External Depreciation Adjustment

[Mr Rex]

That's a big fat negative, sir. Other than its impact on site value, which is where it would rear its ugly head, it will have no bearing on the cost of construction. Again, as I stated in my previous post, there is an inherent weakness in the correlation between replacement cost and market value. In other words, we can find the external obsolescence and quantify it using market data in the Sales Comparison Approach but certainly can't using cost data in the Cost Approach.

External obsolescence affects the site value and the contributory value of the improvements, not just the site value. Obviously you have a weak understanding of the concept. All forms of depreciation should be reflected in the Cost Approach, again you must have a weak understanding of the Cost Approach, its application and use. I'll be glad to school you later, but I have a feeling others will get to it before I have a chance to get back to it.

 

[Pittsburgh Pete]

If external depreciation should never be included in the cost approach, you might want to write Fannie Mae and tell them to remove it from the cost approach in their forms.

But this is heading off topic quickly. My question in a nutshell is do you handle adjustments for external depreciation with across the board adjustments?

Begs the question as to the source of the adjustment; would have to support it by a sale on that road or a similar road (may have to go back in time).

 

[Mr Rex]

Look at that. Me and Pete, on the same page. There is a God. We will argue about our views of God and his views of us, but once we agree.

 

[TXTea]

Portions of the external would be reflected in the land value.

Correct. Most of it is captured there. In cases of external obsolescence, it is important for the reader to see that the cost of improvements are not fully recaptured by the market. The only way to do that is to demonstrate it in the Cost Approach. If you make an adjustment for external obsolescence outside of the site value, you're effectively defeating the purpose of the Cost Approach. Yes, I know what's on FannieMae's forms. I also know that FannieMae forms are grossly outdated and in need of a complete overhaul.

 

[TXTea]

Obviously you have a weak understanding of the concept

I don't have any weak understanding of any appraisal concept pal!!! The Cost Approach is a very valuable tool for me. I use it for feasibility studies. And I also use it in these cases right here. If you're adjusting for obsolescence in the Cost Approach, you're defeating its purpose. We're calculating the cost of the improvements and the market value of the land. Not the VALUE of the improvements. If you're looking at the VALUE of the improvements then what's the point? That's what the Sales Comparison Approach is for. Marshall and Swift? Don't need it, right, because you're calculating the VALUE of the improvements. Whatever dude.

 

[Mr Rex]

I don't think you understand the Cost Approach at all. So you ignore depreciation? Wonder why they have those spaces in the Cost Approach? What relevance does the cost of improvements have on any property as if new if you don't consider any depreciation when its not new? Do you understand that External Obsolescence often occurs in new construction?

 

[TXTea]

So you ignore depreciation?

Absolutely not. Physical depreciation is accounted for. I typically use straight line depreciation, but that has nothing to do with external obsolescence. Again, external obsolescence has no measurable impact on the cost of the improvements. What you'll usually end up with is a Cost Approach conclusion higher than the Sales Comparison Approach. That's where the discussion begins.

 

[Mr Rex]

You might want to read a few Appraisal texts and take a few courses. You are hell bound on putting you license in jeopardy for you lack of understanding of the Cost Approach, its application, implementation, and reconciliation. All you are doing is setting the upper limit of value with the Cost Approach and ignoring 2/3 of the applicable depreciation factors that should be recognized in development of the Cost Approach. CG,and doesn't know how to apply the Cost Approach. Wow.

 

[Terrel L. Shields]

That's a big fat negative, sir. Other than its impact on site value, which is where it would rear its ugly head, it will have no bearing on the cost of construction.

What Pete said. Beat me to it.

My question in a nutshell is do you handle adjustments for external depreciation with across the board adjustments?

You could but I would rather hunt for support in the sales with a similarly situated property.

 

[Rlong]

I simply do not do "accross the board" adjustments for external obsolescence (on a FNMA res report); i will continue (back, out..?) untill I have something, anything.

(I concur with the "it needs to be reflected in the cost approach too"; And a solid argument can be made for doing that solely in the site value OR where FNMA provided us a box to put it in in the cost approach.)