Over Supply/external

Discussion in 'General Appraisal Discussion' started by Richard Carlsen, Jul 24, 2005.

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  1. Richard Carlsen

    Richard Carlsen Elite Member

    0
    Jan 15, 2002
    Professional Status:
    Licensed Appraiser
    State:
    Michigan
    Question: Does anybody consider an over supply of listings on the market to be external depreciation?


    Background: I am in the middle of a $100,000 FHA sale on HUD Code house on 5 acres. Research shows that within a 6 mile radius of the subject, during the past 12 months there have been 7 sales. Currently within the same 6 mile radius, there are 18 HUD Code properties listed for sale. Data is gathered in the value range of $60,000 to $140,000. Obviously an over supply condition in the market.



    However, I was wondering if anybody considers this to be a specific external factor whereby an adjustment is taken in the Cost Approach. I never have made this adjustment in the Cost Approach but always considered it in my reconciliation.

    What sayest thou?
     
  2. Otis Key

    Otis Key Elite Member

    0
    May 15, 2004
    Professional Status:
    Certified Residential Appraiser
    State:
    New Mexico
    Interesting observation Richard, and YES. I agree. In and of itself, over supply, IMHO, can be indicative of external obsolescence. Due to the fact that we must find a "cubby hole" to get the numbers to resemble some sort of reasonableness I would think that it would be fair and reasonable to consider an over supply as an external factor. It is, after all, a factor external to the property that is impacting the value as of a point in time. However, as the market fluctuates and the becomes in balance or moves toward an under supply, does it still fall within an obsolescence?

    I also seem to remember that external used to be called economic (correct me if I wrong). So I can see where you're coming from on this question.
     
  3. Mike Garrett RAA

    Mike Garrett RAA Elite Member

    1
    Jan 14, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Colorado
    How did you check the boxes on the front of the URAR?
     
  4. Couch Potato

    Couch Potato Elite Member

    0
    Mar 15, 2004
    Professional Status:
    Certified Residential Appraiser
    State:
    North Carolina
    I would think the oversupply is not itself external obsolescence, but a symptom of of the existence of external obsolescence unless the oversupply is caused by all the homebuilding activity going on in the area.
     
  5. Richard Carlsen

    Richard Carlsen Elite Member

    0
    Jan 15, 2002
    Professional Status:
    Licensed Appraiser
    State:
    Michigan
    Mike:

    Good Morning.............Page 1 checked as oversupply with declining values.

    ***

    Greg, you posted:

    "I would think the oversupply is not itself external obsolescence, but a symptom of the existence of external obsolescence..."

    If it is just a symptom of the existence of external obsolescence, then what is that external obsolescence that is causing it and should we not be making an adjustment for it?
     
  6. Ray Miller

    Ray Miller Elite Member

    0
    Feb 20, 2002
    Professional Status:
    Licensed Appraiser
    State:
    Wisconsin
    I have.

    I note it in the report and try and show by CMAs and a spread sheet of the trend that has been occuring over the past 6 or 12 months. Sometimes I enclosed these in the report.

    Maggie is great about putting into a spread sheet (EXcel)

    I feel it dose casue an economic effect on the market downward and should be adjusted for.
     
  7. Mike Boyd

    Mike Boyd Elite Member

    0
    Jan 18, 2002
    Professional Status:
    Retired Appraiser
    State:
    California
    Basically, I agree that the over-supply creates external depreciation. However, how do you adjust for it? I would think it might be relevant in the cost approach but in the market analysis maybe not. Why? Because it is likely already addressed in the sales prices of the comps. I was taught that if you make an adjustment for depreciation....whether physical, functional or external, in the cost approach, you must make a similar adjustment in the market approach. Therefore, since that depreciation is already evident by the sale price of the comp you would be double dipping, so to speak, by making an additional adjustment for external depreciation. Maybe an explanation in an addendum would suffice.

    This may be an example wherein the cost approach is not applicable. However, for manufactured homes, you MUST provide a cost approach. I might use a separate format for the cost approach in such a situation with comments about that conundrum. You might get static from a "by the book" underwriter who most likely would not understand.
     
  8. Oregon Doug

    Oregon Doug Senior Member

    0
    Jan 15, 2002
    Professional Status:
    General Public
    State:
    Oregon
    Richard - Generally, no.

    The 7 sales/18 listings may or may not be an oversupply - depending on the market exposure for the sales, when the listings came onto the market and the market's usual sale-to-listing ratio. But it does sound like an "oversupply" situation.

    The appraisal is "as of a date certain" and the market's demand/supply are not in daily lockstep. There is usually some time differential between the two, so that on the date of appraisal, there may be an "oversupply" condition but prices may not have begun to decline as yet - a very good analysis for the Market Conditions in the Neighborhood portion of the appraisal. I rarely see much more than some blind man, worthless canned comments in this section.

    So, while an oversupply (of listings) is not external obsolescence by itself, the underlying cause may be. I think of external obsolescence as being something more tangible (a NEW airport runway with a flight path over the subject, a NEW gravel quarry next door, a NEW freeway through the back yard....) The operative word being "NEW". A physical change to the neighborhood that adversely impact's the subject's marketability is an element of external obsolescence.

    We just had a ply wood mill burn down in a small (pop 2,400+/-) town resulting in a loss of about 200 jobs (about the only jobs in town). I expect to see a lot of foreclosures there in a few months. External obsolescence, market shift...both? Which is the horse & which is the cart?

    Oregon Doug
     
  9. Mike Boyd

    Mike Boyd Elite Member

    0
    Jan 18, 2002
    Professional Status:
    Retired Appraiser
    State:
    California
    Good comments and analogy, Oregon Doug. But, how do you explain the cost approach being significantly higher than the market approach? I suppose the site value would take the brunt of the depreciation which would lower the over-all value.
     
  10. Ray Miller

    Ray Miller Elite Member

    0
    Feb 20, 2002
    Professional Status:
    Licensed Appraiser
    State:
    Wisconsin
    Mike,

    Working on a subject now in one of the counties I cover. Here is what the market looks like here for MFG. For the past 12 months. This just out of two data bases.

    Double wide, on 1 to 5 acres, GLA 1100 to 1500

    15 Sales 25K to 127K

    69 Listing 39K to 194K

    48 Expiried 89K to 194K

    Second Data Base

    43 Sales 21K to 139K

    79 Active 23K to 104K

    17 Expired 49K to 144,900K

    No double listing between the two data bases.

    This person paid $185,000 for this unit 2 years ago and wants to cash out.
     
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