Components of Value

Componentizing value means valuing individual parts of a property and adding the component values together. This assumes the whole is equal to the sum of the parts (more or less). After all, isn't the cost approach a simple summation of the land and improvement values? This is a good method if the extraction technique is applied consistently, and if the estimated land values are reasonable and make sense in relationship with each other.

But didn't we look at SR 1-4(e) a little earlier?  Didn't it basically say the sum of the parts doesn't equal the whole?

A common myth in appraising is that adding together components of value is a violation of appraisal standards. There are certain situations that are specifically prohibited, such as adding land value to the purchase price of a manufactured home and using this as a "comparable sale." However, componentizing value is a legitimate tool, and a valuable one when applied properly. Clearly, the final conclusion must pass the test of reasonableness. Does the opinion of value reached using this method make sense in the market? It is simply another tool that can help the appraiser solve the problem at hand.

Oh and by the way, SR 1-4(e) does not prohibit adding components together, it cautions us against doing that on a rote basis when properties or interests are being combined.

Here are some situations where componentizing is useful:

1. The property has special improvements that require the assistance of an expert with special knowledge.

An example of this is a property with both a residence and a horse boarding and training facility. In addition to the residence, the property has barns, corrals, a covered arena, a detached office, and a caretaker's cottage. In this case, one component of value would be the business value of the boarding and training facility. With a large operation, this could require a business appraiser to make a determination of value.

2. The property is agricultural, and has several tracts of land with different uses.

An example would be a farm which consists of grazing land, land planted with crops, and a section used for residential purposes. Each component would most likely need to be valued separately.

3. The property is a home with a unique design.

The third example above is probably the most common type of complex property encountered by a residential appraiser. These homes are often larger than typical, as well as having a unique design and/or building materials. Round homes, log homes, earth sheltered homes, and solar heated and powered homes are typical examples.

Because such properties are unique and are often constructed as the owner's "dream house", the cost of construction is often significantly higher than the value reflected in the market. In estimating a value for this type of property, the following items should be considered:

  • Reproduction cost often exceeds replacement cost, which means there is functional obsolescence. With a unique home, cost rarely equals value.
  • It may be impossible to find sales of something with the same design (after all, it is unique.) Example: Geodesic dome. However, sales of homes with other unique designs can be used.
  • Buyer motivation is often the desire to own a unique home (not necessarily a geodesic dome). Understanding typical buyer motivation may be important in solving the appraisal problem.
  • Traditional adjustment factors such as room count, number of baths, and living area may have less impact with a unique home. Many of these adjustments may not be appropriate for a unique home.
  • There is often a considerable difference in the living area with homes of a unique design. Using traditional size adjustments may not be appropriate. Componentizing value allows the contributory value of the improvements to be analyzed on a price-per-square-foot basis, which can permit large size differences to be considered.
  • Differences in location can also be considered using the components of value technique. Estimating land value for the subject and comparables will account for most locational factors. The locational influences should be reflected in the land value.