Appraising Properties Having Multiple Components- Discount?

[Howard Klahr]

My appraisal experience and education suggest that the value of the sum of the parts often does not reflect the value of the whole.

While this can be true, the issue is not always attributable to a discount but rather in certain cases there may actually be a premium. This is why it should be addressed on a case by case basis

 

[Elliott]

One man's 'hodge podge' is another man's diversification. Regarding discounts, if you have evidence that the market discounts "use 'em," but lots of people think there are 'discounts' because they are looking for a smaller value and they come up with thought experiments to justify it.

 

[leasedfee]

Has anyone reverse engineered a hodge-podge comp to determine if discounting was warranted or not? And if so, how much? I sorta tried one time had didn't really feel comfortable to draw a conclusion. In more traditional store-front mixed-use I find no discounting irrespective of the YOC. NOI is divided by the dollar-blended cap rate.

There was a AF thread about this topic maybe three years ago. I argued in length that there is no discount -- but have come to appreciate that Denver's market is unusually strong compared to the wide variety of markets represented on our forum. Hodge-podge properties do have an extended exposure/marketing times but somewhere out-there is an eccentric DIY local investor type. They attract the same personality as the seller, an independent do-my-own-thing make-my-own-universe avoid-corporate-formalism type of guy.

 

[Terrel L. Shields]

Has anyone reverse engineered a hodge-podge comp to determine if discounting was warranted or not?

Yes, and like @Howard Klahr said it is case by case. We have a bunch of loft apartments built on second floors in a small downtown, below them are small shops, cafés etc. The area went from dead zone 20 years ago to very lively. There seems to be a premium on these buildings.

OTOH, many rural properties may function normally but have a single feature that is a negative. It could be an oversized horse barn, maybe a small retail shop "Grannies Quilts" was a local one I recall, an ADU, or commonly a shop building for mechanical work. Almost all our tractor repair guys are living in the country. One I've done was a red iron building where the owner built small trailers behind his personal home. Another was a B & B on a ranch with a second dwelling. Another a large indoor arena out in no where. Been on the market for six or seven years. $1,000,000 appraisal...didn't even address functional obsolescence in the cost approach.

A small shop may have no readily measurable functionality impairment but an oversized one might. Again, it is a judgment. I recently appraised a livestock auction. It included a nice 1,700 SF home with a pool. It was unique in that it specialized in non-beef animals (goats, chickens, pigs, etc.) I relied upon the income approach because it made the most sense to me. The house could be rented, and was far enough away from the auction barns that in that rural setting it wouldn't be a real impact. No similar auctions, especially one with a dwelling, was found in a three state search that I did.

Another project was a MotoX race track with a gravel pit on the hill above it, another was a gravel pit, house, and hen farm in addition to 200 plus acres. Almost always any subsequent sale will reveal a discount, and the choice is does the discount apply overall, or did the buyer pay "full value" for the land and say the house, and apply the discount solely to the features that meant nothing to them? I suspect the latter is usually the case.

 

[leasedfee]

pay "full value" for the land and say the house, and apply the discount solely to the features that meant nothing to them? I suspect the latter is usually the case.

Good point.

Terrel what is fueling the return to main-street (and presumably store-front retail and mixed-use) in your areas? Terrel, one of these days I want to take a field trip to Arkansas to hang out with you for a day, see a chicken farm and your main-streets, etc.

They're sometimes in oddball locations too. Did one once that was a former WW2 dynamite manufacturing site (had these large berms along the interior road where the supply trucks drove) and hills that kinda hid it from the state highway. It had a SFR, warehouse, supply sheds, office building, and decent office building, and a fuel farm. It had just been purchased and I found it had no discounts. But the numbers become so blurry that I could have easily argued a premium or a discount from the discrete pieces.

 

[BRCJR]

When segmenting out the different improvements, say residential, self storage, car wash and office building and adding the sum of the parts are you considering the land value from each component? Are you extracting the improvement value and doing a land value on the whole?
Would not a cost approach be a good indication of value in this "special use" scenario?

 

[leasedfee]

considering the land value from each component?

Absolutely -- very important.

Would not a cost approach be a good indication of value in this "special use" scenario?

Yes, it gives an integrated whole, and it reflects that they lie on a larger parcel of, say, five acres which sells for less $/sf, than five buildings each on one acre parcels. The challenge on the assignment I described above was that each improvement was from every-which-era and my physical depreciation table was highly detailed but very subjective as there is little but judgment to support the age of components.

 

[Terrel L. Shields]

Terrel what is fueling the return to main-street

In a word, Walmart. They hire, vendors have to have a local presence. They also bring in tons of international and US employees for training and even block lease apartments for them. College students and singles like the lofts. Coffee popularity in my town has brought in college students within easy walk or bike. That has led to small pizza kiosk & food trucks. Overturning dry county rules also brought in two upscale restaurants and a craft beer bar.

 

[reviewbe]

See USPAP S.R. 1-4 (e). Usually refers to timber, mineral rights, and the like, but applies any time you break the subject into parts and then add them back up. You have to address if whole does not equal sum (or if it does too) based on something. Not supposed to do it based only on a guess or logical reasoning.

I used to keep a file with oddball sales in it, just for this kind of thing. Analyze a component type sale once, and it's good for the rest of your career. I don't understand why appraisers don't keep the weird data in a hallowed place. Useful when you want to estimate a discount for lack of vehicular access, or a premium for river frontage, or a motel on leased land, or other unusual circumstances that you rarely deal with. Even old support is better than none, and if you do track certain types of sales over time, you'll have it in your back pocket when you need it.

Lacking actual data, you could always interview brokers, buyers, sellers, etc.

 

[Terrel L. Shields]

I don't understand why appraisers don't keep the weird data in a hallowed place.

I do that. Summation can be problematic especially if attempting to include an outlier property. Minerals are unique in that they are frequently fungible in oil country and sell readily severed from the surface. They rarely impact surface values unless development of wells is impacting same. In non-oil country the mineral values are so low as to be invisible.