Economic obsolescence

[SANDY]

Why do you have to always be so unpleasant and confrontational?

You're trying to get a handle on depreciation in the cost approach. In this case external obsolesence caused by market conditions. It's correct to use the term "economic obsolesence" for this type of depreciation but it's counter-productive to argue that economic obsolesence is somehow different than external obsolesence.

Economic obsolescence is different than environmental and locational in this general economic downturn in the market. Normally they are similar in that they relate to external factors that are affecting the value of your subject property such as a plant closing nearby, a toxic waste site nearby or proximity to high traffic or railroad tracks etc.... I understand the definition of "nearby" can be debatable and sometimes can be pretty broad based but currently in most not all markets and during times like this when economic obsolescence is attributable to nearly the entire housing sector it becomes necessary for an appraiser to pay a little more attention to it and attempt to apply some market based methods to estimate it.
After all it only rears its ugly head every so often as part of the past normal up and down market cycles but this downturn cycle, it has become more significant than in past downward cycles.
I am just trying to point out that it might be a good idea to pay a little more attention to it in the cost approach especially since if your leaving your cost approach hanging out there so much higher than the sca(assuming your not plugging in a number for it), it is begging for an explanation in your reports and we have been experiencing blow back about it from some clients.
Plus I knew if I started a thread about it, my friends here would splain it to me mo better and discuss with me how they are dealing with it.! I also knew I would have to wade through the posts from those that can't read and respond off topic, want me to re-read the definitions of ecternal obsolescence, tell me about their vast experience with doing appraisals of properties that have locational or environmental obsolescence, condescending and snide remarks indicating that I know nothing about appraising just because I attempted to discuss a very nuanced issue that most likely the majority of appraisers out there are either ignoring, doing it improperly or don't have a clue what I am talking about.

At least Scott was willing to have an honest and reasonable discussion about how he has been dealing with it and while I think what he has been doing is not necessarily wrong it might be exposing a weakness in his reports. If this thread makes him or anyone think a little bit more about how they are dealing with the issue and tighten things up a little, then that's great.
I have learned from this thread. There were things that I had forgotten and it was like a little refresher course but don't think that I am some newbie to this profession or that you all know everything either. There is a big big difference sometimes between appraisal theory and practical application. Theory is how things should be and practical application is how things really are. Theory does not always provide the necessary direction for every circumstance found in the real world especially when confronted with the exceptions to the norm and that's what this thread was all about.

Have a nice day and fly your state flags above that of the stars and stripes like Texas!

 

[Tim Hicks (Texas)]

Have a nice day and fly your state flags above that of the stars and stripes like Texas!

Nowhere in the state of Texas will you find that happening. I have a question. Economic obsolescence did not just occur last week in Florida, why has it taken so long for you ask about it? Also, I thought the market there was in recovery? So, the economic obsolesence should be shrinking?

 

[SANDY]

Nowhere in the state of Texas will you find that happening. I have a question. Economic obsolescence did not just occur last week in Florida, why has it taken so long for you ask about it? Also, I thought the market there was in recovery? So, the economic obsolesence should be shrinking?

You haven't been listening. Didn't you see Scott and me discussing it and I told him that what he has been doing ie... leaving the cost approach out there way higher and adding addendum language about EO was what we had been doing and that were starting to called out for it?
I never said the market here was in recovery-not listening again!

Sometimes I have to question some peoples' ability to actually analyze anything if they can't get beyond simple reading. I guess that could explain so many posts being off point.

 

[Elliott]

I dont care a ratz azz for the CA. If you are relying on estimating the value of a house in a sand state with some critical EO component thru the CA, all your really doing is backing in to a pre-selected value, but aren't smart enough or honest enough to admit it.

 

[SANDY]

I dont care a ratz azz for the CA. If you are relying on estimating the value of a house in a sand state with some critical EO component thru the CA, all your really doing is backing in to a pre-selected value, but aren't smart enough or honest enough to admit it.

True dat!

I just periodically find it amusing to rattle the cages of some ole timers here who think that because of their vast experience and title that the guvnmnt gave em makes them all knowing. Especially the ones who sit behind their computers all day isolated from the world living their lives through right wing google searches and cowering in their bunkers after watching fox news!
:icon_mrgreen:

 

[SANDY]

Dangit Elliot- you made me think again. You may not give a rats about the CA because it's not applicable for most assignments but let's discuss it in the context of the case where the client requests it and why they normally request it.

I would say that most of the time a client requests it, it is because they intend to either use it themselves for determining the appropriate required insurance or they send it to a third party insurance company for their review.

In any event there is a reason for certain clients that want the CA and it may not always be that they want to compare it to the sca value or that they intend to use it as part of their loan making decision process in terms of the amount of the loan or for collateral considerations.

So given the purpose(and maybe we should be asking those clients what their intended use of a CA is when they want it) and its intended use, that alone would make it important to do it correctly-no?
If your in the camp where you don't plug a number in that accounts for Eo and you rely on your canned comments that say you are not relying on the CA in your opinion of market value and it's not applicable blah blah blah(standard cya language), then should you be concerned about the potential misleading CA especially when you are supposed to become aware of all intended users prior to accepting the assignment? And what about the visa versa camp that plugs in Eo in their CA?
Which camp would you rather be in --given the above scenario in terms of liability?

 

[CANative]

lol.... SANDY, if you ever emerge from you long (very long) period of being a trainee and actually learn something you're going to be very embarrassed by your posts.

 

[EddieB]

I would say that most of the time a client requests it, it is because they intend to either use it themselves for determining the appropriate required insurance or they send it to a third party insurance company for their review.

Where did this information come from?

 

[23Degrees]

When truly applicable the cost approach is a necessary method by which to proceed and should only be taken on by those with the experience and skill to do so which is a minority of practicing appraisers. That is, if it is to be viewed as a method that produces reliable numbers backed by relevant and tangible data and not by a series of ethereal and inter-reliant fudge factors.

The current SOP with regard to the cost approach involves mandating that the practitioner (typically) lacking proper and relevant experience use non existent or barely reliable data, contrived "judgments", and unsortable presupposed factors to lay a giant undefendable egg. The only meaningful use of this egg is for it to be readily available to crack over the appraiser's head as a means to discredit an otherwise credible report. And there are plenty of past and future members of the "sanctioned club" that could and will someday be able to attest to this respectively.

The cost approach should be removed from the form. It should be utilized on a case by case basis for problems where it is truly necessary for credible results as determined through a proper engagement process. It should only be taken on by knowledgeable and experienced appraisers with the ability to tackle this approach in a credible manner. And lastly is should cost at least as much to do a proper cost approach as it does to complete a 1004 sans cost approach.

 

[SANDY]

When truly applicable the cost approach is a necessary method by which to proceed and should only be taken on by those with the experience and skill to do so which is a minority of practicing appraisers. That is, if it is to be viewed as a method that produces reliable numbers backed by relevant and tangible data and not by a series of ethereal and inter-reliant fudge factors.

The current SOP with regard to the cost approach involves mandating that the practitioner (typically) lacking proper and relevant experience use non existent or barely reliable data, contrived "judgments", and unsortable presupposed factors to lay a giant undefendable egg. The only meaningful use of this egg is for it to be readily available to crack over the appraiser's head as a means to discredit an otherwise credible report. And there are plenty of past and future members of the "sanctioned club" that could and will someday be able to attest to this respectively.

The cost approach should be removed from the form. It should be utilized on a case by case basis for problems where it is truly necessary for credible results as determined through a proper engagement process. It should only be taken on by knowledgeable and experienced appraisers with the ability to tackle this approach in a credible manner. And lastly is should cost at least as much to do a proper cost approach as it does to complete a 1004 sans cost approach.

I think I like what you said and agree with most of it!
I also think that most users of our reports have come around to the same line of thinking. But although most lenders have finally accepted that it is not an important part of their loan "making" decision, too many are still requiring it for insurance purposes. My hope is that this use of it will also be debunked and they will start relying on the insurance companies to provide their own damn replacement cost estimates as part of their job.