Cost Approach vs Value Opinion

[PropertyEconomics]

I noticed though Denis both you and Randolph found the need to call out external (economic) obsolescence. That suggests to me, and I happen to agree, that labeling them that way is less misleading.
I also think it can be important to a lender to understand the difference .. an economic impact today may not be present in the future while a proximate external factor may not go away.

That merely was my point. I fully understand both are external in they are outside control of the property owner but I do think its important (as apparently both you and Randolph do) the client be informed of what the external really is.

 

[Lee Lansford]

...

Functional, Physical, External and ECONOMIC.

Done!

"Economic" is "External" to the property.

 

[PropertyEconomics]

Done!

"Economic" is "External" to the property.

And should you find both proximate external and economic external affecting a subject property, should they be measured apart, described, and perhaps even applied separately, one from the other?

 

[CANative]

I don't have a problem with making economic obsolescence its own category and not a subgroup of "external" obsolescence.

I can see it now. Fannie will put an Economic Obsolescence box on the CA section. Then they will invent the 1004EC form to fill out when this box is checked. One section will ask the appraiser "how temporary is this obsolescence and how does it have an effect on the opinion of market value?" :laugh:

 

[PropertyEconomics]

I can see it now. Fannie will put an Economic Obsolescence box on the CA section. Then they will invent the 1004EC form to fill out when this box is checked. One section will ask the appraiser "how temporary is this obsolescence and how does it have an effect on the opinion of market value?" :laugh:

I dont bother myself so much with Fannie .. they dont promote appraisal well as is evidenced by the form they have created and approved ...

 

[hastalavista]

I noticed though Denis both you and Randolph found the need to call out external (economic) obsolescence....I also think it can be important to a lender to understand the difference .. an economic impact today may not be present in the future while a proximate external factor may not go away.

Yes, you are correct: I do identify if the externality is economic, and I give a short description of what exactly that means, and that it is usually temporary in duration.

 

[hastalavista]

By the way.......

I know that the GSE forms only ask for H&BU as-improved. It is my opinion that one cannot complete the as-improved unless one does the as-vacant. Further, it is my opinion that while the form only asks for H&BU as-improved, USPAP compliance would require H&BU as-vacant and as-improved.
In my GSE reports, I summarize both the as-vacant and as-improved H&BU.

In the OP's case, where the cost to build exceeds the value, the H&BU as-vacant would not be to develop as an SFR (presuming the newly constructed SFR is close to what the ideal improvement should be). It would likely be hold for future development.

So, if one is doing a comprehensive H&BU analysis (as-vacant and as-improved) and one has economic obsolescence such that the costs to build exceed the market value of the completed project, then the as-vacant H&BU is not going to be "build the house". It would be hold until market conditions change. And, since economic obsolescence is temporary, sooner or later, it will change (or we are all doomed).

 

[PropertyEconomics]

It could be an individual case where the individual builder required EI/EP exceeds that which is present in the market. Positive EI/EP may still result in the existing use being the H&BU ... but not by specific measurement of this specific builder.

I have seen markets where some builders commanded EP well above that which other builders / developers were experiencing.

 

[CANative]

Fannie does not require an extensive HBU analysis "as improved." They simply ask the question whether or not the as improved HBU is the present use. That question can probably be answered, in most residential assignments, without the "as if" vacant HBU.

So I'm not sure about the USPAP compliance issue. SR1-3 requires the appraiser to develop the HBU "When necessary for credible assignment results..."

 

[hastalavista]

So I'm not sure about the USPAP compliance issue. SR1-3 requires the appraiser to develop the HBU "When necessary for credible assignment results..."

But SR2-2(a)(x) states:

when an opinion of highest and best use was developed by the appraiser, summarize the support and rationale for that opinion;

My logic is simple (although not necessarily infallible):
1. I think it is necessary to conclude a H&BU as-vacant in order to analyze the H&BU as-improved.
2. The GSE form asks for H&BU as-improved.
3. If I'm right on point#1, then to comply with point #2, I have to develop the H&BU as-vacant.
4. SR2-2(a)(x) requires me to "summarize the support and rationale for that opinion."
5. If the as-vacant H&BU is a necessary piece of the analysis for the as-improved H&BU, then I need to include that in my summary.

Like I said, this is how I see it, and this is what I advise others to do.
I could be wrong, but if I am, what I do/advise is overkill without any consequence.
If I'm right, then not doing it has potentially significant consequence.



[Edit to Add: My point #2 states the GSE form asks for the H&BU as-improved. I think any market value appraisal would require an H&BU analysis. So, I hope no one is going to interpret that by stating what the form asks, I'm implying that is all the appraiser has to do. I've never stated that. But, we are talking about a GSE assignment, so it is relevant to discuss what the GSE requirements are; many of those requirements are reflected in the format of the GSE forms]