Professional appraisers list three methods of estimating land value: (1) comparables approach, (2) cost approach, and (3) income approach.
The first, and most commonly used method, is to use comparable property sales (entitled for the same land use) in the same geographic area and reduce them to price-per-acre as a common denominator for application to the subject property. This method has the advantage of actual market response to value, but it has the disadvantage of defining comparability (e.g., small retail sites on major roads generally have much higher prices-per-acre than a larger retail site). It also has the disadvantage of time of sale; for example, a comparable sale one or more years old may precede an upturn (or downturn) in demand and a consequent increase in value for this type of land. Thus, the judgment of the analyst is required to select applicable comparables and to increase or decrease the comparable value and consequent unit land price.
The second method of estimating land value involves the cost of improvements on a property, particularly buildings. This cost approach is not applicable to unimproved property, but it requires estimates of construction cost often involving one or more specialists in that discipline
The third method of estimating land value (income approach) is to project improvements to the land (infrastructure, buildings, etc.) and subsequent lease or sale of the improved property. Land value is then estimated by historic ratios of raw land to total property sales value, often involving present value discounts and other statistical inferences not commonly used by many appraisers. Once again, the judgement of the appraiser is applied to decide on applicable discount rates and other economic variables.
During the Great Recession of 2007-09, land values declined rapidly with the result that appraisers were faced with the dilemma of outdated or no property sales upon which to base comparable sales. Many innovations were introduced, including a simple judgment caveat at the end of an appraisal stating a recommended reduction in value in percentage terms (often as high as 50 percent). Although such appraisals simply passed the issue of value to the buyer for an offering, the normal methods of valuation could not be relied upon in a rapidly changing market.
Consequently, appraisers are often faced with the dilemma of testifying in a courtroom litigation in which they find themselves recommending property values in contradiction to those of an equally experienced appraiser supporting the opposing party to the lawsuit. A judge must decide which value conclusions are most realistic for the property in question — a further exercise in judgement applied to the appraisal process.
Professional appraisers’ associations provide evolving opinions on the exercise of professional judgement in the appraisal process. But, the fact remains that such judgements constitute a major part of valuations involving millions of dollars annually, regardless of the method of appraisal selected.
Parker Associates has chosen to remain separate from the appraiser profession. In undertaking valuation estimates for unimproved property designated for planned improvements, the firm’s market analysts frequently research comparable property sales for back-up guidelines on pricing and sales absorption, but strategic planning recommendations rely primarily upon alternative planned improvements to the property for more definitive estimates of future and present value. The issue of future value is much more persuasive than historic comparable property values, but it still relies upon professional judgment to establish discount rates for estimating present value. We often provide two or more discount rates to allow the buyer, or developer, to achieve a realistic risk factor in establishing a fair purchase price.
In sum, regardless of the methodology employed, land valuation always involves the professional judgment of the analyst conducting the valuation. This fact has been particularly clear during the Great Recession downturn as well as the continuing recovery period. Historic data have been an unreliable guideline and future development pricing must be adapted to cost as well as long-term economic trends in order to identify discount rates that allow for feasible development risk factors. Land values are and will continue to be subject to group decision-making by experienced developers.