Cost Appraoch Insanity!

[xmtpedprl]

WOW, thank you all!

Some have asked if I really believe that site to be worth a dollar?

Well truth is, I don't honestly know. Not now, not as of this point in time, anyway. It will not be vacant anytime soon, and there are no new builds taking place in this market, so I do not know.

Site improvements have value, and were valued, but that dirt? In that subdivision? I don't know how to calculate the value of that lot, because it appears to me that they put too large a home in this subdivision (and others like it) for the Round Lake market

I agree it's possibly a type of 'External Obsolescence,' but don't know how to apply it. I agree that cost and value are not necessarily equal. What I do not know is IF, at this very point in time, the lot actually, really, has value, or if its the home operating as gigantic over-improvement, but that due only to the previous availability of financing that has now dried up.

After all, over the previous two to five years ago hundreds, more than that, were sold. They WERE the market, and sure, those lots were worth something then.

Anyway, the whole thing probably simply isn't applicable, but I don't give up easily and am looking for something more, hmmmm, professional in terms of stating the scenario for my clients.

Again, thank you!

Dave...

 

[CURT VAN HOOSER]

The CA is not reliable in the current environment. In most areas I work, it would cost substancially more to construct a home than to purchase existing inventory.

 

[The Sheriff]

Here's my statement I've been utilizing... The land obviously has value...

The site value is based on the total land value allocated by the Pinal County assessors office. Typically, site values are extracted from tract home subdivisions in the market area. However, with the current state of the subject's heavily declining market area, the site value could NOT be extracted as the cost to build these properties per the updated Marshall & Swift Residential Estimator is currently greater than the resale value in the subject's market area, not including a site value. The subject's market area is subjected to severe economic (external) obsolescence based on the current state of decline noted in the area.

 

[Willie]

Most likely you are on the wrong track with manipulating the site value. I'm not there, but I would guess the site is worth something to someone, even at a discount to a neighboring property, assuming there these neighbors aren't in default as well..

You subject is being affected by external factors. In rare cases, if it's a new home in a overwhelmingly older house market, you might have a higher effective age than actual age. I couldn't get enough details from your original post, but from what I gather from other posters, it probably is not the case. Normally you see this sort of thing in an older neighborhood which is stable and established and somebody goes and builds a brand new home. External, sure, or maybe the "utility" of the houses is the same as all the other surrounding houses, thus making it effectively older or their age, in terms of utility.

No matter what you call it, I'd stay away from manipulating the site value unless I knew 100% that it was worth what you say. It could be a serious point of attack going straight to, and jeopardizing the credibility of the remainder of the report. Not that you'll get many complaints in an REO situation, but who knows?

 

[wickedness1]

WOW, thank you all!

Some have asked if I really believe that site to be worth a dollar?

Well truth is, I don't honestly know. Not now, not as of this point in time, anyway. It will not be vacant anytime soon, and there are no new builds taking place in this market, so I do not know.

Site improvements have value, and were valued, but that dirt? In that subdivision? I don't know how to calculate the value of that lot, because it appears to me that they put too large a home in this subdivision (and others like it) for the Round Lake market

I agree it's possibly a type of 'External Obsolescence,' but don't know how to apply it. I agree that cost and value are not necessarily equal. What I do not know is IF, at this very point in time, the lot actually, really, has value, or if its the home operating as gigantic over-improvement, but that due only to the previous availability of financing that has now dried up.

After all, over the previous two to five years ago hundreds, more than that, were sold. They WERE the market, and sure, those lots were worth something then.

Anyway, the whole thing probably simply isn't applicable, but I don't give up easily and am looking for something more, hmmmm, professional in terms of stating the scenario for my clients.

Again, thank you!

Dave...

Dave... What percentage of value do you feel that the sites around this lake contribute to the comps sales prices? For example, if you did matched pairs on identical sales (houses) but with different size lots, what is your percentage for those lots? Maybe 2-20 percent of the sales price for the lot?

Do matched pairs & comparing lot sizes & figure out your percentage & then apply it approprately to your cost approach & explain that you used this method to obtain the site value. (I hope I'm explaining it so you understand what I'm talking about, lol)

 

[hastalavista]

Declining market = External obsolescence...

Without getting into the nuance of what kind of obsolescence, according to the AI's advanced cost approach course (and, the recognized text) Incognito is correct.

Getting into the nuance, it would be considered economic obsolescence. :new_smile-l:

Edit to add:
Sorry, Sheriff. Didn't read your full post. Dave, according to the AI course, Sheriff is also correct in regards of attributing the difference to obsolescence.

 

[The Sheriff]

Dave... Applying the external obsolescence is the most difficult part that I've come across as well... But, what I do, and until someone states I'm incorrect... I look at the data of similar designed homes from that tract from the first quarter of 2007 versus the first quarter of 2008. That's a 15 month period. I show the decline based on the average stats from the MLS (our's is decent here). When I get the straight-line decline per month (say like 2.2% per month in this area I just completed my appraisal in), I then multiply that number by 12 months. There's my economic obsolescence. I believe it's one of the more methodical and logical ways to consider depreciation (but nothing is perfect). The cost approach has appeared to be in-line then with the sales comparison approach. I still state it's unreliable data... but I paid $800 for that M&S online software and want to make sure that I'm using the hell out of it to get my money's worth!

 

[xmtpedprl]

That's good, thank you. My Arizona guy runs into this all the time has been for over a year - he lives in Mesa), it's only now beginning to become an issue in Illinois.

However, again (and bear with me) WHAT value has mysteriously vanished?

I mean, WHAT of the original $414,000 price whisked away into never-neverland...? The home's structure has more or less the same value (unless you apply a value for something or other to it), so how is it that it isn't the AREA, thus the land?

I'm not being wise, I'm just trying to mechanically break it down.

Dave...

Yikes! I submitted this and found five others had been added. Again, thanks this is outstanding, and I'm LEARNING from this...!!

 

[Willie]

That's good, thank you. My Arizona guy runs into this all the time has been for over a year - he lives in Mesa), it's only now beginning to become an issue in Illinois.

However, again (and bear with me) WHAT value has mysteriously vanished?

I mean, WHAT of the original $414,000 price whisked away into never-neverland...? The home's structure has more or less the same value (unless you apply a value for something or other to it), so how is it that it isn't the AREA, thus the land?

I'm not being wise, I'm just trying to mechanically break it down.

Dave...

Yikes! I submitted this and found five others had been added. Again, thanks this is outstanding, and I'm LEARNING from this...!!

I don't think it was whisked into never neverland, but into the developer/builders pocket. The home's stucture has more or less the same cost, rather than the same "value" as you have stated.

Sounds as if the entire subdivision is out of place. Too much house on a site with too little value.

Good luck!

 

[Craig in Oregon]

Dave,

Ran into the external; obs. problem as a learning appraiser in the Oregon Depression of 1982-1986, it's the same answer now.

Loss in value caused by externalities including economic conditions beyond control of owner, presumably, market conditions around the subject area, city or state, nation, world, universe; anything that is not on subject site and almost always incurable; the present decline in values is curable but who knows when? Freeways, steel mills, railroads, etc.

The site has utility and value, more than a dollar, but not as much as in a hot market with demand in the subdivision by builders, etc.

What you have now is cost in excess of value and what went up in smoke was the difference between what replacement cost would be new, minus physical depreciation,
and the value the sale comparison approach is showing you. Used to reconcile the two approaches, the remainder is the dollar figure explanation.

As such, play money figures:

414,000 new cost
-44,000 physical
--------

370,000
-50,000 or whatever site value number

-------
320,000

- 270,000 total sale comparison indicated value

= $50,000 external obsolescence