Economic obsolescence

[SANDY]

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? Yes! Due to economic obsolescence.

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.) My numbers are good. M&S backed by years of info from my brother who has been building new homes of all types for over 30 years. RELS is not the problem. Have good site sales from both the bubble period and recent.

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, Nope! have direct market evidence(sales) of current site value or 2) That knowledgeable builders are willing to put projects together in exchange for negative profit. Faulty interpretation!

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. Why would I make a time adjustment for my "current" site value that you say already should reflect any EO? That makes no sense. Example- current site value $10k bubble peak site value $40k so in my current CA I plug in site value as $10k which is what I did and CA comes out way higher than SCA. Now what would you do? Have you guys never seen this?

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.Your changing the scenario in order to offer an obvious solution. Not helpful! see above comments



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%.

I appreciate your attempt to help but you can't change the circumstances to point to an obvious answer. Homey don't play that game.

 

[SANDY]

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.

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Well my dear, I believe you have sufficient info to answer the yes/no question but unfortunately you like many others are quick to refer me to generalized source information that does not offer any form of an interpretive answer or (my favorite) you try to change the scenario such that the solution becomes obvious so the "trainee" can be lambasted.
Homey don't play that game!

Use all of your vast experience, designations, memberships in appraisal clubs or whatever you need to call upon to answer the question. If your real good and not an ego-maniac you'll also include your analysis of the strengths and weaknesses of your answer rather than dig your heels in when someone else has a different interpretation.

That would impress the lowly Trainee!

 

[SANDY]

Yes I have and yes I do.
Ok tell me what that looks like exactly in your CA?



You still have not explained what you mean by this.

SANDY, Economic obsolesence in a residential assignment refers to a supply and demand problem. Yes this is the reason but in a possibly once in a lifetime downturn in the market like we are/were in, the over supply is not due to over exuberant builder activity-its due to the housing market crash which is a fairly unique cause of EO.There is an oversupply because too many houses got built and no one can or wants to buy them. there is an over supply because the market collapsed and yes you are technically correct that the net effect is still an unbalanced market.

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?

Ok enough wiggling and dodging-answer the yes and no question? Impress me with including the strengths and weaknesses of your answer and if its good I will bow to our vast experience and kiss your designation ring! By the way I will give you your kudos even if I don't agree with your answer but its gotta be a direct answer that includes strength and weaknesses analysis.

 

[SANDY]

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 inclusionankful ....

Oh lord help me-another one of the all knowing has shown up.

Answer the yes/no question.

Thank God we no longer have Mentor, Socrates, Austin, Otis to deal with so I have to be thankful for that!
Don't see any of the high and mighty USPAP instructors though-that's disappointing. I guess this is also over RES Guys head too.

 

[SANDY]

Hurry up with your answers- I am getting swamped with appraisal assignments so I am going to have to apply my lowly appraisal skills to some tough condo assignments with no recent sales and chasing down condo budget docs etc etc.. I hate doing condos in buildings we don't already have data. Not to mention trying to get the info during the holiday season.

 

[Terrel L. Shields]

from an older textbook

In the Cost Approach, an estimated reproduction or replacement cost of the improvements and dwellings as of the date of the appraisal is developed, together with an estimate of the losses in value that have taken place due to wear and tear, design and plan, or market area influences. To the depreciated building cost estimate is added the estimated value of the land. The total represents the value indicated by the Cost Approach.

A Replacement Cost insurance policy is only interested in the actual replacement cost of the building and has no regard for the value of the land nor the depreciation. Insurers use Reconstruction Cost which reflects an additional amount for demolition and clean up....things unnecessary in the appraisal cost approach.

Sales are historical data. Income is forward looking "anticipation of future benefits". Cost is today. it has no "time adjustment."

 

[23Degrees]

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

First - let's get past the likelihood that 95% or more of the cost approaches that will be filled out today on the URAR in the USA will be misleading in one respect or another. In the second scenario where adequate data was not in place to reasonably quantify a number for EO then I would say it would not be misleading to leave it out as a line item and consider it as accounted for within the land value. This of course assumes at least some evidence of brain activity with regard to the market analysis within the report. On the contrary, to pretend or represent that one can solve with unrealistic precision a problem involving 4 or 5 unknowns could be viewed as misleading.

 

[Head Surfer]

To OP:

In the future please ask questions in the Newbie/Appraiser Wannabe Forum

Since this has gone 17 pages, I am sure you have your answer by now.

Closed.