The Determination of Capitalization Rate by the Remote Segments Approach: The Case of an Agricultural Land Appraisal

Abstract

In the absence of comparative real estate data in the market segment of the property to be estimated, the appraiser may resort to income capitalization to estimate the market value. Often, however, the choice of which rate to apply is affected by subjective and arbitrary assessments. The estimation result can therefore be inaccurate and rather unclear. However, the Remote Segments Approach (RSA), through appropriate adjustments on the original values, prices, and incomes detected in the remote segments, makes it possible to arrive at an appraisal result consistent with estimative logic and real estate valuation standards. The proposed application illustrates the estimation of the market value of a specialized fruit orchard of avocado, which is to be considered new in relation to other fruit species already present in the reference area. The adjustments required by the RSA are solved with the General Appraisal System (GAS), defining the difference matrix based on relevant characters common to all segments considered. The application is carried out by comparing the segment in which the orchard being estimated falls (subject) with other remote market segments in which prices and incomes constituted by other tree crops are collected. The market value of the subject is derived by making adjustments to the prices and incomes observed in the remote segments of comparison with a comparison function constructed through relevant characters common to the segments considered. The comparison function makes it possible to arrive at the determination of the capitalization rate to be used in estimating the value of the fruit orchard by income approach. While it is based on the comparison of segments, the approach followed allows for a value judgment consistent with the estimation comparison and capable of providing a solution less conditioned by the appraiser’s expertise in the presence of particularly pronounced limiting conditions.