External obsolescence prove it exists

[xm39hnu]

Are you referring to the THEORY of evolution, with its 100 years of research, or the THEORY of creation which has just hung around for about 8000? couldn't tell which theory you may be referring to.

Both are theories. Neither is proven. So what difference would any reference to either make?

Here, we have a "theory" war. Maybe just a "hypothesis" war. Land does not depreciate. But depreciation, while it can have more than one meaning, is defined previously in this discussion as "The loss in value from all sources."

Differentiating between loss in value to the improvements after establishing a site value makes some sense in the context of measuring depreciation to the improvements. Remove the determined site value, and you have the depreciated value of improvements by the residual process. You can then extract various components of that depreciation, but you're no longer working with land. That makes sense.

What doesn't make sense is defining depreciation as "Loss in value from all sources" and then saying that land doesn't depreciate, it is just worth less. Either a more detailed and comprehensive definition of depreciation is needed, or land depreciates by definition.

Then we get back to the old maxim: Land HAS value, improvements CONTRIBUTE to value. I think maybe we need a better definition of depreciation.

 

[Joyce Potts]

Based on your post, neither.

YA GOT ME. You're right because the property didn't actually sell.

Now Steve, lets see if you can keep up.

Say the property did sell for $800,000. What say ye now?

The Slow One

 

[Joyce Potts]

Both are theories. Neither is proven. So what difference would any reference to either make?

Here, we have a "theory" war. Maybe just a "hypothesis" war. Land does not depreciate. But depreciation, while it can have more than one meaning, is defined previously in this discussion as "The loss in value from all sources."

Differentiating between loss in value to the improvements after establishing a site value makes some sense in the context of measuring depreciation to the improvements. Remove the determined site value, and you have the depreciated value of improvements by the residual process. You can then extract various components of that depreciation, but you're no longer working with land. That makes sense.

What doesn't make sense is defining depreciation as "Loss in value from all sources" and then saying that land doesn't depreciate, it is just worth less. Either a more detailed and comprehensive definition of depreciation is needed, or land depreciates by definition.

Then we get back to the old maxim: Land HAS value, improvements CONTRIBUTE to value. I think maybe we need a better definition of depreciation.

Jim,

To be honest and despite some of my previous posts, I have argued for many years with the AI as to the theory that land doesn't depreciate.

It's a poor term and is extremely confusing for most people. Any loss or reduction if value is generally thought of as depreciation just as any increase in value is perceived as appreciation.

I have also taken exception to the fact that land can't physically depreciate. I think there are arguments that would contridict that such as 3-Mile Island or Hinkley (Erin Brockovich). Another example that we see much of here in Florida are sink holes.

And while the term 'depreciation' is probably another semantics discussion, --in terms of the cost approach the site value is estimated as if vacant and ready to be put to it's HBU. Thereafter, any further diminution of value is attributed to the improvements.

 

[Steve Owen]

I buy a vacant lot for $300,000 and build a 5,000 sf home for $700,000 for a total expenditure of $1 Mil.

The problem is I built it in an area where the surrounding homes are generally 3,500-4,000 sf with a predominant value of around $700,000.

After adequate market exposure, the highest offer I had on the property was $800,000. Therefore, there appears to be $200,000 worth of obsolescence. Correct?

1 - Is that an example of functional or locational obsolescence?

2 - What went down in value? The lot or the improvements?

3 - Without the market reaction to the finished product, how else do you measure the obsolesence?

No one seems to have tackled #1... I don't care what you call it so long as they got the number right. I would call it EO, but, I would not fault an appraiser who called it functional. I believe arguments can be made for both points of view. Now, if the $1m house had been built first, and then other, smaller houses had been constructed around it, it would be a more clear-cut case of EO.

#2: If the property sells for $800,000, then there is a loss of value for the improvements. That loss of value can be proven by the cost approach; i.e. the CA, before func/EO is taken into account, predicts MV of $1m, actual SP is $800k. Technically, it didn't actually go "down" in value because this is the first time it sold, but no one could argue that the owner didn't lose money. Whether any of the money lost is related to land value depends on whether $300k is a typical selling price for a lot in that sub. If not, then some of the loss in value could be from paying too much for the land in the first place. Note, that doesn't mean the land went down in value.

#3: You don't. Of course, if it was not for sale or didn't sell, and an appraiser was hired to appraise it, then he or she would have to come up with an opinion concerning obsolescence. If there were not previous sales in the same or a competing sub with similar obsolescence it would be more of a "guess" than an opinion... I know, appraisers don't like to use that word. Instead, I'll say the appraiser would have to put a number on it based on past experience and knowledge in that particular marketplace.

 

[Fred]

Now Steve, lets see if you can keep up.
Say the property did sell for $800,000. What say ye now?

Same thing. I took 880k as a surrogate for MV. Steve O hits the point that there is only the one sale, one point in time, so nothing changed.

However, where he and differen is this:

If the property sells for $800,000, then there is a loss of value for the improvements. That loss of value can be proven by the cost approach

First, I'd ask what loss of value. When was it ever worth more? There was a loss of money, a monetary loss to the person who invested $1 mil and only got 800k back. Second, that loss was measured by the difference between the sales price or MV and the cost estimate. The estimate by itself is different from the "approach to market value" part of it. That is the same distinction I have been unable to make clear to either him or Austin (re his last few posts) for five years.

 

[Joyce Potts]

Mr. Owen,

I agree with most of what you said. I'm not sure whether this is another semantics issue or it's perception of cost vs. value. For the sake of argument lets say the property was originally purchased for $1 Million.

I still say that if you have the land value and cost out the replacement or reproduction (let's not argue that one right now) and it comes out to $1Mil vs. only recoving $800,000 in the open market, your obsolesence is $200,000.

I would agree that it can either be functional or external. Was the house too big or the surrounding properties too small?

 

[Fred]

Jim,
To be honest and despite some of my previous posts, I have argued for many years with the AI as to the theory that land doesn't depreciate.

I have also taken exception to the fact that land can't physically depreciate. I think there are arguments that would contridict that such as 3-Mile Island or Hinkley (Erin Brockovich). Another example that we see much of here in Florida are sink holes.

First, while there are definitely problems with the AI text tht hamstring appraisers (like the larger issue that EO is part of, the text presents none of the historic recognition of the cost approach to market value as unsound), I don't recall seeing the AI text saying anything as indelicate as - land doesn't depreciate.

On the second point, remember basics. Land is space, the inverted pyramid, not what fills the space. Soil, for example, can deteriorate, become contaminated, not support improvements.

 

[Joyce Potts]

First, while there are definitely problems with the AI text tht hamstring appraisers (like the larger issue that EO is part of, the cost approach to market value, I don't recall seeing the AI text being that indelicate with - land doesn't depreciate.

On the second point, remember basics. Land is space, the inverted pyramid, not what fills the space. Soil, for example, can deteriorate become contaminated, not support improvements.

Forgive me. I made an extraordinary assumption that when we were talking about land, we were also talking about the soil.

Wow, land is space, the inverted pyramid. That's deep.

 

[Fred]

Wow, land is space, the inverted pyramid. That's deep.

Yeah, it goes all the way to the center of the Earth. That's a key point in the argument that depreciation expense, for example, should not be applied to land, because it is space that will exist to forever or when the Earth starts to fall apart - whichever comes first.



Despite the exciting detour, the question of sourcing the alleged AI theory

I have argued for many years with the AI as to the theory that land doesn't depreciate.

is still pending

 

[Joyce Potts]

Yeah, it goes all the way to the center of the Earth. That's a key point in the argument that depreciation expense, for example, should not be applied to land, because it is space that will exist to forever or when the Earth starts to fall apart - whichever comes first.



Despite the exciting detour, the question of sourcing the alleged AI theoryis still pending

Dear Mr. Hawkings,

I'm running late for an appointment and will pick up on the discussion upon my return.