External obsolescence prove it exists

[incognito]

Ben, I don't blame you! Discussing Religion is MUCH LESS likely to get you into heated debates than will discussing the cost approach, appraisal attire, and EO!

Thanks though, REALLY, for discussing this. It isn't often that an old dog hears about a new (old) trick, and I really find this interesting!

 

[Couch Potato]

I would argue an overimprovement for a neighborhood could be FO or EO. Condider the following two situations.

A neighborhood of 99 2,000 sf SFR and someone comes in and builds a 5,000 sf house that sells for below its cost. The problem is obviously that they built too big a house and all the cause of the obsolesce is internal and should be viewed as a functional problem.

Now take the same neighborhood. Only this time the 5,000 sf house is built first and sells at a reasonable price in relation to cost (fully acceptable to the market.) Then, due to reasons other than market forces such as a government mandate for affordable housing, the builder puts 2,000 sf houses on the other 99 sites in the neighborhood. The decline in market value to the 5,000 sf house has nothing to do with characteristics internal to the site, which would make it external obsolescence.

I think a strong case could be made for either point of view. The accepted way of dealing with it is as functional obsolescence to the best of my knowledge, but, if a thoroughly reasoned explanation is given to label it external obsolescence, I don't see where it would be a problem

 

[Ben Vukicevich SRA]

Bill,

A thought. And I've got to get out of here on a final inspection.

Think this way about my house that I built as I stated in the post above.

It's standard build. Nothing special. The same as a national builder would contruct but it's bigger than typical for the neighborhood. What causes the loss? The over-size or the neighborhood? It's the neighborhood.

Say I move my house to a similar neighborhood. There would be no loss in value. If it was true functional obsolescence, it should carry over to the new neighborhood and still be recognizable.

I don't view over-size as being a super-adequacy and neither does the definition that I posted. Maybe Boyce the PHD that wrote it was smarter than the rest. LOL Got me.

 

[Ben Vukicevich SRA]

Bill,

"Ben, I don't blame you! Discussing Religion is MUCH LESS likely to get you into heated debates than will discussing the cost approach, appraisal attire, and EO."

Hah, you haven't then met Ambrose the Seventh Day Adventist over on the HOC forum....He's a hoot. He's threatened to kick me in my quote "Romish butt" several times. Much more fun than here.

 

[incognito]

Greg, regarding your example, in my mind it is still the physical fact that the house is too big that is the problem.

I'm trying to think of this logically, and the following question comes to mind:

If over improvement is EO, than isn't all depreciation than EO?

Presume I have a house in a neighborhood of identical homes, but mine is not well maintained. I think we would all agree it would have a lower value than the others, due to inferior physical condition. But using your argument, you would say that it is EO, because less well maintained homes do not sell for as much as better maintained ones in the neighborhood.

All depreciation is quantified in the markets reaction, either by sale price, or by rent loss. I do not think the procedure in which we use to quantify depreciation (market observation and actions) defines the type of depreciation (EO, FO, or Physical).

 

[Roger Kinnard]

If the textbooks define EO as "diminished utility to the structure", then they are saying that it should be deducted as EO from the structure if the property is improved, right?

Given the same set of circumstances, with unimproved land that cannot exhibit external obsolescence because there is no structure to accrue the diminished utility, the loss is shown differently.

It seems to me that they are telling us that the loss does actually run up into the house and accrue to the improvements after the site is improved.

 

[Fred]

Brad,
Just out of curiosity, do you think there are any mistakes in appraisal texts?

Ben,

It's standard build. Nothing special. The same as a national builder would contruct but it's bigger than typical for the neighborhood. What causes the loss? The over-size or the neighborhood? It's the neighborhood.

My first question would be: what loss? Isn’t the larger home going to be worth more than the smaller ones?

 

[CANative]

Cheap lots, little houses.

Expensive lots, big houses.

Develop the lot the wrong way and you've got depreciation. What you call it or how you calculate it may be more dependent on who wants to know and how able they are to follow "appraiserspeak."

 

[Jim Bearden]

Functional Obsolescence - On Site
External Obsolescence - Off Site

The trick is to value the land, then figure out how these adversities affect the improvements. I take exception to the RR track example. It does carry over to the improvements.

How? Please prove it.

 

[Fred]

Develop the lot the wrong way and you've got depreciation.

I thought the discussion was about existing improved property, not development consequences. I can see that if you build something for two dollars can only sell it for one, you have a loss, but it is a loss of money. That's why I asked before, if the overimproved building already exists and it is worth more than the smaller ones nearby. What's the loss, either in value or money?