcels based on an estimated average or typical value for each sub area (stratum) or class of land. The average value can be determined by calculating the median or mean sale price per unit of comparison. If there are high average deviations within the sub area, additional refinements or stratification may be necessary to arrive at a typical value. Due to its ease of use and efficiency, this method is well-suited to strata where the parcels vary in size but have all other land characteristics in common. Vacant land sales can be grouped together based on similar characteristics and the assessing officer may then assign land values derived from the grouping to subject properties sharing similar characteristics with the group. Example: An assessor must analyze land sales data from a subdivision where the lots share common land characteristics and select the best unit of comparison. 17 Table 1 Sale Price Price/Lot Front Feet Price/FF Sq. Ft. Price/SF 1 $ 68,000 $ 68,000 100 680 7,500 $ 9.07 2 3 4 5 6 7 $ $ $ $ $ $ 36,000 35,000 50,000 69,500 52,500 35,500 $ $ $ $ $ $ 36,000 35,000 50,000 69,500 52,500 35,500 50 50 75 100 75 50 720 700 667 695 700 710 4,500 5,500 5,625 9,000 5,625 5,500 $ $ $ $ $ $ 8.00 6.36 8.89 7.72 9.33 6.45 Unit of Comparison Range Percent Difference Price/Lot $ 35,000 - $ 69,500 49.64 Price/Front $ 667 - $ 720 7.36 Price/Square Foot $ 6.36 - $ 9.33 31.83 The data in Table 1 indicates that price per front foot has the least percent difference. Therefore, using price per front foot will produce the least amount of variation in value when applied to subject properties in the subdivision. The percent difference is calculated by dividing the difference of the upper and lower range limits by the upper limit or ($720-$667)/$720=7.36%. Note that once typical values have been determined by strata, it may be necessary to apply site adjustments at the individual parcel level when characteristics differ from the average lot. Table 2 contains vacant land sales information compiled in a mass appraisal situation as part of the comparative unit method. The information shown has been collected, verified, analyzed, and sorted by surface area (size). In this case, the selected unit of comparison is value per square foot. This information has been developed to the point where a conclusion of value could easily be drawn and then applied to a group of subject properties with a highest and best use of office, a land area of roughly 90,000 to 110,000 square feet, and a good location in the same assessment unit and local school district in which the vacant land sales occurred. Where possible, vacant land sales information should be developed and maintained by category of property to be appraised. (In practice the table would likely contain additional information such as parcel number, grantor, grantee, liber and page, adjusted sale price, etc.). 18 Table 2 12/07/17 $ 363,700 Area (SF) 88,712 09/11/16 $ 373,600 90,019 $ 4.15 Good Location/Future Office Site 03/03/17 $ 495,700 90, 129 $ 5.50 Good Location/Future Office Site 03/03/18 $ 370,000 91,814 $ 4.03 Good Location/Future Office Site 06/22/16 $ 405,000 100,988 $ 4.01 Good Location/Future Office Site 11/25/17 $ 412,900 101,954 $ 4.05 Good Location/Future Office Site 02/02/18 $ 303,850 103,000 $ 2.95 Good Location/Future Office Site 07/17/17 $ 417,700 108,490 $ 3.85 Good Location/Future Office Site 12/15/16 $ 424,100 111,598 $ 3.80 Good Location/Future Office Site 04/25/16 $ 428,400 113,944 $ 3.76 Good Location/Future Office Site Sale Date Sale Price Sale Price / SF Comments $ 4.10 Good Location/Future Office Site The information provided in Table 2 is uniform and logical in nature. In a real world setting, such a high degree of uniformity and logic is rare. An assessing officer establishing land values often must deal with difficult or confusing sales information. It can be common for sales information to contain outliers, which are values that lie outside the range of values formed by the majority of other sales. Another common problem is for the sales information to appear not to lead to a logical conclusion. Or it may be that there is a lack of sales information. Assessing officers must deal with all of these difficult situations when valuing land. In instances where there are too few sales within a stratum or class of properties to develop a “per unit value”, but sale prices per unit are similar between strata, the appraiser or assessor can combine strata when developing a per unit value to be applied. For example, the office site stratum found in Table 2 might be combined with apartment sites. Table 2 has been reproduced, see Table 3 with the addition of two outlier sales shown in strikethrough. 19 Table 3 12/07/17 $ 363,700 Area (SF) 88,712 09/11/16 $ 373,600 90,019 $ 4.15 Good Location/Future Office Site 03/03/17 $ 495,700 90, 129 $ 5.50 Good Location/Future Office Site 03/03/18 $ 370,000 91,814 $ 4.03 Good Location/Future Office Site 06/22/16 $ 405,000 100,988 $ 4.01 Good Location/Future Office Site 11/25/17 $ 412,900 101,954 $ 4.05 Good Location/Future Office Site 02/02/18 $ 303,850 103,000 $ 2.95 Good Location/Future Office Site 07/17/17 $ 417,700 108,490 $ 3.85 Good Location/Future Office Site 12/15/16 $ 424,100 111,598 $ 3.80 Good Location/Future Office Site 04/25/16 $ 428,400 113,944 $ 3.76 Good Location/Future Office Site Sale Date Sale Price Sale Price / SF Comments $ 4.10 Good Location/Future Office Site These two sales are considered outliers because their sale prices per square foot lie well outside the range of values formed by the other sales information. Under such circumstances, use of the outlier sales information may lead to faulty results. Often there will be a reason for the divergent sale price. If additional investigation showed that the buyer and seller involved in the sale for $2.95 per square foot were business partners and the reduced price was due to their business association, it would be appropriate to remove that sale from the analysis. Generally speaking, unexplained outlier sales should be given little weight in determining land values. They can remain in the chart but should be noted as inactive and not used in the analysis. If additional review does not reveal a valid reason to remove that sale from the analysis, the sale may remain in the chart, but it should not be given much weight in reaching a land value conclusion. Table 4 contains residential vacant land sales information. All of the sales information comes from the same residential subdivision and the same time period (and assume for this example that the lots all have the same depth). Looking at this information it would be difficult to determine the proper land value to use in this subdivision. As an example, the four indicated values for lots having 85 feet of frontage are: $547, $550, $625, and $647. Additional analysis is needed to form a conclusion regarding the appropriate front foot values to use. 20 Table 4 Sale Date Sale Price Front Feet Sale Price / FF Comments 02/27/18 $ 45,000 75 $ 600 Residential Site 08/13/17 $ 55,000 75 $ 733 Residential Site 11/25/17 $ 56,000 75 $ 747 Residential Site 01/10/18 $ 46,400 80 $ 580 Residential Site 10/08/17 $ 47,000 80 $ 588 Residential Site 06/06/17 $ 54,000 80 $ 675 Residential Site 02/30/18 $ 46,500 85 $ 547 Residential Site 10/29/17 $ 46,750 85 $ 550 Residential Site 07/14/17 $ 53,125 85 $ 625 Residential Site 05/15/17 $ 55,000 85 $ 647 Residential Site When the assessor does more research, they find that a local school district boundary cuts through this subdivision. With this additional piece of the puzzle in place, a definite pattern emerges from the data, as shown in Table 5. School district B is clearly more desirable than school district A and the assessing officer can use the information below to establish reliable front foot rates for lots in this subdivision. With additional analysis, confusing data can be turned into meaningful information. Here is an instance where additional stratification is indicated before establishing a typical value per front foot. Table 5 Sale Date Sale Price Front Feet Sale Price / FF Comments 02/27/18 $ 45,000 75 $ 600 Residential Site/School District A 08/13/17 $ 55,000 75 $ 733 Residential Site/School District B 11/25/17 $ 56,000 75 $ 747 Residential Site/School District B 01/10/18 $ 46,400 80 $ 580 Residential Site/School District A 10/08/17 $ 54,000 80 $ 675 Residential Site/School District B 06/06/17 $ 47,000 80 $ 588 Residential Site/School District A 02/30/18 $ 46,500 85 $ 547 Residential Site/School District A 10/29/17 $ 46,750 85 $ 550 Residential Site/School District A 07/14/17 $ 53,125 85 $ 625 Residential Site/School District B 05/15/17 $ 55,000 85 $ 647 Residential Site/School District B Example Land Value Analysis A land value analysis grid (see Table 6) and a plat map follow as part of an example land value analysis using the comparative unit method. In this analysis, several of the lots in the plat have sold and an appropriate analysis (the grid) and resulting conclusions are 21 provided to show how to conduct a vacant land value analysis for a neighborhood and determine what, if any refinements are necessary. Table 6 Lot Sale Date Sale Price Front Foot SP/FF Square Feet SP/SF Effective FF SP/EFF 1 06/22/16 $ 10,000 100 $ 100 15,000 $ 0.67 100 $ 100 6 08/10/17 $ 9,975 100 $ 100 15,000 $ 0.67 100 $ 100 11 09/22/16 $ 11,000 97 $ 113 13,440 $ 0.82 96 $ 115 12 12/08/16 $ 10,900 97 $ 112 13,580 $ 0.80 97 $ 112 24 02/06/17 $ 10,300 92 $ 112 13,800 $ 0.75 92 $ 112 31 05/16/17 $ 10,500 96 $ 109 12,655 $ 0.83 94 $ 112 37 08/12/17 $ 10,750 85 $ 126 13,765 $ 0.78 87 $ 124 41 11/25/18 $ 12,600 95 $ 133 17,815 $ 0.71 94 $ 134 45 04/17/16 $ 10,000 100 $ 100 15,204 $ 0.66 101 $ 99 46 01/27/18 $ 10,250 100 $ 103 15,204 $ 0.67 101 $ 101 Remember…when the front of a lot is a different size than the rear, the formula for determining the frontage is as follows: ((2 X front feet) + rear feet) ÷ 3. In this case, the front of lot 11 is 97 feet and the rear of the lot is 95 feet. The calculation for the frontage to use in valuing the parcel is as follows: ((2 X 97 feet) + 95 feet) ÷ 3 = 96 feet. The frontages of other lots (31, 37, 41, 45, and 46) in this example are determined in this manner as well. Lots 1, 6, 45, and 46 are on the exterior of the plat (See Figure 7) and border on major roads (with higher speeds, greater traffic counts, etc.). The lower values of these lots reflect this negative influence. Lots 1, 6, 45, and 46 all have lower values per front foot and per effective front foot. The use of a site or lot value would work well for these as well. The remaining lots are all interior lots within the subdivision. The use of lot or site values for these lots would be less than ideal. Also, the sale price per front foot for these lots is less consistent. Using the sale price per effective front foot, however, yields consistent results for all the lots in the subdivision, with the exception of lots 37 and 41which appear to be outliers and should carry little weight in the analysis. Based on this analysis, this neighborhood could be stratified into two sub areas (strata) with a typical value of $100 per effective front foot appearing appropriate for exterior lots bordering on major roads and a typical value of $112 per effective front foot appearing to be indicated for interior lots within the subdivision. Alternatively, a rate of $112 per effective front foot could be used for all the lots with a negative location adjustment (of about $12 per effective front foot) used to value lots on major roads). 22 Figure 7 23 In many situations, an assessing officer setting land values or a County Equalization Direction trying to create land values will be faced with a lack of sales information. In difficult situations like these, land values must still be determined and used. When there is a lack of sales information, the assessor should use sales outside the normal time frame of the sales study period or use sales from outside the area for which land values are being determined. If sales from outside the normal time frame of the sales study period are used, adjustment for market conditions (i.e., a time adjustment) should be made to bring the sales to the midpoint of the sales study period. If sales from outside the area for which land values are being determined are used, adjustment for location should be made. The calculations below demonstrate how to determine an adjustment from market data for changing market conditions or time: Original sale price (two years ago): $175,500 (A) Sale price of same property (present time): $182,000 (B) Change over two-year period ((B ÷ A) – 1) = C: .0370, 3.70% (C) Percentage change per year (3.70% ÷ 2 years) = D: 1.85% (D) The analysis above is called a “paired sales analysis”. A paired sales analysis is a technique to identify and measure adjustments to sales prices or rents of comparable properties. In order to apply this technique, you need to use properties that are identical or as nearly identical as possible. A paired sales analysis will help you identify and isolate the effect of a single variable on the value of a property, for example time. The example above indicates a 1.85 % increase in market value per year for the subject property (this assumes no physical changes to the property, etc. over that time). Using paired-sales analyses like this, an assessor can determine an appropriate time adjustment and then apply that time adjustment to older sales to supplement existing sales information and determine land values for an area. It should be kept in mind that a single paired sales analysis is generally not considered sufficient to justify the adjustment of older sales information to the mid-point of the current sales study period. The following demonstrates how to make an adjustment for location from market evidence. Sale 1, for $27,000, is a vacant lot located in subdivision A which has no other vacant land sales. The assessor is trying to establish land values for subdivision A. Sale 2, for $25,000, is a vacant lot located in subdivision B which is similar to subdivision A. These two vacant lots are similar in all respects except for location. The calculations below demonstrate how to determine an adjustment from market data for location: Sale 1: Sale 2: Difference due to location ((A ÷ B) – 1) = C: 24 $27,000 (A) $25,000 (B) 0.080 or 8.0% (C) This paired-sales analysis indicates that subdivision A is 8.0 % superior in location to subdivision B (i.e., this indicates that the assessor should use a multiplier of 1.080 to adjust vacant land sales from subdivision B to arrive at a land value conclusion for subdivision A). Using paired-sales analyses like this, an assessing officer can determine an appropriate location adjustment and then apply that adjustment to sales outside subdivision A to supplement existing sales information and determine land values for subdivision A. Assessors are cautioned that a single paired-sales analysis is generally not sufficient to justify the adjustment of sales outside the area in question for location and that a long time period on any type of paired sales analysis is not useful; over a long period, trends will tend to be fairly normal looking. As a last resort, an assessor could consider reviewing “asking prices” to help establish land values. If an assessor is going to use this method, they need to understand that actual sale prices are typically a percentage of “asking price”. For example, an asking price of $119,900 might result in an actual sale price of $110,000. It is important for an assessor to know their market extremely well when considering “asking price”. Discussions with knowledgeable sources, realtors, and fee appraisers may be used to support land value conclusions drawn by an assessor. Practical Exercise for Time Adjustments: The first step in determining a time adjustment is to locate parcels that are twice sold i.e.: those sold twice in a given time period. It is important to verify that there were no physical changes to the parcel between the sales. Divide the most recent sale price by the original sale price to determine the overall percentage of change. Finally, divide the overall percentage of change by the number of time periods between the two sales to determine the percentage change per month or year. Below are is an example of twice-sold parcels. Fill in the blanks. Original sale price (Sept 1, 2011): Sale price of same property (April 1, 2016): Percentage change in value between sales ((B ÷ A) – 1) = C: Percentage change in value per month (55 months): $225,000 (A) $305,000 (B) (C) (D) Original sale price (December 10, 2013): Sale price of same property (March 11, 2015): Percentage change in value between sales ((B ÷ A) – 1) = C: Percentage change in value per month: $325,000 (A) $355,000 (B) (C) (D) The paired-sales analyses above are of commercial parcels in a given assessing unit. Would it be appropriate to use a time adjustment determined from the above analyses for industrial parcels within that same assessment unit? Why or why not? The paired-sales analyses above are from the time period September 20011 to April 2016. Would it be appropriate to apply a time adjustment determined from the analyses 25 above to a sale that occurred in March of 2016 to bring that sale forward to April of 2018? Why or why not? Time Adjustment Answers Below are two twice-sold parcels which have been discovered through research. Fill in the blanks. Original sale price (September 1, 2011): Sale price of same property (April 1, 2016): Percentage change in value between sales: Percentage change in value per month: Original sale price (December 10, 2013): Sale price of same property (March 11, 2015): Percentage change in value between sales: Percentage change in value per month: $225,000 (A) $305,000 (B) 1.356, 35.6%(C) 0.65%(D) $325,000 (A) $355,000 (B) 1.092, 9.2%(C) 0.61%(D) The paired-sales analyses above are of commercial parcels in a given assessing unit. Would it be appropriate to use a time adjustment determined from the above analyses for industrial parcels within that same assessment unit? Why or why not? No. Market conditions typically affect industrial properties differently than commercial properties. It would not be appropriate to use a time adjustment determined above from commercial parcels for industrial parcels within that same assessment unit. The paired-sales analyses above are from the time period September 2011 to April 2016. Would it be appropriate to apply a time adjustment determined from the analyses above to a sale that occurred in March of 2016 to bring that sale forward to April of 2018? Why or why not? No. Market conditions between April of 2016 and April of 2018 may well have been different than the market conditions covered by the paired-sales analyses (the last sale in the analyses occurred in April of 2016). It would not be appropriate to apply a time adjustment determined above to a sale that occurred in March of 2013 to bring that sale forward to April of 2016 without additional support of some kind from the market or from market participants. Base Lot Method When an appraiser or assessor must adjust for substantial differences in property characteristics, the base lot method is superior to the comparative unit method. With the base lot method, the assessor selects the most typical lot in a sub area (stratum) as the base lot and uses the sales comparison approach to estimate its value, as illustrated in Table 7. The base lot provides a standard of comparison by which to value the 26 remaining parcels in the sub area by adjusting for differences between the base lot and the subject parcels. Adjustment amounts are calculated for differences in property characteristics between the base lot and other comparable property sales. The value of individual subject parcels in the sub area that have characteristics which differ from the base lot can then be estimated by applying the appropriate adjustment amounts to the established base lot value. In Table 7, an assessor must analyze sales data and select a base lot value. The major factors which attribute to price differences for lots in this stratum are view (standard, restricted or premium), traffic (moderate, light or heavy), and size (quarter or half acre). Table 7 Time Adjusted Sale Price Base Lot Comp 1 $ 23,000 View Traffic Size Standard Moderate 1/4 Acre Standard Light 1/4 Acre Net Adjustment Adjusted Sale Price Absolute Deviation from Mean (-5%) $ 21,850 $ 842 $ 1,380 $ 23,000 $ 308 $ 230 (-30%) $ 24,150 $ 1,458 $ 920 15% $ 23,460 $ $ 230 (-30%) $ 19,320 $ 3,372 $ 3,910 25% $ 24,375 $ 1,683 $ 1,145 Mean $ 22,692 Median $ 23,230 (-5%) Comp 2 Comp 3 Comp 4 $ 23,000 $ 34,500 $ 20,400 Standard Moderate Premium Light (-25%) (-5%) Restricted Moderate 1/4 Acre 1/4 Acre 1/4 Acre 15% Comp 5 $ 27,600 Standard Moderate $ 19,500 Restricted Heavy 15% 10% 758 1/2 Acre (-30%) Comp 6 Absolute Deviation from Median 1/4 Acre Ave Absolute Deviation from Mean $ 1,405 Ave Absolute Deviation from Median $ 1,303 The adjusted sale prices shown in the last column of Table 7 have been adjusted to the base lot using percentage adjustments developed from paired sales analysis. In this example, the additive model is used to apply adjustments (base rate x (adjustment 1 + adjustment 2 + adjustment 3) = value), although the multiplicative model (base rate x adjustment 1 x adjustment 2 x adjustment 3) = value) would be equally valid. 27 Remember comparables are always adjusted to the subject, or in this case, the base lot. The sale price of Comparable 1 in Table 7 has been adjusted downward, for example, because it has less traffic than the base lot whereas the sale price of Comparable 4 has been adjusted upward because it has a restricted view. In this example, Comparable 2 appears to reflect the market value of the base lot at $23,000. This value will need to be adjusted for individual parcels within the stratum when their site characteristics differ from the base lot. The accuracy of base lot values can be gauged or quantified by a measure of dispersion called average absolute deviation, which is a calculation of how much the adjusted sale prices of comparables, in this case, deviate from the mean or median adjusted sale value. The mean or median value is subtracted from each adjusted sale price and stated as an absolute value, meaning that there are no negative or positive signs. The total is then divided by the number of values in the analysis to yield the average absolute deviation. In the previous example, the average absolute deviation from median equaled $ 1,303 or approximately 5.6 percent of $23,230 indicating a low measure of dispersion and high level of consistency among comparables. If there was a large measure of dispersion, additional analysis would be necessary to determine why. It is possible, in that instance that the strata may need to be redefined, additional base lots may need to be generated as a result of further stratification, or the adjustments may need to be modified. Advantages to using the base lot method include accurate and supportable benchmarks which are rooted in market comparisons and a