External obsolescence prove it exists

[incognito]

As Ben's text example shows. the overimproved house is worth $K and typical for the neighborhood is $K to $K. To accept that the overimproved house has a diminished value, I would have to accept that 30 is a diminished version of 10 and 14. And that's never going to happen.

Using those terms, I agree with you. But what if we use a different method of quantifying the loss. What if we said that the value, expressed in $/sq.ft., of the overimproved structure, diminished. This would allow us to accept that the value of the larger house is not less than the smaller houses, which appears to be your objection to there being a loss.

Lets say, instead, that the overimproved house would have a value, expressed in $/sq.ft., which is lower ($/sq.ft, not in dollars) than may otherwise be expected.

Example: Typical newer subdivision improved predominantly with 2000-3000 sq.ft. homes.

1 yr. old 2000 sq.ft. house sells for $250,000. $50,000 land value. Sale price is $100/sq.ft. exclusive of land.

1 yr. old 3000 sq.ft. house, same S/D and site amenities, sells for $325,000. Sale price is $92/sq.ft., exclusive of land.

So far, about what we would expect.

But some clown builds a 6000 sq.ft. house, same s/d and site amenities. After a long marketing period (Realtor convinced him it was worth $90-100/sq.ft. based on the above sales ) it sells for $400,000, or $58/sq.ft., exclusive of land.

It sold for more dollars, but for less, IN $/sq.ft. than we may have expected it to have in a subdivision which comfortably supported homes ranging in size from 2000 to 6000+ sq.ft.

So there is a loss in potential, which I think should be characterized as FO, but I suppose I could understand it being classified as EO, but it is a loss none the less...??

 

[xm72mhd]

I sure missed this one, but as Bill G. would no doubt observe, you have got along well without me! But I want in so here it goes.

The original question asked something with respect to proving external obsolesence. Last week we had an extensive discussion about H&BU, and some of what we said about that applies here, as has been observed previously.

Some challenged the wisdom of applying a H&BU analysis to vacant land and no doubt those will discredit this contribution, but if you analyize H&BU of the site as unimproved and find that it has Y uses that fit the physical, financial and legal citeria and are inclined to move on to the maximum return step then, we may have a contrast to assist us.

Add to my hypothetical that more than one use is legal, possible and feasible and that the site is already improved. Now the analysis "as vacant" when contrasted with "as improved" should clearly demonstrate whether there is external obsolesence. If the max productive use of the property is as a multistory atrium office complex and it is surrounded by used car lots, there is obsolesence. NO?

Now that obsolesence obviously runs to location, which s the site, but it negatively effects the value of the improvements since H&BU of the site is as a used car lot since H&BU has told you the hypothetical or actual multistory office building is deprectiated by its surorundings. The site value would only be greater if the external uses did not exist.

How's that for butchering it? Somewhere in there is something I think due to logic. Hope you can figure it out. I'll give it another shot as soon as Bill G. tells me to get lost or otherwise turns on his charm.

Functional O has got to do with comparing the utility of a structure with that of comparable properties. More a matter of style than location.

 

[Fred]

Bill,

Using those terms, I agree with you

And isn’t that a great leap forward.

but it is a loss none the less...??

Again, as I posted to Greg B, you are switching to evaluating a development decision instead of appraising an existing over-improvement. If some “clown” builds 6,000 sf, that clown will lose -MONEY. That's not a loss in market value.

Also, you are also changing “value” to marginal value (per square foot). When it comes to appraising an existing over improvement for market value, you example still shows a gain and not a loss. What you are talking about is diminishing returns. In your scenario, the marginal returns are getting smaller (diminshing).
the first 2,000 sf contributed 200,000 to overall value or $100/sf
the last 4,000 sf contributed 150,000 to overall value or $37.50/sf

But slower growth is still growth. “Value” is still going up, not down.
In your example there is a gain in value going from 2,000 sf to 6,000 sf
From 250k to 400k in overall value
From 200k to 350k in contributory value.

The way I understand arithmetic, until the larger ones sell for less than the smaller ones, there is no “loss in value” due to overbuilding.

 

[Webbed Feet]

To All,

Love the thread! Reading all of it can make a person go cross eyed after a while however. So can quoting all the texts in the world in an effort to support one position, or the other, without focusing on if that section of the text is attempting to deal with EO or FO as it relates to the different approaches to value being addressed really work? .. Plus, we have to toss into the ring the differences between “Appraiser Speak” and lay person viewpoints when we begin to define the meanings of things for the purposes of discussion.

Taking Mr. Geiger's great last post above. Do we call his case study question a “Loss” at all in terms of relating it to comparable for a market value opinion or look at it as poised by his last question? Personally, I say no we don't. In his case study what has occurred was a failure in the analysis of the land's highest and best use. Typically, a residential appraiser stops H&BU analysis at something like “The H&BU is one (1) SFR improvement.” .. But Mr. Geiger's case needed it taken to what I would call the “Umpteenth Degree” of analysis. One that should have been “A SFR improvement built between the GLA sizes of 1,800 sqft to 3,500 sqft to remain typical of the neighborhood.” ... This concept could even go deeper to “A SFR improvement built between the GLA sizes of 1,800 sqft to 3,500 sqft to remain typical of the neighborhood painted earth tones and not bright blue with bright yellow with bright neon orange poke-a-dots.” My point being that it was not a loss at all. It was a failure to maximize the value of the land by building something that actually returned it's costs. A personal loss for the first owner, but not any following buyers as they refused to pay those extra building costs for that location for that big of an improvement. Where is the new buyer that is refusing to pay the extra building costs for too big of an improvement losing? They are losing by the burden on ownership of something bigger than they need. The extra expenses of heating / cooling, maintenance, insurance, and replacement of short term items as they wear out or longer term items such as roofing. Are any of these things EO? The “Regression” effect is really just market data showing this burden on ownership assuming all other factors being equal such as landscaping maintenance for example.

Look at a different case. A vacant SFR zoned lot placed up for sale for $200,000. The owner bought the lot a year before for $175,000. In a lovely neighborhood with no issues. Every similar lot in the last year selling for about the same. The market very obviously says the $200,000 price is right on the money. A week later, before a offer, disaster!....The SFR improved lot adjacent turns into a 300' deep sink hole and swallows the house on it. Our subject now has a 300' cliff on one side and news cameras all over the place, it just made international news as an entire family was swallowed. A case like this was just on the news in the last couple of weeks. Ok, we have some in this thread essentially saying the EO is “Cured” by either filling in the sink hole or just also creating an equal 300' deep sink hole at the subject site! ... LOL .. I am the only one, other than Ms. Potts and some others participating here, that sees a problem with such a concept? .. It just does not work for us common people in all cases, does it? .. Let's face it, and “Appraiser Speak” aside, the owner of that SFR lot next to the sink hole probably just lost his *** financially. Your lay person is going to say that the subject land just “depreciated” if we like the use of that term or not because the lay person is not concerned with discussing a approach to value or what “depreciation” means. The location of that site just became a negative one to the market place. There is no doubt EO is affecting the land. At least until the sinkhole swallows the subject site too!.. Then I guess the subject would no longer suffer from EO.

So I am back to the question of does EO exist and does it affect both land and improvements to land? Even though I have left out an example of direct improvement loss due to EO, again I say, yes, yes, and yes. I believe that the better texts are trying to say do not double charge for EO by using sales with similar EO already in them, and then adjusting for EO again while also failing to check if you have EO that should be allocated between the land and the improvement as it should in your approaches. Residential appraisers really need sales with similar influences. Because lacking capitalizing of income such allocation between building and land would be highly subject at best.

Maybe a few forumites agree with me. If not.. Heck, I tried! ..

Barry Dayton

 

[incognito]

Steven, I'm beginning to understand your perspective. I think Barry explains it pretty well, using the HBU analysis (or lack of) as the reason for the initial loss. I think the difference is the way we are viewing the issue. I guess, if I could, summarize what you are saying, the loss (whatever we may call it) happened the day the house was built, due to a poor development decision? I guess I can buy that.

However, the original topic was EO as a whole, but took an interesting turn towards overimprovement. Going back to the original question, proving a loss due to EO, if the external influence presents itself, after the development of the subject property (say a zoning change to industrial on vacant adjacent properties, change in comprehensive land use plans to high density on adjacent vacant properties, or the neighbor decides to breed a particularly nasty breed of pit bulls,) and there IS a loss in value (actual rent decreases due to the influence), is this EO, or just a loss in land value?

 

[incognito]

Edd: Welcome to the discussion. I hope you noticed, so far, that I am trying to be "charming", or at least as "charming" as I am capable of being!

Even more interesting, David W. actually agreed with me, (much to his chagrin) and Steven S. and I have seemed to have pulled off some interesting, friendly discussions!

This is a really interesting one, and I think because it is one which hasn't been re-hashed OVER AND OVER. We, or at least I, am actually learning some things. As I have indicated to Ben, I am fascinated that an over-improvement could even be considered EO, let alone be backed up by the references he has provided. I still do not fully agree, but it sure has me at least reconsidering the issue!

I hope you enjoy it as much as I have!

 

[Jim Bearden]

Mr. Geiger your batch plant example is certainly interesting and good in theory the problem is it would never happen. The planning department would deny it after input from neighbors. Now even if it did the diminution of value would be fodder for a lawsuit for diminution of value which would make the owner whole. Now when they sell you merely prove the negative land value how you say? Let's say the site is vacant and an individual wants to build on the site but realizes the impact on value and that when the home is built the impact is going to be a loss of $15000. The owner of the land is paying taxes insurance (liabiity) maintenance (mowing) etc. will he pay to sell? No because he's not stupid he already got $50,000 from his lawsuit settlement. Now he doesn't pay the taxes and the county now owns it or he just deeds it over. The county wants to sell it but can't. What to do.

They pay somebody to develop the lot because they figure when built and sold they now get tax revenue and will eventually recoup the cost. Thus the land has a negative value.

You guys are working very hard at proving that EO exists and now I am convinced it it doesn't.

 

[Ben Vukicevich SRA]

Bill G,

Here's another one from a professorial lecturer on Land Economics at American University, Arthur A. May.

It's old but he has a detailed section on an under-improvement that I will post. Probably in several sections because I can't upload a file that large

 

[Ben Vukicevich SRA]

How about this?

Sorry it's in two parts but it's the best I could do. An under-improvement example.

 

[incognito]

Ben, these are interesting articles. I'm still really torn, though. Two things come to mind:

-article 1 states:

This form of depreciation is present because the property fails in it's appeal to the typical buyer.

My real problem isn't with that statement as much as it is with the fact that it is basically the textbook definition of Functional Obsolescence!

-I concede, unconditionally, that you have provided numerous reputable sources of this idea. I am NOT being critical here, and you win, but these are rather dated sources ($2000 commercial land! ). Do you think the the school of thought may have changed over the years, resulting in more modern texts generally describing overimprovement as FO, not EO?

Lastly, Although I suggested otherwise earlier, I can find no significant references to an overimprovement in size being FO in any of my texts, so I am really beginning to become suspicious of my own beliefs at this point.