Real estate appraisal is the practice of forming an opinion on the value of real property; simply put, real estate appraisal--also called as property valuation or land valuation -- is all about determining the market value of the a real estate property, whether it is commercial or residential. Only a licensed or certified appraiser can perform a real estate appraisal.
Different countries have different methods for conducting a real estate appraisal. In the United States, there are three accepted methods of real property appraisal: the cost approach, the sales comparison approach, and the income capitalization approach. The cost approach, also known as the summation approach, values a property by adding the land and depreciated values of improvements. The sales comparison approach arrives at the market value of the real estate property by adjusting the sale prices of properties comparable to the real estate property art issue.
Commonly used for commercial and investment properties, the income capitalization approach values a real estate property by estimating the income stream of the property using revenue multipliers or capitalization rates. Obviously, there are many factors and considerations in conducting a real estate appraisal. Other considerations include the scope of work, Highest and Best Use (HABU) and types of ownership interest. In this article, we will focus on the land to building ratio.
The land to building ratio is the percentage or ratio of the size of the building on the land on which it resides. Take for example an office building. The building stands on 100,000 square feet of land and has a floor area of 45,000 square feet. To arrive at the land to building ratio, divide the square footage of the land by the square footage of the building. To illustrate:
100,000 square feet / 45,000 square feet = 2.22
This 2.22:1 is the land to building ratio. This can be used in appraising the property. If you notice, I used an office building as an example. The reason is because land to building ratio is not often used in appraising the value of residential real estate. In fact, it is not always reported in real estate appraisal reports for residential properties. However, there are existing municipal codes that restrict the land to building ratio of residential properties so be sure to check in with the local government to avoid any problems later on.
As mentioned above, land to building ratio is not frequently used in residential appraisals. It is extensively used, on the other hand, in the valuation of commercial and industrial real estate. As it is, land to building ratios are used to guide building construction and other land improvements. So how do appraisers use land to building ratios? An appraiser can tell if the land is being under utilized by looking at the land to building ratio. The higher the land to building ratio, the higher the probability that the land is being under utilized. Consequently, a low land to building ratio means that the land is being used to its capacity.