Basis For Adjustments

[hastalavista]

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.

Sid: I would submit that in the example above, depreciation includes: physical deterioration + functional obsolescence.

As Gobears81 states:

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.

Value = Cost - Depreciation
where depreciation includes all forms (physical, functional, and external.

 

[Elliott]

You got an alternative basis, like realtor opinions, or ebay?

 

[Mark K]

I'd say generally Yes for commercial property and generally No for residential.

For residential, if its the only option available, i.e., no market data, its better than nothing, a method of last resort.

 

[leasedfee]

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? . . . .

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

With all due respect, we are on the commercial/industrial side of the Appraiser's Forum, not the residential side.

The buyers and sellers are sophisticated. They commonly (if not usually) know more than appraisers about cost and the numerous alternatives of construction techniques and materials. Pools and garage units can be measured as a counter-check by apartment rent differentials. What do you do if a comparable's warehouse's dock high bay requires replacement or addition to come to market norms? A subject or comparable has a small bridge crane; fuel station; weight station; extra office TI? How much does the lack of, over-capacity of, or code compliance of HVAC, electrical, fire sprinklers, or elevator's affect the comparable? What about calcs to determine loss of clearance or free-span due to a bad aviation hangar door? How about atypical operating expenses from building features that need to be analyzed for comparison to the market? Like chronic masonry sealing expenses because the developer bought lousy crumbly brick. The commercial/industrial appraisal world lacks data that can never be match-paired. Ever. Thus, the mini cost approach is an excellent method to bridge the gap.

 

[NachoPerito]

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.

We are professionals and we determine if the depreciated cost is valid. We are qualified enough to determine if something is a market standard desirable to a typical buyer. If so then the depreciated cost works well. An outdoor pool in North Dakota is a perfect example of when not to use depreciated cost. Or in commercial appraising, when a warehouse user finishes 70% of the building with office space when a typical buyer will tear out some of that office.

 

[NachoPerito]

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.

I don't think a buyer needs to know the replacement cost of a porch to pay money for it. They are buying the entire property and aren't breaking down the segregated cost.

Spec homes are built all over the country. Builders get the cost back and then some for the kitchens, fireplaces, 3rd car garage, skylights, decks that they construct. Seeing builders make profit constructing homes proves that cost is an indication of value.

 

[Michael P Jacobs MAI]

Wondering about the gallery's thoughts on the following quantitative adjustments for an commercial improved property (office, retail, warehouse)...

Our methods should reflect the market, and sometimes SWAG is all there is. Anyone would recognize that "discount to replacement cost" requires too many poorly defined variables to be an ideal method, but during down-markets investors use it to justify value all the time so it's considered "credible" nevertheless. Why wouldn't your method sound reasonable when data is insufficient?