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Discussion on External Obsolescence

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Thomas Fiehler

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Certified General Appraiser
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Ohio
I am deep in thought (no smart *** comments!) on how to show external obsolescence in the cost approach relative to declining property values. How far out do you "estimate" these losses to continue or is at a lump sum at the time of the appraisal? Never had to calculate declining values before so this is a new thought for a very old mind.
 

stefan olafson

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You have to go to the market and prove the presence and amount of external obsolescense, you just can't pick it out of thin air. Hopefully you can find two sales near enough similar, one affected by external factors and one not, then you have a clear picture after you do a matched pair anaysis.
 

Thomas Fiehler

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Stefan-Don't know how you can do a matched pair when all values are declining, and have been for the last year. It is simple to show the calculations for loss of value for a comp 6 or 9 months old, but in the CA how far out do you calculate the EO?
 

stefan olafson

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In a free fall market find a point of reference in the past, the last stable market and use that for your benchmark. Track sales since then and determine what the rate of descent is, then you have a percent of slippage that is directly attributable to EO.

Then in the cost approach get cost new, deduct physical deterioration, functional (if any) and your percent from the market and add in land value.

Then you're done except for explaining how you got the EO.
 

Joker

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May 28, 2002
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Certified General Appraiser
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Ohio
I am deep in thought (no smart *** comments!)

:rof: Nah, it would be too easy.. :new_all_coholic:

I'm not sure I would refer to it as "external obsolesence" but rather "economic obsolesence" and in any event, it can be calculated from the market, as I know you are well aware how to do.

If I read your question correctly, my opinion is that you consider a lump sum at the time of the appraisal. You must be having a brain [email protected] or you are contemplating a forecasted appraisal. :peace: There is no need to worry how far values may decline next month as most likely your effective date is the present date, not a future date.
 

DaveH

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May 5, 2007
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Certified Residential Appraiser
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Ohio
Tom,
What part of the area are you talking about. If it was like Middletown, when the AK Strike was going on, then you could try to project it, but if it's say northside or somewhere like that then foreclosure rates and as-is sales depict your market. Once you try to determine the amount, you have yo project backwards to see when it started and then try to go forward to see when it will end. Just my 2 cents.....
 

Pat Butler

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Jan 17, 2002
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Certified Residential Appraiser
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Illinois
Do you mean external obsolescence, or declining values? If values are declining and construction prices stay the same then that means that land values are decreasing. Nothin to do with external obsolescence.

In any event, the CA numbers are good for the eff. date of the appraisal and there's no need to project out in the future.
 

Thomas Fiehler

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Ohio
If property values are declining, and its not related to physical, its not functional since the source is outside influences (specific market conditions, interest rates, etc) then it should be considered external obsol.
 

Farm Gal

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Jan 14, 2002
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Licensed Appraiser
State
Nebraska
Thomas
I disagree-- what it sounds like you have is THE MARKET Marekts rise, and markets fall. You are just reporting THE MARKET.

Unless it is a situation applicable to only a small market segment for a readily defined reason outside the property lines... and in excess of any present general market actions whether rising falling or stable.

Usally EO is due to a physical, olifactory, or otherwise identifiable SPECIFIC influence with either defined boundaries or diminshing area of influence inversely proportional to the proximity to the identifiable cause(s).

Once in a while you have locational circumstance which is proven to be or is believed to be transitory in nature:

eg. For the past 28 months since an expose of drugs in a specific neighborhood, in which the surrounding homes/businesses more distant from that nighborhood had no diminution in value... there was a drop in value in that specific area... however due to increased policing the values appear to be on a rebound. And the realtors are telling all new buyers no problemo no problemo at all!

So you chart and squirm your data into something you call external and hope your crystal ball was clear on your effective date!

Otherwise (ia am really gonna hammer this home - Its the MARKET.
 

Riick

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Aug 14, 2007
Professional Status
Certified Residential Appraiser
State
Delaware
Do you mean external obsolescence, or declining values? If values are declining and construction prices stay the same then that means that land values are decreasing. Nothin to do with external obsolescence.

In any event, the CA numbers are good for the eff. date of the appraisal and there's no need to project out in the future.
Agreed.. It would have to be in the land -- if costs were stable.

HOWEVER, material prices are not stable - costs are down, no matter what Marshall & Swift have to say.

Have a look at this CHART for framing lumber
-- Down from 1/5/07 (299) to 244 on 2/8/08 !
Thats minus more than 25%. and from 1/6/06 down over 40%
I'll bet (non-union) labor costs are down too.
 
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