Comments on response to "Subdivision Development: Risk, Profit, and Developer Surveys".
In all the subdivision work I have dealt with, as an appraiser and in my current roll as reviewer for a lending institution, the subject has been either an approved subdivision or one anticipating approval. Under such a condition, profit on the approval process is in the past and is not to be considered in the appraisal. The function of the appraisal is typically financing of land acquisition, and often, financing of land development. We typically require an as-is value as of a current appraisal date and a prospective, as-completed value as of the anticipated date when land development is completed.
If construction financing of homes is an objective, there are separate appraisals of the building improvements as completed.
When subdivision approval is not present or anticipated in the near term (or invoked as a hypothetical condition), the only appropriate analysis is one based on bulk land sales. The profit potential from the approval process itself is not expressed explicitly in such instances. Neither, of course, is potential profit on possible future development and construction.
Most single-family subdivisions are appropriately analyzed by projecting a sellout of finished lots. The rare exception occurs when the quantity or reliability of individual, finished-lot sales data is inadequate but there are ample sales of completed homes (as well as solid cost projections for their construction). This situation occurs in hot housing markets, where developers are less inclined to give up their finished lots, preferring to reap the full harvest by building the project to completion.
Also, in multifamily development (a condominium, for example), individual lot sales do not exist, and the appraiser must consider sales of completed dwelling units.
Whether the analysis scenario can be accomplished using lot sales or must rely on a sellout of completed homes or dwelling units, there is potential profit in land development, which should be considered in its actual time frame. This can best be accomplished by taking the profit as a line item.
I have enjoyed the opportunity to have this discussion with you, and hope that the issues you have addressed so articulately will find their way into established appraisal literature.
Walter Kane, MAI
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|Title Annotation:||letters to the editor|
|Article Type:||Letter to the Editor|
|Date:||Jan 1, 2005|
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