UP Standards

1.5.3. Cost Approach. In the cost approach, the market value of the vacant land is added to the depreciated reproduction or replacement cost (contribution) of the improvements to arrive at an indication of the value of the property. The value of the land, vacant and subject to improvement, is generally developed by the sales comparison approach for land (see Section 1.5.1.1.). The estimate of the reproduction or replacement cost of the improvements is based on current local market cost of labor and materials for construction of improvements. All forms of depreciation are deducted from the cost new estimate, as discussed below. This approach to value is most useful in developing the value of a property in which the improvements are…

1.5.2.4. Sales Requiring Extraordinary Verification. Certain types of sales can be used only under certain circumstances or for limited purposes in appraisals for federal acquisitions. As a result, these sales require extraordinary verification to ensure the appraiser’s opinion does not reflect any legally improper considerations. Section 4.4.2.4 addresses several types of sales that require this extraordinary treatment and the legal reasons for this requirement. This Section explains the verification process required for sales to government entities, sales to environmental organizations, and contingency sales.60  Sales to Government Entities.Because sales to government entities routinely involve nonmarket considerations, sales to the government should be immediately viewed by appraisers as suspect in appraisals for federal acquisitions.61 Sales to the government should not be used…

1.5.2.3. Adjustment Process. Comparison of sales transactions to the subject property is the essence of the sales comparison approach to value. The basic elements of comparison to be considered are recognized as:  • Property rights conveyed  • Financing terms  • Conditions of sale  • Expenditures made immediately after purchase  • Market conditions (historically referred to as a time or date of sale adjustment)  • Location  • Physical characteristics  • Economic characteristics  • Legal characteristics (land use, zoning)  • Non-realty components of value included in the sale property55  The comparable sales should be adjusted through quantitative and/or qualitative analysis, depending on the market data available, to derive an indication of the market value of the subject property.56 Quantitative adjustments should be…

1.5.2.2. Selection and Verification of Sales. In selecting the comparable sales to be used in valuing a given property, it is fundamental that all sales have the same economic highest and best use as the subject property and that the greatest weight be given to the properties most comparable to the subject property. In this regard, appraisers must recognize that when valuing a property with a highest and best use that will require rezoning or extensive permitting, sales of similar properties may require extensive analysis and adjustment before they can be deemed economically comparable. The analysis and adjustment of such sales is discussed below.  All comparable sales used must be confirmed by the buyer, seller, broker, or other person having…

1.5.2.1. Prior Sales of Subject Property. Since any recent and unforced sale of the subject property can be the best evidence of its value,52 any such sale is treated as a comparable sale in this approach to value. It must be analyzed like any other comparable sale and given appropriate weight by the appraiser in forming a final opinion of the market value of the subject property. As noted in Section 1.3.1.5, the appraiser must verify the most recent sale of the subject property with the parties to the transaction to ensure that the sale provides an indication of market value. 52 See Section 4.4.2.4.1.

1.5.2. Sales Comparison Approach. The sales comparison approach is normally the preferred method of valuation for property being acquired under these Standards. The sales comparison approach is a systematic procedure in which appraisers study the market for sales of properties with the same highest and best use as the subject property that are as close in proximity and time as possible. Each sale is verified with parties to the transaction to ensure that information is accurate and the sale is a market transaction. Each sale is adjusted for elements that are different from the subject property and the resulting array of sales data is reconciled to a final opinion of market value. Analysis of sales shall be made using a…

1.5.1.3. Ground Leases. In those rare circumstances when the property being appraised is under a long-term ground lease, the appraiser must analyze the lease and determine whether it is appropriate to use a direct capitalization of the ground lease to develop an opinion of the market value of the land. The appraiser must be able to identify comparable properties in the area that are subject to similar ground leases in order to ensure that the ground lease is a market rent, as well as adequate market data to support the selection of a capitalization rate. This procedure should be used to support a conclusion of land value developed by the sales comparison approach rather than as the only method used…

1.5.1.2. Subdivision Development Method. When the highest and best use of a property is for subdivision purposes and comparable sales do not exist, resorting to the subdivision development method50 to land value may be appropriate if adequate market and/or technical data are available to reliably estimate the property value. This method of estimating land value can also be used to test the appraiser’s highest and best use conclusion and to check against the indicated value of the land developed by the use of comparable sales when the sales data is limited. However, this approach to value is complex, often requires the assistance of other experts,51 and always requires substantial amounts of research, analysis, and supporting documentation.  In applying this technique,…

1.5.1.1. Sales Comparison Approach. The appraiser shall develop an opinion of the value of the land for its highest and best use, as if vacant and available for such use. In doing so, the appraiser’s opinion of value shall be supported by confirmed sales of comparable or nearly comparable lands49 having like optimum uses. Differences shall be weighed and considered to determine how they indicate the value of the subject land. Items of comparison shall include property rights conveyed, financing terms, conditions of sale, market conditions, location, and physical characteristics. The appraiser shall obtain adequate information concerning each comparable sale used and perform a comparative analysis to form a supported opinion of the market value of the subject property as…

1.5.1. Land Valuation. When the subject property is unimproved or the cost approach is being used, the primary method of land valuation is the sales comparison approach as described below. The subdivision development method and the capitalization of ground leases are to be used only in rare cases when the property has a highest and best use for subdivision development or the property is subject to a long-term ground lease. Even when those situations exist, the latter two methods are better used as additional support for the sales comparison approach.