Economic obsolescence

[SANDY]

There are cost handbooks out there. Granted, doing a thoroughly accurate cost approach would be very time consuming but a "ballpark" figure is good enough in most cases. Some cost handbooks may be a bit out of whack based on what typical costs are within a market, but then its up to the appraiser to account for those market factors.

I don't plug in numbers into my cost approach to make them line up with my SCA. And as a result, economic obsolescence is fairly easy to determine. Couldn't care less if my cost approach without a economic (external) obsolescence adjustment comes out 10,000's of thousands if not $100,000+ higher. Just like I didn't care when my cost approach was $10,000's lower then my sales comparison approach during the boom.

So I assume you don't subscribe to the theory that all approaches if developed should result in a narrow range of indicated value if done properly? To me not providing a market derived adjustment for economic obsolescence(when it is obviousely the only thing missing) is akin to not providing a site value or a cost for a porch. And for that matter why don't we use the same inference method for calculating the site value? Just leave it out till the end and fill it in by inference with whatever number is needed to fall in line with the other approaches?

 

[CANative]

And I am the jerk?

Well, frankly... yes. But I like a good jerk.

 

[CANative]

or you can reconcile that the cost approach to value was given no weight in determining an opinion of market value as the market area appears to be experiencing economic obsolescene, with current market values not supportive of current building costs.

If you're going to do a cost approach, do it right.

 

[CANative]

I see the problem. SANDY has learned a new appraisal word. "Inferred." I assumed SANDY is struggling with the difference between inferred analysis and fundamental analysis.

SANDY, either buy a copy of Stephen Fanning's text (Market Analysis for Valuation Appraisals) - or take the AI course, or you can look up some of his articles on line.

 

[Scott R Marshall]

So I assume you don't subscribe to the theory that all approaches if developed should result in a narrow range of indicated value if done properly? To me not providing a market derived adjustment for economic obsolescence(when it is obviousely the only thing missing) is akin to not providing a site value or a cost for a porch. And for that matter why don't we use the same inference method for calculating the site value? Just leave it out till the end and fill it in by inference with whatever number is needed to fall in line with the other approaches?

Any approach performed must be credible. Can't or don't now how to figure out site value, well then you better not do a cost approach. If the client insists then you must turn down the assignment. Can't figure out how to calculate depreciation and/or obsolescence. Same answer.

As for making that adjustment within the cost approach section, some may agree and others will disagree but generally I do not make the adjustment, with an explanation within my reconciliation that the cost approach was given no value due to the presence of economic obsolescence. If somone wants to take me to task on it, fine. My argument is I've already stated it's not a reliable source in determining the opinion of market value for the subject due to the economic obsolescence. What, someone is going to argue it is?

Try building the same house and sell it for what it cost to build. If it were possible, build the same house "depreciated" out and see if you can sell it for cost. Making the adjustment or not making the adjustment, it can't be done unless the builder loves losing cash.

 

[SANDY]

Explain to me further how doing a bunch of cost approaches is going to provide you with a numeric indication of economic obsolescence. In order for that method to be reliable at all you would have to have done numerous appraisals (with a sca for comparison to cost) in the same neighborhood and of similar homes and within a stable market in order to account for neighborhood and time variables. It's a stretch but it is using market data.

 

[CANative]

Count it up on your fingers or use a WalMart Big Key Calculator. No one said it was easy or quick. But it could be easy and quick if you invest the time and effort to keep on top of it.

It doesn't have to be an exact percentage or dollar amount. It is a range based on your research. Inferred or fundamental analysis (other peoples work or your own...) Just like entrepreneurial incentive. You have to put that into the cost approach (which will increase the costs) even though it is non-existent in a market where no building is happening. Then you have to apply external/economic obsolesence.

The cost approach IS NOT EASY OR QUICK. It's also not necessary. So don't do it unless you HAVE to for some reason. And be careful because the cost approach IS NOT EASY OR QUICK.

 

[Mr Rex]

Explain to me further how doing a bunch of cost approaches is going to provide you with a numeric indication of economic obsolescence. In order for that method to be reliable at all you would have to have done numerous appraisals (with a sca for comparison to cost) in the same neighborhood and of similar homes and within a stable market in order to account for neighborhood and time variables. It's a stretch but it is using market data.

Yep. that's what real appraisers do. You looking for a shortcut, typical of the Sandy persona.

 

[SANDY]

Any approach performed must be credible. Can't or don't now how to figure out site value, well then you better not do a cost approach. If the client insists then you must turn down the assignment. Can't figure out how to calculate depreciation and/or obsolescence. Same answer.

As for making that adjustment within the cost approach section, some may agree and others will disagree but generally I do not make the adjustment, with an explanation within my reconciliation that the cost approach was given no value due to the presence of economic obsolescence. If somone wants to take me to task on it, fine. My argument is I've already stated it's not a reliable source in determining the opinion of market value for the subject due to the economic obsolescence. What, someone is going to argue it is?

Try building the same house and sell it for what it cost to build. If it were possible, build the same house "depreciated" out and see if you can sell it for cost. Making the adjustment or not making the adjustment, it can't be done unless the builder loves losing cash.

That's pretty much what we do but a few of our clients want to split hairs.
I think that if one is inclined to be a strict advocate of adhering to appraisal theory, then once one acknowledges the presence of economic obsolescence(especially when it is a large number) it behooves one to find a way to calculate it with a better method than by inference. Otherwise how would one know or test whether or not the difference between the two approaches is actually due to economic obsolescence or is it actually due to an error somewhere else in the cost approach.

Anyway-thanks for the discussion.

Maybe if Cannative wants to learn something, I will tell all of you our method for calculating it more precisely.:icon_lol:

 

[SANDY]

Yep. that's what real appraisers do. You looking for a shortcut, typical of the Sandy persona.

Bullshat! I would bet you that most appraisers don't do a bunch of cost approaches and compare them to the sca for similar properties in similar timeframes and adjusting for differences in lot sizes etc etc.... Nor do they check the external obsolescence box and explain that economic obsolescence is present. Nor do they adjust for such in their cost approaches.

But of course you do!