Basis For Adjustments

[NachoPerito]

Wondering about the gallery's thoughts on the following quantitative adjustments for an commercial improved property (office, retail, warehouse). In a perfect world we would adjust based on paired sales, but let's be realistic.

Location Adjustment: Based on underlying difference in land value per square foot.

Condition Adjustment: Difference in effective age divided into the effective life then multiply by the ratio of improvement value to whole property value to eliminate the land component.

Quality: Estimate additional cost per square foot of comparable sale and deduct for physical depreciation and functional issues.

Thanks.

 

[hastalavista]

By definition,
Value = Cost - Depreciation

So I naturally voted "yes".

 

[Terrel L. Shields]

ocation Adjustment: Based on underlying difference in land value per square foot.

Since land is valued as if vacant and available for its highest and best use, there is a fixed dollar adjustment. Any other method potentially is including external obsolescence which should be addressed separately.

Condition Adjustment: Difference in effective age divided into the effective life then multiply by the ratio of improvement value to whole property value to eliminate the land component.

Looks sound to me.

Quality: Estimate additional cost per square foot of comparable sale and deduct for physical depreciation and functional issues.

Not well worded but I think that is not an unreasonable method.

 

[NachoPerito]

Not well worded.

Says every client that has read one of my reports

 

[Joe Flacco]

Depreciated cost is fine but it needs to address all the different kinds of depreciation. Not only physical depreciation.

 

[Michigan CG]

I think it is very viable. I do it for residential all the time.

 

[Joe Flacco]

For residential if you are using depreciated cost for something like a five year old pool and there are no sales with pools, how do you know the market even wants a pool? The depreciated cost could be zero. Issues like that is the problem I have with depreciated cost for adjustments.

I agree difference in land value is the best way to determine adjustments for neighborhood/subdivision location.

 

[Meandering]

Depreciated costs can be used alone, or in conjunction with sensitivity analysis that would indicate a change in market preferences, validate the condition of the market relative to replacement costs, indicate the value of new technology that is not widely available, such as the early days of solar panels, or T-1 wiring for in house internet connections.

It is a tool like any other, you have to know when to use or not use it, and how to use it correctly.

 

[Gobears81]

If you factor functional/ economic obsolescence into your depreciated cost adjustments and the clients reject that, then they also reject the premise of the cost approach.

 

[Sid Holderly]

Yes, have used, but some/many/ depending on the subject circumstances & line item may need adjusted to a buyers perception of the value.

Example, a 3 year old pool in northern Indiana is not likely to be valued by a buyer at its depreciated value. The window or use is too narrow for most buyers to allocate an amount equal to depreciated value.
A sun room, yes.

Buyers generally have little knowledge of the cost of amenities: pools, fences, large porches, outbuildings, retaining walls, etc.