Economic obsolescence

[23Degrees]

My guess would be that they would leave it be and not adjust for EO, but that is just a guess - all I can say for sure is that I've never seen a report with EO indicated as a line item in the CA and considering that the number of times all of those If's are actually in play is close to zero, if not absolutely zero around here I would not fault anyone for not having it as a separate line item.

 

[SANDY]

I'm not trying to bully you, just trying to answer your elusive question.

You make statements about your conclusions and then ask how would we handle it, but you refuse to enlighten us as to how you arrived at your conclusions, in whole, but have only given us part of the information, which was how you determined your site value. There is no way for us to tell you where or how to apply a discount for economic obsolescence that may or may not be attributable to the improvements until you explain how you arrived at the cost new of the improvements and the depreciation you are applying and the current condition of the market were your subject is, and if there are new homes being constructed and if any new homes are competition for your existing subject.

So without complete information, no one can answer your question.


.

I don't want your approval or blessing on my conclusions on the recent appraisal I completed. That's not what I asked for a yes/no answer to. If your confused re-read the post. I am not totally convinced that either answer is entirely correct so it's not a trick question. To me the more correct answer depends a lot upon what the intended use of the CA is or is not and of course ones' opinion about whether you fall on the side that says the CA is credible/applicable for a 2 year old or older property or whether you believe the CA is not critical/relevant for anything older than a new or 1 year old subject.

If my client's intended use has to do with determining adequate insurance coverage to protect the collateral they are loaning on, I would think that including an EO number in the CA might result in some liability because it may be misinterpreted. You can say all you want that the use of the appraisal for insurance purposes is not an intended use but I say that it is required of us to determine the intended use of a CA that is required from our client prior to accepting an assignment. I have also stated my "opinion" that these days most(not all of course) of our clients have come to recognize that the CA (for older properties) is not what most appraisers are hanging their hat on for valuation purposes. So that leaves me with only one remaining conclusion as to what they intend to use it for.
Obviously if you disagree with any aspect of the above, then we are doomed to go off on any number of different tangents arguing the finer points of the statement.

So for the simple purpose of wwypd(what would your peers do) can I have your yes/no answer?

 

[Meandering]

I don't want your approval or blessing on my conclusions on the recent appraisal I completed. That's not what I asked for a yes/no answer to. If your confused re-read the post. I am not totally convinced that either answer is entirely correct so it's not a trick question. To me the more correct answer depends a lot upon what the intended use of the CA is or is not and of course ones' opinion about whether you fall on the side that says the CA is credible/applicable for a 2 year old or older property or whether you believe the CA is not critical/relevant for anything older than a new or 1 year old subject.

If my client's intended use has to do with determining adequate insurance coverage to protect the collateral they are loaning on, I would think that including an EO number in the CA might result in some liability because it may be misinterpreted. You can say all you want that the use of the appraisal for insurance purposes is not an intended use but I say that it is required of us to determine the intended use of a CA that is required from our client prior to accepting an assignment. I have also stated my "opinion" that these days most(not all of course) of our clients have come to recognize that the CA (for older properties) is not what most appraisers are hanging their hat on for valuation purposes. So that leaves me with only one remaining conclusion as to what they intend to use it for.
Obviously if you disagree with any aspect of the above, then we are doomed to go off on any number of different tangents arguing the finer points of the statement.

So for the simple purpose of wwypd(what would your peers do) can I have your yes/no answer?

WE are not doomed to go off on any different tangent.

I stand by my questions. We can not give you a yes/no answer to your question until we know how you are arriving at your conclusions, because frankly, you have not demonstrated any in depth knowledge about any appraisal technique or approach in any of your posts, although I will give you credit for recognizing that lenders are using the CA to ascertain insurance amounts, but take that credit back with your statement that we may hold liability for their decision to misuse any portion of an appraisal report. Also, there is a reason that insurable value has a different definition then market value, so I suggest you address the differences in regard to the conclusions you are trying to reach.

You are playing with yourself if you think you will get any reliable answers to this question given the amount of information you have disclosed.


Have fun.

.

 

[PropertyEconomics]

Once some appraisers learn how to analyze market extracted depreciations from ALL FORMS, the question regarding use of the sales comparison approach in a home of any age will be moot.

Until then, it appears, some will not understand how market derived depreciation can be used to determine individual depreciation amounts that are reflective of the market and therefore supported for their inclusion ....

 

[KD247]

... the fact that you cannot build a similar home for the remaining cost compared to the sca . ...

Ok, I'm going to take you seriously on the off-chance that you really are interested in discussing methodology. Are you saying that the sum of your opinion of site value plus your total estimated construction costs is larger than your indicated value from the Sales Comparison Analysis?

If that's the case, I'd be inclined to double-check my numbers. Construction costs can be easily tested for reasonableness by interviewing contractors and owner/builders. (If you regularly do appraisals involving new construction, you're probably doing this anyway. If you never discuss real-world building costs with builders, there's a good chance that you're relying on an inaccurate construction costing method.)

So let's say you've got reliable construction costs and the total of site value plus construction costs is significantly higher than the Sales Comparison indicated value. That leaves you with two possibilities: 1) That your opinion of site value is too high, or 2) That knowledgeable builders are willing to put projects together in exchange for negative profit.

I'm thinking it's pretty obvious that your site value is too high and it's very likely that it's because economic obsolescence has reduced the value of sites between the time of your best site sales data and the date of the appraisal. So, YES, a time adjustment should be made to the land sales data in order to form an opinion of the current site value. And, NO, there shouldn't be any adjustment for economic obsolescence in the Cost Approach section of the URAR form, because it's already reflected in the site value.

But, if it gets to that point, it's most likely that you didn't start with a good analysis of site value. Just as with the Sales Comparison Analysis, it takes more than historic sales data to estimate current values. If your analysis doesn't include current listings for lots and adjustments for current market trends, you're probably off on the cost approach as soon as you enter the very first number - your opinion of current site value.

Once some appraisers learn how to analyze market extracted depreciations from ALL FORMS, the question regarding use of the sales comparison approach in a home of any age will be moot.

Until then, it appears, some will not understand how market derived depreciation can be used to determine individual depreciation amounts that are reflective of the market and therefore supported for their inclusion ....

Are you saying that our profession is lacking in appraisers who know how to identify trends in a population and then apply those trends to the forecasting of individual events? It doesn't work in that direction - correlation doesn't imply causation. With all the data, intelligence, and processing power behind Zillow, Trulia, and Redfin, what's the explanation of their inability to accurately predict sales prices?

If you're saying that many in our profession lack general statistical literacy but that still doesn't stop them from citing vigorously massaged statistical conclusions as if they were fact, I agree 100%.

 

[KD247]

... If your confused re-read the post. ...

Or if your readers are confused, you might consider rewriting the post.

 

[Tim Hicks (Texas)]

Nice try at a dodge to a yes or no question. I didn't ask if you use a specific number that was the same all the time for similar properties.

Yes or no given the scenrio? What is so hard about the question that you can't answer yes or no?

Because at this point, I have no confidence that you know your market, you described the scenario correctly or you understand the concept yourself. When we ask questions you go on the assault because obviously you believe if you are less likely to be questioned if you appear confrontational and combative.

Question- Do you include in your CA a specific number for Economic obsolescence or not?

There is nothing in this yes or no question that doesn't infer a "specific" number for all properties. My answer would be, "in my market it is rarely needed, but when it is, I do include external obsolescence in my cost approach." Even then, you see, it is not a simple, yes or no question. Surely, you have spec or tract home builders still building in your area. Surely, they are not selling for less than they cost? Surely, no EO is needed for those cost approaches? Surely, you have these builder's current costs in your factors for other homes cost approaches.

I am still confused by your "famous" appraisers comment. I really don't know any 'famous" appraisers. I have never seen one on the cover of any newspaper, US magazine or any other supermarket tabloid.

I am done with this topic, because you are not learning anything and I certainly am not learning anything useful from you.

 

[CANative]

How many time adjustments have you seen in any appraisal CA? Do you do it? I doubt it.

Yes I have and yes I do.

If I had used the inference method

You still have not explained what you mean by this.

SANDY, Economic obsolesence in a residential assignment refers to a supply and demand problem. There is an oversupply because too many houses got built and no one can or wants to buy them. Developers are not building houses because it is not financially feasible. There is no entrepreneurial incentive.

But here we are forced to build a theoretical house in a market where this does not happen on the date of value. In order to land on Market Value we have to account for market factors (you MUST do a market analysis in order to do a proper cost approach.)

The cost approach requires determining a land value, the hard and soft costs of building the structure, a factor for entrepreneurial profit, and an accounting of all forms of depreciation.

In an unstable market determining depreciation is especially problematical because the market reacts differently to physical and functional depreciation depending on market conditions.

If you have properly accounted for the physical and functional depreciation and your MV indication is still too high then it has to be external obsolesence. If you've ruled out locational or environmental external factors then all that's left is "economic obsolesence." You've already extracted the amount from the market using the sales of similar property.

Forget the stupid cost approach section in Fannie Form. All that those cells do is use a mathematical formula to deduct from the RCN cell. Work it out on paper and then use the simple-simon form to report your conclusions.

On a side note, it doesn't matter if a client wants the CA just for insurance. If you're doing a CA then you have to do it right. All those clients are interested in any is the RCN. Why don't you just give them that?

 

[CANative]

How many time adjustments have you seen in any appraisal CA? Do you do it? I doubt it.

I misread the question. I thought you meant included a factor for external obsolesence in the CA. May answer is still the same but I'll answer the actual question also.

Yes I have and yes I do. Since the sheer quantity of work I do and professional work I see far eclipses anything you could possibly imagine I am enormously confident in my answer.

Lose the attitude and maybe you'll learn something.

 

[SANDY]

My guess would be that they would leave it be and not adjust for EO, but that is just a guess - all I can say for sure is that I've never seen a report with EO indicated as a line item in the CA and considering that the number of times all of those If's are actually in play is close to zero, if not absolutely zero around here I would not fault anyone for not having it as a separate line item.

Thank you for your honest answer. Where do you come down on whether you think leaving it out is misleading or not?