External Depreciation Adjustment

[nauthead]

I am looking at a report where the appraiser states that a property suffers a 12% penalty for external obsolescence due to its location on a collector road. The 12% penalty is applied to the cost approach, and the dollar amount is then applied across the board in the sales comparison approach. This is a 70+ year old home where the cost approach is likely meaningless in the first place. I think this methodology is correct when accounting for deferred maintenance but not for external issues. My way of thinking would be to apply the 12% penalty to the unadjusted sales price of the comparables. Thoughts?

 

[Mr Rex]

If its applied $4$ in the SCA isn't it applied to the unadjusted sales price of the comparables?

 

[J Grant]

How does being located on a collector road affect cost approach, unless site is valued for less, and if so, where did site estimate come from?

 

[nauthead]

There is an across the board adjustment made to each comparable, based on the external penalty applied in the cost approach. The adjustment is the same in both approaches. Again, I think that's fine for something like deferred maintenance where you have a known cost to cure, but external is incurable. I have generally seen such adjustments made as a percentage of the sales price of the compatrables, and each adjustment would be different.

 

[nauthead]

Site value was based on vacant land sales, and two of them were on the same street. I have no issues with the way the cost approach was derived.

 

[TXTea]

Please don't use the word penalty. The adjustment is related to market stigma. I agree with you and the other comments; it shouldn't even be in the Cost Approach due primarily to the weak correlation between replacement cost and market value.

 

[Mr Rex]

Please don't use the word penalty. The adjustment is related to market stigma. I agree with you and the other comments; it shouldn't even be in the Cost Approach due primarily to the weak correlation between replacement cost and market value.

External depreciation should be reflected in the Cost Approach. The proof should come from the SCA. The weakness is the across the board adjustment in the SCA. But it may or not be a % of the site value, as external obsolescence does not only impact the site value, but the value of the improvements on the site.

 

[TXTea]

External depreciation should be reflected in the Cost Approach.

That's a big fat negative, sir. Other than its impact on site value, which is where it would rear its ugly head, it will have no bearing on the cost of construction. Again, as I stated in my previous post, there is an inherent weakness in the correlation between replacement cost and market value. In other words, we can find the external obsolescence and quantify it using market data in the Sales Comparison Approach but certainly can't using cost data in the Cost Approach.

 

[nauthead]

If external depreciation should never be included in the cost approach, you might want to write Fannie Mae and tell them to remove it from the cost approach in their forms.

But this is heading off topic quickly. My question in a nutshell is do you handle adjustments for external depreciation with across the board adjustments?

 

[Pittsburgh Pete]

That's a big fat negative, sir. Other than its impact on site value, which is where it would rear its ugly head, it will have no bearing on the cost of construction. Again, as I stated in my previous post, there is an inherent weakness in the correlation between replacement cost and market value. In other words, we can find the external obsolescence and quantify it using market data in the Sales Comparison Approach but certainly can't using cost data in the Cost Approach.

Wrong! The premise is that the improvements don't recapture their cost due to buyer resistance with the dwelling located on a moderate/heavily traveled roadway. Has no bearing on the cost of construction but does bear on the value of that construction. Portions of the external would be reflected in the land value.