External obsolescence prove it exists

[Lawrence R.]

Just to clarify

The "it" I say you don't depreciate is the land, just in case i wasn't clear.

 

[Couch Potato]

Mr. Gillespie, Ms. Potts,

Recent site sales should have been used to develope the opinion of site value. If recent site sales were not found, then the site value should have been found using either extraction or allocation, or even both used for consideration.

IF any of the above had been properly done, this so called EO for "poor economy" would have inherently been reflected in the opinion of site value

So the economy has gone bad on the southwest side of town because the local auto plant is unexpectedly idled for nine months and site values have dropped by $7,000 and improved property values have dropped $10,000, but construction costs remain unchanged. You are correct that the effect of poor economy is reflected in the site value, but not all of the effect. That additional $3,000 of loss is the EO required in the cost approach.

because it also, if the site sales or comps used for extraction / allocation are properly selected, reflects the location of the subject. Since "economy" is affecting the entire general area, and not a case of an external smelly junk yard next door, this is a discussion of market location and not appropriately one of an adjustment for external depreciation that should only affect some properties in some of the area. Not ALL properties in the entire area which should be reflected already in the comps!

Correct, an adjustment would not be needed in the sales comparison grid as long as the sales used are from the affected area. "Economy" can disproportionately affect portions of a general area. Not all economic events affect whole areas equally.

To then AGAIN adjust for "Poor Economy" affecting the entire area IMO is now either double dipping or showing a sucky job of site value analysis was done in the first place with a later adjustment pulled out of thin air, with no support for it, to correct the lousy site value opinion.

I agree estimating site value properly is critical. Sales of sites would lead to proper results (most likely.) Extraction would incorrectly attribute EO rightfully attributed to the improvements to the site value obtained. The site value would be underestimated, but without sales, who would know or care. Allocation would work if a proper allocation percentage is available, but how often is a truly accurate number available for allocation?

Also, if the cost to build even the physical depreciated improvement is so great no one will pay it in the area due to a lack of jobs, we are only proving either the houses have all come to the end of their economic lives and the H&BU analysis for one SFR improvement is incorrect, or the value of a SFR site in the area has to decline. It either is not ecomomcally affordable to build a SFR house there due to costs to do so versus the contributory value to the land and land costs, so the land is no longer appropriate for SFR, or the value of the land (location) has to go down until it is economcally feasible.

H&BU as improved would still be SFR even if it is not economically feasible to build the house now. That is exactly why there would be EO attributable to the improvements, because site costs plus construction costs do not yield an economically feasible price. The house is there and has value. It is not economically feasible to tear it down either. The difference between the cost and the value, would in part, be EO.

The site value should have been much lower and the SCA probably SHOULD have had negative market condition (time) adjustments in it. The appraiser used historical land sales, unadjusted for market conditions (time) in a declining market, and opined a land value too high as a result.

If the site value was estimated using actual sales closed on the effective date of the appraisal, why should it be lower? Adjustments in the SCA would depend on the date of the sales and the economic event causing the EO. Your whole argument is predicated on the idea the site value must be wrong. Sometimes that is indeed the case, but not always. I have worked on appraisals near a chicken processing plant, railroad tracks and a highway where the site value was from recent site sales and construction costs where from actual construction. The site value alone did not account for the effect of the external factor.

There was a time when I agreed with the idea all EO would be taken care of in the site value. This belief was mostly due to the extremely lame job of teach done on the subject; where morons were using an allocation percentage meant to derive site value to allocate EO between the site and the improvements. I still think that (most of the time) most (if not all) of the EO is attributable to the site, but I have encountered enough instances where that is simply not a viable explanation to know sometimes a portion of the EO should rightly be attributed to the improvements.

 

[Joyce Potts]

If most of you don't understand the basics that external and/or functional obsolesence only has to do with the improvements and not the land, there's not sense in arguing, IMO.

Not to mention that the market is the only viable method to measure any form of obsolesence.

Go for it.

 

[Austin]

If most of you don't understand the basics that external and/or functional obsolesence only has to do with the improvements and not the land, there's not sense in arguing, IMO.

Not to mention that the market is the only viable method to measure any form of obsolesence.

Go for it.

Joyce: Suppose a residential property is located in an area in which much more expensive housings are being constructed in the neighborhood. This has a very positive effect on the subject. How would you handle that? Would you call this negative external obsolescence? Would you allocate the difference to building and land or both?

 

[xm39hnu]

external and/or functional obsolesence only has to do with the improvements and not the land, there's not sense in arguing, IMO.

Functional certainly pertains only to the improvements. External hits both. Ever do breakdown depreciation?

 

[Couch Potato]

If most of you don't understand the basics that external and/or functional obsolescence only has to do with the improvements and not the land, there's not sense in arguing, IMO.

Not to mention that the market is the only viable method to measure any form of obsolescence.

Go for it.

Agreed Joyce. When the value of a property is reduced due to an external factor, the portion of that reduction that is reflected in lower site value is not technically external obsolescence; the land just isn't worth as much. (It's not a $100,000 lot with $25,000 in external obsolescence, it's a $75,000 lot.)

The fact remains that in judging external obsolescence, one must start by looking at the way the value of the whole property (including the land) is affected by the external factor. It is common practice (though technically speaking an incorrect practice) to refer to this interim number, the value of the effect on the whole property, as external obsolescence, because it is simpler than saying "effect on the value due to externalities" and because it is a handy term in talking about what the land would be worth with different surroundings. (If I ever write on the subject for a publication, I'll take the time to be concerned with the nuances.) In an area where there are no sales of similar sites, it is much simpler to just use extraction and assume all the reduction in value is a reduction in the value of the site. The only time it would be a problem is if the extraction resulted in a negative site value.

Austin, the definition of depreciation is the difference between cost and market value, but it only applies when the cost is higher than the market value. When the cost is lower than the market value, the difference is then called entrepreneurial profit. A more descriptive term that could be used for both situations is fudge factor.

 

[Joyce Potts]

Take an 101 AI Course

Joyce: Suppose a residential property is located in an area in which much more expensive housings are being constructed in the neighborhood. This has a very positive effect on the subject. How would you handle that? Would you call this negative external obsolescence? Would you allocate the difference to building and land or both?

Austin,

1. How do you know it has a postive effect on the subject?

2. How is the subject property's estimated site value any different than the sites for the larger homes? If you're telling me the site value is the same for both the larger vs. smaller home then you can start analyzing the data to see at what point the market is paying more psf for the smaller home.

3. The example you cite is not one illustrating external/locational or functional obsolesence, in fact it's totally the opposite and an excellent illustration of the principle of (??) which exact name escapes me at the moment.

4. I don't think you're asking the right question. The question is how much more psf is the market paying for a smaller house vs. a larger house with equal site values. And how do you go about supporting it? Like anything, if you have good market data you analyze it. In fact, with enough data a regression analysis may be a great way to illustrate the difference.

You could do it be doing an allocation of building to land for your comparables, but for residential purposes, I think there far less complicated methods of supporting any positive influences.

I think what you're describing could also be described as an 'underimprovement'.

That's off the cuff as my appraisal library is still packed in boxes from my latest move.

But my point is your example is not one of external/locational or functional obsolesence, IMO.

 

[Jim Bearden]

If most of you don't understand the basics that external and/or functional obsolesence only has to do with the improvements and not the land, there's not sense in arguing, IMO.

Not to mention that the market is the only viable method to measure any form of obsolesence.

Go for it.

Joyce I have done appraisals (many) where I can prove you are wrong given 27 years of experience you can read all that claptrap in the books you want but that doesn't change the evidence that I have seen first hand many times that it's in the land not the improvements.

 

[Couch Potato]

Joyce I have done appraisals (many) where I can prove you are wrong given 27 years of experience you can read all that claptrap in the books you want but that doesn't change the evidence that I have seen first hand many times that it's in the land not the improvements.

Jim, I respect your experience, but Joyce is correct due to the way External Obsolescence is defined. In the case where the adverse effect of an external influence is fully reflected in the value of the land, and has no effect on the value of the improvements on that land; no external obsolescence exists.
In that case, one just has cheaper land due to its location. :new_all_coholic:

 

[xm39hnu]

Comments on this scenario solicited:

I extracted location adjustment of -$3,000 to the comparable due to subject's location on a busy street, as opposed to a quieter location within the subdivision.

GRM is 150, extracted from market. Rental market shows a $70/mo rent penalty if the rental is on a busy street.

Breakdown depreciation, analysis of external obsolescence:

$70 rent penalty x 150 GRM = $10,500 total external obsolescence due to location.

$10,500 - site adjustment of $3,000 = $7500 attributable to improvements.

Agree or disagree?