Extraction 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.

This lesson looks at land and site valuation using the extraction method. Appraisals of real estate are used for selling, assessing taxes, and evaluating financing for real property transactions.

Overview of the Extraction Method

Real estate valuation is a critical element in real estate sales. It is also valuable for taxing authorities to use as a basis for determining accurate property tax assessments.

Meet Colton, who was looking for a new career that would allow him to work outside. He was tired of spending eight or more hours per day in a cubicle. Becoming a real estate appraiser interested Colton, so he spent some time learning about appraisals.

One of the first things he learned was that there are different methods for estimating the value of a real estate purchase. The Uniform Standards of Professional Appraisal Practice (USPAP) provide a set of guidelines for appraisers to follow.

One common method for determining value is the extraction method. This process focuses on determining the value of the land or site without improvements. In some instances, the land value is the primary amount that needs to be appraised.

Difference Between a Site and Land

Colton was feeling confused about the difference between the terms 'site' and 'land'. In real estate, 'land' is the term used to refer to an undeveloped parcel. In contrast, 'site' is a term used for a parcel that is ready for building. If he was appraising a raw parcel of land, Colton realized that the extraction method was unnecessary because there would be not be any improvements and/or buildings to deduct.

Steps for the Extraction Method

Appraising real property requires a series of steps that need to be completed in the correct order. Colton learned that his appraisals could be relied upon by buyers, sellers, taxing authorities, lenders and banks, and possibly even courts if that property was involved in probate or other legal proceedings.

The steps for completing an extraction method appraisal are:

  1. Carefully review the existing land or site to be appraised to determine its characteristics. What types of improvements exist on the parcel? What is the acreage of the parcel?
  2. Research comparable land or sites to find typical sales prices for similar properties.
  3. Break down similar sales by type. For example, if the parcel in question has a four story apartment building, find other four story apartment buildings that are comparable in size and condition.
  4. Using comparative sales information, set a value for the existing improvements. This can be difficult since the appraiser may not be able to examine the inside of comparable improvements to know if the condition is equivalent. Another approach would be to determine the cost to build a new improvement and then deduct depreciation based upon the age of the existing improvement.
  5. Deduct the value of the improvements from the overall price/value of the improved property.

In Practice

For instance, Colton needs to use the extraction method to value a parcel of land that currently has an old four story apartment building on it because a next door commercial property wants the land to expand.

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