Cost Appraoch Insanity!

[TJSum]

Pat if I am reading your post correctly, you seem to be working the numbers backwords assuming Market Value equals Cost. That is the problem however, in this market they do not match...

 

[Pat Butler]

TJ- I am being a little sloppy by assuming that these newer comps (New to 2 yrs old) are probably not selling too far below their cost, so their cost is likely to represent at least the highest replacement cost per square foot. One comp in particular is listed by the builder.

So I'm assuming that the one comp which is over 4,000sf doesn't have a replacement of $400-$550K since it sold for around $300K.

 

[xmtpedprl]

Pat,

Hence my concerns. Have you not appraised in Round Lake lately? You're not altogether too far in Naperville.

Dave...

 

[Pat Butler]

I don't get up there too often. I'm in Montgomery and that's pretty much as far north as I go.

 

[JT1974]

TJ- I am being a little sloppy by assuming that these newer comps (New to 2 yrs old) are probably not selling too far below their cost, so their cost is likely to represent at least the highest replacement cost per square foot. One comp in particular is listed by the builder.

So I'm assuming that the one comp which is over 4,000sf doesn't have a replacement of $400-$550K since it sold for around $300K.

Attention Trainees:

The above is a good example of what NOT to do.

 

[athome77]

Dave, I checked the MLS (all reports done, nothing else to do). 1 VL sale in Round Lake in past 6 mos, 18 in last 12 mos, 49 currently listed. I agree there is a strong case for functional obsoloescence due to market conditions. Obvious over supply. Check Lake County Assessor site. There have been a few recent developer closeout/auctions of un built home sites in Grayslake and Mundelein, all located within subdivisions. Both were handled by Inland. It'll take some time, but if you search by partial PIN or street name you should find at least one or two. Even if you have to adjust site value for location (that little area labeled "Support for the opinion of site value), you will at least have a defensible position. I strongly advise against the $1 site value. Tried that in Englewood a few years back and it was a nightmare. Find one good land comp and reconcile your value with emphasis on the sales comparison.

PS No Income Approach? 20 4+ bedroom 2 stories currently listed for rent in RL/RLB just kidding.

 

[JT1974]

Dave, I checked the MLS (all reports done, nothing else to do). 1 VL sale in Round Lake in past 6 mos, 18 in last 12 mos, 49 currently listed. I agree there is a strong case for functional obsoloescence due to market conditions. Obvious over supply. Check Lake County Assessor site. There have been a few recent developer closeout/auctions of un built home sites in Grayslake and Mundelein, all located within subdivisions. Both were handled by Inland. It'll take some time, but if you search by partial PIN or street name you should find at least one or two. Even if you have to adjust site value for location (that little area labeled "Support for the opinion of site value), you will at least have a defensible position. I strongly advise against the $1 site value. Tried that in Englewood a few years back and it was a nightmare. Find one good land comp and reconcile your value with emphasis on the sales comparison.

PS No Income Approach? 20 4+ bedroom 2 stories currently listed for rent in RL/RLB just kidding.

I think you meant to say external obsolescence due to market conditions.

The following are taken from the Dictionary of Real Estate Appraisal Fourt Edition

Functional Obsolescence: An element of depreciation resulting from deficiencies or superadequacies in the structure.

External Obsolescence: An element of depreciation; a defect, usually incurable, caused by negative influences outside a site and generally incurable on the part of the owner, landlord, or tenant.

I am NOT trying to be a wise ***..........just trying to clarify as I'm sure there will by MANY trainees reading this thread and I want to ensure that they don't confuse Functional and External obsolescence.

 

[Joyce Potts]

I've only read the original post and I'm hopeful that someone has already posted as to the possibility of external obsolescence posed by current, oversupplied and/or declining market conditions.

In my market of Central Florida the land values have gone down. Labor has gone down because much of the residential housing market has tanked.

That leaves the bricks and sticks. Unfortunately, the building suppliers have not decreased the cost of their building components and sorry, I no longer waste my money on Marshall and Not So Swift.

Resulting in the cost to reproduce or replace the site and improvements at a higher COST than the current market is willing to pay for. That's right--if you have like sales it's a reasonably simple analysis. (Oh, I see it coming now.)

Off Site = External Obsolescence which is the way my appraisers are doing most of their cost approaches these days. Many will suggest that's a backed into Cost Approach, but I disagree if you have both reliable cost data and comparable sales data.

Yes, even my trainees get a 1/2 day seminar on how to handle this situation.

Thanks AI, for dumbing down the demo requirements. Because that's where most appraisers USED to learn it.

 

[athome77]

JT.

Meant EXTERNAL. My bad.

 

[hastalavista]

Thanks AI, for dumbing down the demo requirements. Because that's where most appraisers USED to learn it.

Joyce,

Since you said you read the original post and fast-forwarded to the current, I'll add this to what you skipped:
I posted that the AI courses cover Economic Obsolescence.

And, since you've completed the demo I have yet to attempt, I will add that I have it on good authority that EO is an expectation when it is appropriate!