Cost Appraoch Insanity!

[Scott Kibler]

Dave,

4,000 sq ft just seemed like a large house for the RLB subdivisions I've been to out there. I generally decline Lake County assignments due to PITA travel but I occassionally do some work up there. Good online data.

I was just wondering if the subject was unusual for the subdivision..ie. it's 4,000 sq ft with all the builder upgrades while most models range 2,600 to 3,200 sq ft.

Just idle curiousity on my part. The RLB I'm most familiar with is composed of 1940's-1960's frame ranches.

 

[incognito]

You CAN NOT manipulate the cost approach by arbitrarily toying with the land value. There are ways to come up with a land value. But, as has been said, the land value is "AS IF VACANT". To prove my point, I GUARANTEE no one will sell me any of these vacant sites for $5,000. It is not the land that is causing the cost approach to come in high.

IT IS the lack of understanding and proper allocation of depreciation and obsolescence. In this case, it most certainly is mostly external or economic obsolescence.

We all had no problem throwing in Entrepreneurial Profit into the cost approach 2-4 years ago (me included). When the market dictates that MANY buyers are READILY paying more than it costs to build, the difference between cost and value became EP. Now that the market is dictating that people are willing to pay less than the cost, it is just the opposite.

I would like to submit that EP was in essence a form of positive External obsolescence. The market created a condition external to the subject property: Ridiculously rapidly raising prices. Now we have a falling market, and that same magical entity which caused the rise, is the same one which is causing the fall (exclusive of course of the changes in land values, and labor and materials costs). Whereas we once called it a profit over and above all normal costs (as in Entrepreneurial profit) but we are calling is a loss (as in External obsolescence), where it is worth less than it costs to build.

Please credit me in the first text book that publishes my theory:
"Like positive functional, positive external exists. In the cost approach, negative External (aka External Obsolescence) is a form of value decrease relative to external market factors. Positive External (aka Entrepreneurial Profit) is a form of value increase relative to external factors.

We will call it the "Geiger Theorem of Externalities".

 

[xmtpedprl]

Scott,

There are several subs that have 3,500 to 4,000 SF homes, actually, they are quite common. But yes, you're correct, the 'regular' part of the Round Lake areas (there are 4 'Round Lake' cities all gathered together) are as you say, older homes, cottages, and whatnot.

Again, the problem is, there are NO vacant land sales in these now closed off subdivisions. The builders are long gone. The question I then ponder would be this:

Even if there were ONE, sole, remaining lot available, who would buy it right now, due to the obvious problem of needing to build a CONFORMING home that no one would now build?

As Terrell said, he'd buy it for a buck, but - ABOVE that - what would, or could, it be said to be worth? You see, I may NOT buy that thing for a buck, as I may never, EVER, be able to build a home that becomes profitable for me for years (if ever) to come, YET, I'd still be paying taxes on it all the while.

Again., I simply do not know, and I would like to figure it out, as this will be a reoccurring issue in the year to come.

Dave...

 

[PropertyEconomics]

Scott,

There are several subs that have 3,500 to 4,000 SF homes, actually, they are quite common. But yes, you're correct, the 'regular' part of the Round Lake areas (there are 4 'Round Lake' cities all gathered together) are as you say, older homes, cottages, and whatnot.

Again, the problem is, there are NO vacant land sales in these now closed off subdivisions. The builders are long gone. The question I then ponder would be this:

Even if there were ONE, sole, remaining lot available, who would buy it right now, due to the obvious problem of needing to build a CONFORMING home that no one would now build?

As Terrell said, he'd buy it for a buck, but - ABOVE that - what would, or could, it be said to be worth? You see, I may NOT buy that thing for a buck, as I may never, EVER, be able to build a home that becomes profitable for me for years (if ever) to come, YET, I'd still be paying taxes on it all the while.

Again., I simply do not know, and I would like to figure it out, as this will be a reoccurring issue in the year to come.

Dave...

When something costs more to produce that it does to buy existing then you have obsolescence. If home prices are declining then land values are declining as well .. it stands to reason. Allocation of land as a percentage of the total would supply a means of measureing land value. I would doubt over time that the percentage would change much but the total price/value will.

 

[DTB]

Therein lies the problem, the community also has amenities to match. A 4K house there is only equivalent to a 4K house in let's say Libertyville or Vernon Hills in some (many) idiot buyers' minds.

My 18 year old son says who the **** wants to live out here? I'm proud of that youngun'.

Watch for the city and inner ring to have a HUGE upside when all is settled out.

 

[Scott Kibler]

Watch for the city and inner ring to have a HUGE upside when all is settled out.

I have a house in the city, 4 blocks from the city limits and 1 block from the Metra. I figure I'm sitting pretty.

 

[TJSum]

The prices in gas also fuel these value trends...

 

[DTB]

I have a house in the city, 4 blocks from the city limits and 1 block from the Metra. I figure I'm sitting pretty.

You da man!!

 

[wickedness1]

When something costs more to produce that it does to buy existing then you have obsolescence. If home prices are declining then land values are declining as well .. it stands to reason. Allocation of land as a percentage of the total would supply a means of measureing land value. I would doubt over time that the percentage would change much but the total price/value will.

Thats exactly what I tried explaining in post 15, but it was kinda ignored, lol. Probably my whole trainee designation

 

[xmtpedprl]

I understand allocation, and normally that's a fine tool to consider, but I would still like to know why, if should exist (and I don't know whether it does or does not, as the builder is gone), would anyone even consider buying a vacant lot in a subdivision like this at all?

Let's say an uninsured home burned to the ground, and the owner abandoned his debt, and the remains were removed, would anyone even consider purchasing the lot? I don't think they would, as the burden of taxes combined with no profitable use for it would preclude anyone with their sense about them from buying it.

What would anyone do with it *now* even if it were available?

I think this is my stumbling block, and if an answer was provided I obviously missed it.

Dave...