Abstraction Method

Definition of "Abstraction Method"

Written by

Raul Ruisanchez

Weichert, Realtors - Wayne NJ

The abstraction method is a valuation procedure used to determine the land value relative to the total market value of the property. The abstraction approach is most often used when there are no vacant parcels of land for sale in an area to figure out which is the value of the land when the property built on it is taken out of consideration. This method of evaluation is the most commonly used approach to evaluate the land value for tax purposes. It is also most often used in urban areas with little to no vacant lots for sale, also known as the depreciated replacement cost approach to valuation. It can also be referred to as the extraction method of valuation of land.

Why is the Abstraction Method Used?

In the United States of America, 29 of the 50 states require different values for buildings and lands for tax purposes, which is where the abstraction approach comes into play. This is one of the ways in which residual land that pertains to a property can be evaluated fairly. This method isn’t used in areas where there are ample vacant land sales that can be used for comparison, but only where the list of vacant lands for sale is limited or nonexistent.

When calculating the value of residual land that pertains to a property, you must consider the property itself and any improvements affecting its value. This method does this by taking into account the upgrades, replacement costs of the property, or any other improvements that affect the land like pools, landscaping, etc., or the property.

Other methods that can be used to evaluate the value of vacant land to total parcel value is the allocation method, and a more similar way, the contribution to value method, which takes into account improvements to land features.

The reason for the abstraction method, aside from the basic tax purposes, is to determine the best uses of a particular site in regards to zoning laws, return of investments, productivity, and what are the actual physical possibilities for the site.

How does the Abstraction Method Work?

Determining the most accurate land value in an urban situation where there are no vacant lands for sale to compare uses the abstraction method. The method begins with the market value of the entire property and sales of properties in the neighborhood. The abstraction method subtracts the value required to replace the improvements by considering the market’s depreciation. The depreciation is the factor that influences the validity of this approach. For this reason, the abstraction method can not provide an accurate land value of a site where a historical building is located as depreciation can not be accurately calculated. The abstraction method is used mostly for new structures.

The abstraction method also needs to take the location of the land into account. In general, the location affects the market value of a property and, by extension, the land value.

How is the Abstraction Method Applied?

In determining the land value on a particular property, the abstraction method requires the following steps:

• Gathering information on comparables sale prices;
• Estimation of improvements and investments in the property;
• Depreciation is subtracted from the estimation of improvements and investments;
• Depreciated cost of improvements and investments is deducted from the selling price;
• We get the approximated land value.

Example:

A lot of 6,500 sq. ft with a 500 sq. ft single-family residence on it. The property is sold for $83.000, and the residence has been estimated to cost $61,000 with a depreciation of $20,000.

Sale price of property ……………………...............………………..................…….…...……….…… $83,000

Depreciated value of the building (improvements and investments): 

Building ………..$61,000

Depreciation …..$20,000

Depreciated value of building ………………….…………………….................……...........…...…..$41,000

Resulting remaining land value (depreciated value subtracted from sale price) …$42,000

Divide value by remaining lot size of 6,000 sq. ft ………………………….........................…$7/sq. Ft

Multiply by total lot size of 6,500 sq. ft ……………………………..........................…………….$45,000

Through the abstraction method, the land value is estimated at $45,500.