There are two basic ways to do a residential subdivision appraisal.
1.Compare it to sales of similar subdivisions. Good if you can get it, but seldom do you have data for this kind of analysis.
2.A market analysis that considers existing inventory of house lots and absorption rates going forward.
These two examples are redacted actual appraisals we have done:
Similar Subdivisions
The market for house lots is active in Subject Town with prices trending upward, as indicated by the following tables of sales and listings:
The process of comparison can be made on the basis of some common denominator or unit of comparison such as cost per house site in an approved subdivision.
A market survey was conducted in order to find the most recent sales and/or offerings of similar property permitting meaningful comparison to and, hence, an indication of value for the subject property.
Noted sales all involve transfer of the fee simple interest for cash or on a cash equivalent basis with normal mortgage financing under normal conditions of sale with both buyer and seller acting in their own best interest. Sales are historic in a flat market and require no adjustment for time.
Physical adjustments are made for key features of the comparables:
Location – This adjustment reflects such influences on value as access, nature of neighborhood, and effective demand as well as available supply. Sale RL1 is in a suburban part of Some Town, but is not in as good of a commuting location as the Subject so it is adjusted upward 10%. Sale RL2 is located just off Exit 7 of Route I-95 and about one mile from downtown Some Town in a superior location, so it is adjusted downward 10%. Sale RL3 in Some Town, is in a good commuting location, and requires no adjustment. Sale RL4 is less than two miles from Route 101 so it needs no adjustment for location.
Size – This adjustment reflects economies of scale associated with differences in building site size, i.e., with larger building lots typically costing more. The Subject’s proposed lots are one acre or more in size. Sale RL1 is a conservation, or “open space,” subdivision with one-quarter acre lots, so it is adjusted upward 20%. Sale RL2 has one-eighth acre lots and is adjusted upward 30%. Sale RL3 has lots of one acre, so it needs no adjustment. Sale RL4 has one-half acre lots and is adjusted upward 10%.
Development Costs – This adjustment reflects overall development costs, both soft costs, such as planning and permitting, and hard costs, such as roadways, water and sewer systems.
The Subject requires soft costs of about $4,000 per site. The internal roads that must be built total 5,000 feet in length and public water and electricity must be extended along the roads. For the roads, cost is about $1,800,000 or $37,500 per site. The $1,800,000 road cost is allocated over the 41 sites in the Subject and the 7 sites on Subject drive that are not part of the Subject. Private septic systems, based on actual costs for RL1, will average $6,500 per site. Total cost per site for soft and hard costs is $48,000.
According to developer Mr. Jones, Sale RL1 required $5,500 per site for soft costs. Demo costs for the old building were $30,000 or about $1,000 per site. The community water supply cost $468,000 or about $15,000 per site, road costs to include water distribution of $390 per lineal foot times 2,330 feet or about $29,000 per site. Private septic systems average $6,500 per site. Total hard and soft costs for RL1 is therefore $57,000 per site. With the Subject cost of $48,000 per site, the adjustment for RL1 is $9,000 per site.
RL2 needed a 700 foot roadway at a cost of $400 per foot or $15,000 per site for the 19 sites. With soft costs of $5,000 per site, the total was $20,000 per site. With the Subject cost of $48,000 per site, the adjustment for RL2 is -$28,000 per site.
For RL3, 50 per cent of the engineering costs were already done; so remaining soft costs were about $3,500 per site. Hard costs for road, water and sewer distribution were estimated at $33,500 per site, for a total of $37,000 for soft and hard costs. With the Subject cost of $48,000 per site, the adjustment for RL3 is -$11,000 per site.
RL4 needed well and septic systems on each lot at an estimated cost of $22,000. The development needed a 3,400 foot road at a cost of $400 per foot or $68,000 per site. With soft costs of $5,000 per site, the total was $95,000 per site. With the Subject cost of $48,000 per site, the adjustment for RL4 is $47,000 per site.
The noted sales and their adjustments are summarized in the following tabulation:
Adjusted unit prices range from a low of $3,263 to a high of $69,688 per site with a mean of $38,041 per site. I give about equal weight to all Sales, thus supporting a value for the subject of $38,000 per site, or 41 sites × $38,000 = $1,558,000, rounded to
$1,560,000
Market Analysis
In this approach to value, the subject property is compared with other similar property offered or having recently been sold at known price levels. In employing the Sales Comparison Approach, the process of comparison can be made on the basis of some common denominator or unit of comparison such as cost per house site.
A market survey was conducted in order to find sales in Subject Town since January 1, 2012 of similar house sites permitting meaningful comparison to and, hence, an indication of value for the Subjects house sites. The twenty sales in two and two thirds years have an absorption rate of about eight house lots per year in Subject Town. I excluded three lot sales that were 21 acres to 70 acres in size. The sales, sorted by View, are:
House lot sales like these typically involve transfer of the fee simple interest for cash or on a cash equivalent basis with normal mortgage financing under normal conditions of sale with both buyer and seller acting in their own best interest. Sales are historic in a flat market and no adjustments are required for time.
The fifteen sales with mountain views, like the Subject, average $148,000 for 2.1 acres. They range from $48,500 to $250,000 and from a zero acre condo footprint lot to 3.76 acres.
I also searched MLS for sales of newer houses and condos (built from 2000 to 2014) in Subject Town and found only one such sale; a house built and sold in 2012 for $282,000 after only 43 days on market.
My search for active listings of house lots in Subject town revealed only ten active listings as follows:
The six listings with mountain views, like the Subject, average $196,000 for 2.0 acres. They range from $125,000 to $250,000 and from a zero acre condo footprint lot to 4.3 acres. This indicates there is little inventory on the market to compete with the Subject sites.
The subject’s hypothetical sites will be condo footprint lots and will have mountain views, although not as spectacular as some of the comparables.
I opine that the Subject’s ten house sites will sell for an average of
$120,000 Per Site
The foregoing value is the average value of each of the ten house sites. Market value of the subdivision as an entirety would be less. Estimates of value can be developed considering the associated costs for construction and sell-out in three discounted cash flow (DCF) analyses. Discounted Cash Flow analysis basically involves two steps; i.e., analysis of the property’s capacity to generate cash flow on a year-by-year basis and conversion of the cash flow into present value based on a required annual rate of return (discount rate).
Costs
My hypothetical condition is that all approvals are in place for the ten site subdivision. There will be site development costs to extend the existing roadway, parking lot, and landscaping for which I carry a cost of $100,000. Legal expense for each sale is estimated at $400. Transfer taxes for real estate sales in New Hampshire are 0.75% for the seller’s share. Sales and advertising costs are estimated at 4% and management at 5%. Developer’s profit is estimated at 20%. I carried the current real estate tax rate of $10.00 per thousand per year.
I realize that selling prices and costs may go up or down in the future, but I assume that prices and costs will track; therefore, I don’t change either in this analysis.
Absorption Rates
MLS shows a current inventory of six mountain view lots for sale in Subject Town. MLS also shows eight lots sold per year in Subject Town in the past two plus years, so there is less than one year’s inventory in competition with the Subject sites. Mr. Smith, Subject Town Planning Board chairman, told me there were no active subdivisions in Subject Town and none in the queue. I estimate absorption of the Subject lots of two lots every six months.
Selection of Discount Rate
In order to convert the predicted cash flow benefits into an indication of total present value, it is necessary to select an annual discount rate. The usual procedure is to select a single discount rate applicable to the entire stream of benefits. The discount rate employed in the appraisal process is analogous to an “internal rate of return” or “yield to maturity” on a bond, and should not be confused with the cash flow or equity dividend rate. Rate selection requires consideration of the most up-to-date market data available at the time because of the obvious distortion which could take place in employing a historical discount rate to a future income stream. Data considered can be general and specific. With respect to general data, Realty
Rates reports an average discount rate of 12.78% for new developments in third quarter 2014. Due to the Subject’s good location and average local market for new housing, a yield rate of 13.0% is deemed appropriate.
The cash flow analysis is thus:
The discounted cash flow analysis indicates an AS IS value of the ten sites of $590,332 rounded to
$590,000 AS IS – Ten Sites
The net present value of $590,000 is about 49% of the aggregate value of $1,200,000 and is about $59,000 per site.
