Allocation Method of Land & Site Valuation

Instructor: Kyle Aken

Kyle is a journalist and marketer that has taught writing to a number of different children and adults after graduating from college with a degree in Journalism. He has a passion for not just the written word, but for finding the universal truths of the world.

There are several methods to use for valuation of land. One method is Allocation, in which ratios of land value to total property value are used to determine site value. This is ideal when comparables are not available.

The Valuation Method

There are several methods to land and site valuation or appraisal. The Allocation Method for land and site valuation is an appraisal technique that involves gathering information about comparable site values of recent sales and creating a ratio between the land/site value and total value. This ratio is then applied to the property that is to be appraised. This method assumes that similar homes/land in similar locations/areas will have the same or close to the same ratio of land to value.

When to Use The Allocation Method

This method is not often used compared to other valuation techniques. It is ideal to use when a new home is built on land that has been recently purchased. It is best utilized when applied as proportion or percentage of the total value of a property that has been improved. When using a comparable improved sale, you will want to first determine either the land or the building portion of the property. If the home is fairly new, then you can estimate the cost of improvements and divide that cost by the sales price of the home. This will give you the percentage of improvements compared to purchase price of the comparable.

This method is not ideal for older homes. This is due to the subjectivity in the estimation of accrued depreciation. However, if there is new construction occurring in a nearby location, the developers may be able to offer the costs of building for the homes being sold there. The inclusion of site improvements is ideal for this to be effective. These improvements can include driveways, landscaping, patios, and swimming pools.

Carrying out the Allocation Method

To apply this method you first start by locating a comparable site or comparable land with vacant home sales as well as vacant lot sales. Next, find the ratio of the value of the land to total property values. Then, apply the ratio to the property that is being appraised. This will determine the appropriate value of the land or site.

This method is only used when there are not sufficient comparable sales needed to estimate the site value (using the sales comparison method of valuation). Allocation is most dependable when improvements of the site or land are fairly new. As these improvements get older, the ratio of land to property increases. Older improvements that have been remodeled have a tendency to distort ratios, however, when used to compare to older properties.

Examples

If lot values in a certain area are about twenty percent (20%) of total property value and the subject property sold for one hundred thousand dollars ($100,000), then the site or land value of the subject property is twenty thousand dollars ($20,000). This is done by turning the percent into a decimal and multiplying that decimal by the total property value. The equation for this example would look as follows:

100,000 x .2 = 20,000

If lot values are about eighteen percent (18%) of total property value and the subject property sold for two hundred fifty thousand dollars ($250,000), then the site or land value of the subject property is forty five thousand dollars ($45,000). The equation for this example would look as follows:

250,000 x .18 = 45,000

If lot values are about twenty five percent (25%) of total property value and the subject property sold for three hundred seventy five thousand dollars ($375,000), then the site or land value of the subject property is ninety three thousand seven hundred fifty dollars ($93,750). The equation for this example would look as follows:

375,000 x .25 = 93,750

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support