Cost Appraoch Insanity!

[DTB]

Willie,

Man, I assure you, hundreds of homeowners lost a hundred or more thousand dollar's of 'value' over the past year in Round Lake. Nothing unique these days nationwide, but for us it's now becoming a reality normally unheard of.

God help those (remaining) who have the ARMs expiring, they will be unable to refi unless their loan was quite small in comparison to their sale prices.

Dave...

And you will see this, if you haven't already, in McHenry County. There is NO reason for the masses to be living there in these oversized houses, unless you like horrendous commutes to Chicago, congestion to go shopping as ALL commercial is on about 3 roads only, skyrocketing taxes to support the growth...

And yes we had one of the last cottages on LITH in the 70s and a sister living in Lakewood (McMansionland), nuff said.

Anyone ever wonder why these locations had nearly ZERO growth in the prior 80 years?

 

[mwbode]

Declining market = External obsolescence...

Ditto! In this market it's applied to almost everyone of my cost approaches.

 

[xmtpedprl]

I do believe my peers have spoken, and EO it is, and shall be.

As for the McMansions? Couldn't agree more. They just came too fast and for all the wrong reasons. What shall become of them? Time will tell.

One final question, which came to me clearly last night as I lie awake in bed concluding my final thoughts:

Regarding the land value. Someone mentioned that there are vacant land sales IN Round lake. To that I would agree, 100%. HOWEVER, those lots are NOT in my guy's subdivision, or any subdivision like his. They are entirely different, as Round Lake is a quirky little town, with vacant land in odd areas here and there, and old homes having been demolished in favor of new homes, homes that will likely (and sensibly so) conform to the neighborhood.

Therefore, how would one value a lot such as my guy has, keeping in mind that the question is relevant due to conformity, no? Let's say there WAS one vacant lot in my guy's subdivision, would there be ANYONE interested it at ANY price? Methinks not, as the wonderful folks at the Village of Round Lake would set the parameters of what could, and will, be be built there, so as to keep the peace with what already exists.

See, I don't think anyone would be interested, as no builder would even consider putting yet ANOTHER 'McMansion' on that lot, certainly not right now, it's a guaranteed loser, as there is no more market for such a home.


So, if I'm right (perhaps I am not!), wouldn't that lot have the potential to be absolutely worthless right now, at this time...:?

Your thoughts.

Dave...

 

[TJSum]

If no comparable lot sales are available, the next best thing is to look for sales of tear downs or properties where the improvements add very little value. If neither of these are available than one usually uses the Allocation or Abstraction Methods.

Based on Dave's last post, in this circumstance, would the Abstraction Method even be possible? It seems to me there would be two unknowns, the land value and the EO, how could one determine the value of each?

 

[xmtpedprl]

TJ,

Correct, I don't think any of the 'traditional' land valuation methods will work right now in Round Lake 'McMansionland.' In fact, I'm 100% certain they won't work, which is why I think the land is worthless at this particular point in time.

Dave...

 

[Scott Kibler]

I didn't realize RLB had a "McMansionland". I guess I need to leave the city more often. Are we talking about an oversized model in one of those low-mod quality curvy street developments?

What Neff says can be applied to most any of these exurb towns whose transplanted Chicagoans, Des Plainesians, Ciceroians, etc. face skyrocketing property taxes and transportation costs.

Some kids my kids went to school with moved last year when their parents divorced. They went to live with their mother who bought a brand new house in Plano...she works for Cook County. Yeah, that'll last.

 

[xmtpedprl]

Scott,

Well, I dunno if they're OVERsized (they do conform), but they are big, and those streets are really "curvy!"

;^)

Seriously, sure, NOW they seem odd as can be, but they did sell like hotcakes for 6 -7 years, they couldn't build them fast enough for a spell. Now they can't sell them for anywhere near the original sale price, which is, well, BAD for the folks having purchased them.

Dave...

 

[Terrel L. Shields]

Declining market = External obsolescence...

right answer

agree it's possibly a type of 'External Obsolescence,' but don't know how to apply it.

geez

would it be more accurate to say that the CA was not "independent," or that there was really only one approach?

all three approaches depend upon MARKET DATA. Therefore, all are interconnected and cannot be separated one from the other. You can (should) use both income and cost to support and/or confirm Sales adjustments just as you should use sales to estimate or allocate values and you relate both to the income they generate.

that still won't solve what LAND values are worth, that I honestly do not know,

what was the last lot sale in the area? Even if that was two years ago...Are there not ANY lots offered for sale? Blah Blah Blah about the taxes but if land (lots) are selling for $1, gimme some. I'll pay a buck a lot - take a 1000 of 'em if you can find them for me. If the assessor tries to assess them for more than $1 to court we go. If they win I ventured only a dollar anyway. I'll walk and the county can own the lots.
Land is appraised as if vacant and available for its highest use. I suspect that is some discounted price of a lot that relates to someone (investor) willing to wait the market out. They might offer about 1/3rd of prices from 3 years ago.

Now you are ready to subtract land value from your comps. Then estimate physical depreciation (straight line works for me or extract it) Whatcha got? Just what the example above said. Comp sales $300,000 less $30,000 lot = $270,000. RCN $400,000. 10% physical? 360,000 - 270,000 = 90,000 loss in value from external influences.

Just because there are no recent sales, does not mean there is no "market value". That applies to either bare land or improved land.

 

[Michigan CG]

TJ,

Correct, I don't think any of the 'traditional' land valuation methods will work right now in Round Lake 'McMansionland.' In fact, I'm 100% certain they won't work, which is why I think the land is worthless at this particular point in time.

Dave...

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.

Dave, it is not the land, it is externalities. The national and local housing crisis is an external factor. Entrepreneurial Incentive and profit was through the roof in the boom. There is no incentive now to build because there is no profit to be made.

The difference between cost and value is the external obsolescence (depreciation).

 

[Fred]

would it be more accurate to say that the CA was not "independent," or that there was really only one approach?

all three approaches depend upon MARKET DATA.

I wasn't referrig to "data." I was referring to "results." The arrayed comp prices are results. That's why a "comp check" is an appraisal. The opening post for example states the single-point results of the sales comparison. It would simplify matters if you clarify whether you are suggesting that the practice continuing to add and subtract numbers to the cost estimate until the summation process matches the results of the real approach is a way of producing credible cost approach results?