Sensitivity Analysis For GLA

[Gobears81]

I don't understand why the portion of the value attributable to the underlying land would factor into the structure size adjustment.

If you have a 1,000 SF home selling for $100 per SF ($100,000), and site value is 25,000, then the adjustment is going to be around $75 per SF. If cost new is $100 per SF then that means improvements are about 25% depreciated including physical, external, functional.

If you have a 1,000 SF home selling for $60 per SF ($60,000), and site value is $25,000, then the adjustment is going to be around $35. If cost new is $100 per SF then that means this improvement is about 65% depreciated including physical, external, functional.

I am more familiar with this type of price range on homes than $1 million, but you also have to factor in site improvement costs (garage, sidewalks/ patio, driveways, etc) which are independent of the residence size. Also, there may be a marginal decrease in functional utility for each incremental square foot, so a buyer might not pay the same for an additional square foot as a property gets larger, even after a perimeter multiplier is considered. If you make a $75/ SF GLA adjustment for a 1,000 SF house selling for $100,000, it will most likely result in a wrong value. I have seen newer, small condos where the GLA adjustment might not be too far off from $75 per square foot in your example, but here - where most land values are low and external obsolescence is high - adjusting even 25% of the total price/ SF will overstate the GLA adjustment in many cases.

 

[Pittsburgh Pete]

Sounds to me like you have been doing it wrong for the past 30+ years. Do you need me to put together case studies for you?

 

[Joe Flacco]

Come on let's do this. Bring some properties in here that I can find info about online and let me educate you.

 

[Joe Flacco]

I am more familiar with this type of price range on homes than $1 million, but you also have to factor in site improvement costs (garage, sidewalks/ patio, driveways, etc) which are independent of the residence size. Also, there may be a marginal decrease in functional utility for each incremental square foot, so a buyer might not pay the same for an additional square foot as a property gets larger, even after a perimeter multiplier is considered. If you make a $75/ SF GLA adjustment for a 1,000 SF house selling for $100,000, it will most likely result in a wrong value. I have seen newer, small condos where the GLA adjustment might not be too far off from $75 per square foot in your example, but here - where site values are pretty low and external obsolescence is high - adjusting even 25% of the total price/ SF will overstate the GLA adjustment in many cases.

Total price / SF is a very flawed way of comparing properties. At least residential properties. I think it is probably one of the main ways to compare commerical properties.

 

[Joe Flacco]

Except when you do the sensitivity analysis using both larger and smaller comps the adjustment is in the $20-30/sf range before the values cross the respective axis of values. It may be closer to the actual cost/sf in brand new homes but even then it usually tends to be a fraction of the $/sf cost.

Are you doing the sensitivity analysis with very similar, near identical properties where the only difference is size of the house?

 

[Gobears81]

Total price / SF is a very flawed way of comparing properties. At least residential properties. I think it is probably one of the main ways to compare commerical properties.

Agreed - When I adjust on a price per square foot basis for commercial, it is typically based on percentages, so it isn't apples to apples. But for residential, understanding where the % of price/ SF the GLA adjustment is - and why - is a useful test of reasonableness.

 

[Joe Flacco]

Agreed - When I adjust on a price per square foot basis for commercial, it is typically based on percentages, so it isn't apples to apples. But for residential, understanding where the % of price/ SF the GLA adjustment is - and why - is a useful test of reasonableness.

I disagree with you.

• When your site value is 20% of total value, then your GLA adjustment is going to be a large percentage of total price / SF of improvement.
• When your site value is 80% of total value, then your GLA adjustment is going to be a small percentage of total price / SF of improvement.

The only thing that is for sure is that the GLA adjustment is going to be less than the total price / SF of improvement.

 

[Gobears81]

I disagree with you.

• When your site value is 20% of total value, then your GLA adjustment is going to be a large percentage of total price / SF of improvement.
• When your site value is 80% of total value, then your GLA adjustment is going to be a small percentage of total price / SF of improvement.

The only thing that is for sure is that the GLA adjustment is going to be less than the total price / SF of improvement.

Right. But is the property with a 20% site value going to be in the same market as one that has 80% site value? Different adjustments are made for different markets. I have been out of 1-4 family residential appraising for a few years now, but one of the last homes I appraised was worth $20,000. In that market, the analysis was actually suggesting a NEGATIVE contributory value for GLA when over a certain threshold, which may be attributed to the potential homebuyers not wanting to maintain and heat a 2,500+ SF home. Even though the lot values were only about $600 - $1,000, a depreciated cost analysis would certainly imply a positive adjustment for GLA, which would have taken you the wrong direction.

 

[Joe Flacco]

Right. But is the property with a 20% site value going to be in the same market as one that has 80% site value? Different adjustments are made for different markets. I have been out of 1-4 family residential appraising for a few years now, but one of the last homes I appraised was worth $20,000. In that market, the analysis was actually suggesting a NEGATIVE contributory value for GLA when over a certain threshold, which may be attributed to the potential homebuyers not wanting to maintain and heat a 2,500+ SF home. Even though the lot values were only about $600 - $1,000, a depreciated cost analysis would certainly imply a positive adjustment for GLA, which would have taken you the wrong direction.

I get what you are saying but depreciation from functional obsolescence is also depreciation. So I am not understanding what you are trying to say.

 

[Joe Flacco]

• When your site value is 20% of total value, then your GLA adjustment is going to be a large percentage of total price / SF of improvement.
• When your site value is 80% of total value, then your GLA adjustment is going to be a small percentage of total price / SF of improvement.

This here is a fact. "where the % of price / SF the GLA adjustment is" is directly related to the site / improvement ratio.