Allocation is a tool used by some appraisers in some areas in order to determine land value. Its often used when no other tools are available. These tools include:
Vacant land sales - this analysis is preferred as it gives an up to date look at what vacant land is commanding on the open market. The subject site is considered vacant (without any improvements) and then compared to sales of vacant land in the recent past.
Extraction - in this analysis the appraiser calculates the cost to build the structure new, depreciates the improvements to their current condition, and then subtracts this from a sale of the property. According to the model, this should leave the remaining value of the land.
Allocation - in this method a percentage is determined from sales in the market area which defines the percent of the value that is the land and the percent that is the improvements. To determine land value, we multiply this factor with the value to determine the land value. This is widely held to be the least accurate as it assumes that an equal factor can be applied over wide areas. While this may be the case in some, very uniform developments in which both the lot sizes and improvements match closely, anywhere else, this becomes increasingly useless.
Why does this matter? Currently in the push towards appraisers not actually visiting properties, there are banks (1st National Bank, for example) that REQUIRE this to be THE method used to determine land value. Lets take a look at how poor of a tool this can be.
This property recently sold for $72,000, with .1515 acres. The county has the following assessment: Land: $4,030; Improvements: $14,840, TOTAL: $18,870. This would mean that land contributes 21.36% of the total value to the property, or ($72,000x.21.36) $15,376.79. Then again, if we apply the Common Level Ratio (the tool that counties use to calculate the fair market value of a property) of 6.94, the county believes the property is worth $130,957.80, or off by 54.98%. Sooo… there’s that.
What does vacant land sales tell us? Well, in the last 10 years there have been 6 vacant parcels sold in the entire school district, so we need to be careful how much weight we place on this method, but it does have some data to show us.
Of the four sales, 3 were considered most comparable to the subject. One is an outlier, but we’ll come back to this. Applying a calculation based on these sales sees an approximate land price of $3926.98 or 392% lower than the allocation method.
From the pictures and county records, the extraction method shows an approximate land price of $4,589 (off by 335%). So, what do we trust? Three prices indicated for the vacant land, and two are within 14.4% of each other, and the other method is sitting 300+% away.
Lets consider the market factors:
There have been 6 land sales in the prior 10 years, but there have been 21 offerings that never saw a sale. There is “plenty” of land to be had, but no one to buy it.
In the past 10 years there have been 0 new constructions sold on the market in this area of New Kensington/Arnold SD.
The appraiser drives through the area with some regularity and knows of no new construction of SFR in that time.
The only vacant land sale in the same area as this home was the outlier we talked about earlier. However, this is in a portion of Arnold that has home values below $10,000. That piece of property, being .06 acres sold for $500. This area is located directly adjacent to an industrial area.
So, there is no demand, there is no new construction, and there is a low price industrial area within the market that suppresses overall prices.
Perhaps allocation works in some markets:
Markets where the assessor had access to accurate land sales at the time of assessment.
Areas where mass new construction immediately follows land purchase.
But in areas where there hasn’t been vacant property changing hands regularly in 30+ years and no demand for new construction, the tool is rusty. You’re more likely to hurt yourself then get the job done right.
APPRAISERS: Stand up to clients who insist you use bad tools.
