Comparable Sales -- Land Abstraction
Comparable sales of improved properties can be utilized to estimate the market value of land in fully built-up areas. For example, consider an area near downtown Boston which has been fully developed for over 200 years. It may be virtually impossible to locate sales of vacant land in this area. One alternative is to estimate the market value of land based upon the sales price for improved properties less the market value of improvements.
The market value of a property is comprised of the sum of the market value of the land and the market value of the improvements. The market value of the improvements is the replacement cost new (RCN) less depreciation. Calculating depreciation for comparable sales can be difficult. Components of depreciation include physical, functional and external. Physical depreciation can include both short-life depreciation and long-life depreciation. Functional depreciation can include curable and incurable. External depreciation can include economic factors, unfavorable neighboring properties and other issues external to the property.
Comparable sales can be utilized to estimate the market value of land by utilizing the following process: Locate sales of property for which the underlying land is similar to the subject property. Research the sale to determine whether it was an arms? length transaction and any atypical issues artificially influenced the sales price. Making adjustments for atypical issues reduces the reliability of the land abstraction process. Estimate the replacement cost new (RCN) of the improvements for the comparable sale. Calculate all forms of depreciation for the improvements on the comparable sale. The market value of the improvements for the comparable sale is equal to the replacement cost new less all forms of depreciation. The market value of the land for the comparable sale is equal to the market value of the total property less the market value of improvements. Land abstraction based upon comparable sales can be a useful technique in fully built out areas. However, this technique is less reliable than direct sales of land due to estimates of replacement cost new and depreciation.
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About the Author
Patrick C. O'Connor has been president of O'Connor & Associates since 1983 and is a recipient of the prestigious MAI designation from the Appraisal Institute. He is also an registered senior property tax consultant in the state of Texas and has written numerous articles in state and national publications on reducing property taxes.
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