All too often appraisers, market participants, and brokers focus on recorded sale price alone. In the market of southwestern Virginia, this can be the cause for significant error for appraisers and bad decisions for market participants. It is not uncommon for site preparation to eclipse sale price. When in conversation or analysis, at times colleagues will not consider extreme site prep costs associated with the sale. I often think, "Would it have been acceptable to incorrectly report half of the recorded price in this discussion?".
The recorded sale price may be a fraction of the true cost of the pad-ready site.
There is always more than meets the eye
There is commonly more to the story when it comes to challenging site topography. Rock is known to lurk beneath the ground in these areas. Rock and other site hinderances are can carry a significant cost, but in addition to that added risk and delay.
I remember the first time I ran into rock as a developer, it was known and budgeted, but it still pained me to slow down the project and know the hourly rate attached to the hammering. If I left the site while they hammered, the tick-tick-tick sound of hammering would keep playing in my head the whole day. The only relief I had was knowing that the guys up the road spent more than my entire project cost removing rock.
Make Friends with Excavators
Well, the Estimator at Excavation Companies
Earthwork costs have a market of their own. A cut subject site that has excess dirt will need a fill site to truck material to, and a fill subject site will require a borrow site. This "dirt market" will make earthwork pricing fluctuate. The distance from the concrete or asphalt plant can also play a role in site cost fluctuations. To get an accurate grasp on site costs, you must talk to the excavation companies. Estimators and owners in those offices are great resources. They don't just simply do take offs. They seek fill/borrow sites, bargain and negotiate to put a quote package together. A few minutes of conversation will be well worth your time.
How do we deal with excessive site costs?
Once you get your cost information from a credible source, you can start your valuation or project budget. The question for an appraiser remains: "Is adjusting in the amount of the cost differential enough?" I would say its a lower limit. You must consider that poor site conditions bring its cronies risk and delay along with it.
As most projects are financed, interest carry is a real number that should be considered when an extended construction period results. Asking the buyer what they feel the price difference was, knowing the actual costs of site development, is the best way to nail down the appropriate adjustment. You may be surprised how valuable time is to market participants.
In Closing
I hope this post encourages everyone to dig into the details to really understand the magnitude of site work costs and how they relate to your specific property under analysis. For the appraiser, make sure to consider site development cost in the adjustment process. For the market participants, know the property and know the costs and delay associated with the project.
