External obsolescence prove it exists

[Jim Bearden]

I posted the below in another thread and was challenged to post a seperate thread. So here goes I think EO is related to land value. What I want to see is someone make a mathmatic proof it exists. Can you prove it?


OK let's go by example in fact I'll give you a real life example. Fremont Ave is a primary N/S street Monterey Rd is E/W MR is very busy west of FA and east of FA much less so as everything there is high end residential. On the S/E corner is a service station which is quite busy to the east of it is a house. The house conforms to the neighborhood and would normally sell for similar prices except for the service station. Let's say an identical house would sell for $500,000 a few blocks east. The subject sells for $400,000 because of the location. The question now becomes what part of the price is attributed to the location.

The two homes are identical in every way so no adjustments are required except for location. Now how do you attribute external to the improvements. Now let's look at the land value ask yourself would you pay the same for the lot as the one further away knowing that once you build each home one is worth $100,000 less. Of course not you would pay that much less thus the value difference is soley attributable to the land therefore there is no external depreciation it cannot happen.

 

[DTB]

I'll bite with another example.

Homogenous neighborhood with typical houses being 6/3/1 1,200 sq. Feet.
Lot sizes 10k sq.ft.

White elephant is built 5 years ago 9/5/3 3600 square feet. Same lot size. Sells yesterday for 350,000.

Across the park a subdivision of 3000-4000 square footers about 5 years old. The white elephant sells for 450,000.

I opine the improvement is charged w/EO due to the smaller houses dragging down its value. This would all be charged to the improvement. Yes/No.

Does anyone agree overimprovement is EO or do some see it as FO?

 

[Couch Potato]

How about when two functionally identical lots sell, one on a busy street for $5,000 less than and one on a typical residential street. Identical houses are built on the two lots. The houses then sell and the one on a busy street sells for $7,000 less than the on the typical residential street. That extra $2,000 less in the sales price is the external obsolescence attributable to the improvements.

 

[Oregon Doug]

Generally, I'd agree that EO impacts land value (based on a res subdivison alalysis we did many years ago on sales of lots in the same tract - some with overhead high tension lines, some without). But that difference would also carry forward to the re-sale of the homes built in that tract (it did).

EO is an external issue that impacts site utility and thus, its value. We do not normally apply depreciation to vacant land, we customairly segment it out on improved properties as EO, FO and/or PD but yes it does impact land value. And yes, I think you could "prove" it if you had sufficient data.

FO is a design related issue that usually impacts improvements only. An oversized "white elephant" house suffers from a functional problem that may/may not be ecnonically curable. I suppose that you could over/underimprove vacant land with enough earth moving equipment, but the net result would be simply an increase/decrease of the land value.

I think - now, tell me where I'm wrong,
Oregon Doug

 

[DTB]

I don't think the white elephant has functional issues at all. It is impacted by its surrounding market. External, no?

 

[Ben Vukicevich SRA]

I'm trying to remember back to my SREA SRA demo days-33 years ago.

And I disagree, over-improvements as to size suffer from EO not FO.

Back to the initial problem. You know the % of external/locational obsolescence attributable to the whole. You then poke around the market and develop the old, long forgotten Land to Building ratio typical for the area. Turn it into a percentage and using the LTBR opined, apply those percentages to your two part problem, as necessary.

 

[Brad Ellis]

Jim,

According to our current body of knowledge, such as it is, EO will always be attributable to improvements.

Site is across the street from a commuter RR station and has a single family home. By paired sales you know this locational factor causes a 10% loss. Now it burns down (was in great shape- just an accident) and the zoning allows for a rebuild of the SFR or all the way up to a 12 unit building. In that market, rental locations near the RR go for a premium but not for SFRs. The loss would be attributable to the improvements vs. the site.

Mike,

No- it is functional. For its area (immediately within that older neighborhood) it is an over-improvement. So, if you have a 4000 SF improvement in a 2000 SF neighborhood, AND it has a loss due to its size, it will be functional.

Brad

 

[Brad Ellis]

Ben,

You will need to go back and read the text.

Brad

 

[Webbed Feet]

Mr. Bearden & Mr. Neff,


Guys, could you both work on your posts a little more for clarity? Mr. Bearden's seemed to be doing good right up until that last sentence. Mr. Neff, I think you meant a house similar to the white elephant sold in the adjacent subdivision... not the white elephant. Both of you need to explain how you are applying what you are saying in whatever approach you mean to apply it to before anyone can answer more directly. But I'll take a stab at it.


Mr. Bearden, break your argument down to “As-Vacant” and “As-Improved” and then ask yourself why the EO may not exist in both cases. Perhaps do not assume the only improvement that can be made to the land would be residential. What if a car wash was built on the land? Where did the EO then go? Because now the market for the land has now changed. So we see it was only the residential improvement that was effected by that form of EO, not the land. But then what if a radioactive waste dump that glowed at night was next door? Perhaps no improvement of any kind on the subject site would remain unaffected by that “form” of EO and we see it is the land that is harmed due to it's immovable location.


Mr. Neff, do the same. Break your argument down to “As Vacant” and “As Improved” then ask yourself why the EO does not exist in both cases. I don't believe considering incurable functional obsolescence should be charged, due to regression as a form of EO, would work any better than adding value in the form of additional “cost” to an adjacent improvement due to “progression” from an adjacent property.


I believe if both of you look again, the answer is you both are correct, and you both are incorrect. It depends. EO can harm the land only if the land is vacant, or the improvement only if improved, or it can harm both the land and the improvement. It depends on the EO and the market for the vacant land or the improved land.


As to proving mathematically external obsolescense exists, an appraiser does not have to. Just line up a bunch of buyers and ask them if it exists or not!... .... Our job is to prove what any EO should be quantified as unless our assignment allows us to “qualify” it instead. The later would be much nicer wouldn't it?


Barry Dayton

P.S. I believe Mr. Nelson meant to say "improvement utility" instead, perhaps I am incorrect about that. I also believe those considering EO to only affect land, or only affect improvements, need to rethink that on both sides. Stop focusing on specific examples of already improved properties. Rather, consider the entire world of possible external influences instead.

 

[incognito]

I "challenged" Jim to bring the discussion to a new thread. It was buried in another thread. His comment in the thread piqued my curiosity:

While some talk about external depreciation most and I've yet to be convinced any exists because the land value is what is affected not the structure.

I submit that economic obsolescence can ONLY be attributable to improvements. Land value is determined as vacant, and available to be developed to the highest and best use. Any influence on value that external influences ON THE LAND may have, are already in the land value.

Just to start the discussion, I offer the following:

-By definition, (The Appraisal of Real Estate, 9th, page 395), line 1 under External Obsolescence, "External obsolescence, the diminished utility of a STRUCTURE due to negative influences from OUTSIDE the site, ..."
-The FNMA 1004 cost approach has a place for economic obsolescence, in the IMPROVEMENTS section, ONLY...
-(Appraising the Single Family Residence, 1978, p-222) "ONLY improvements are subject to accrued depreciation, which is derived from causes within ... and without (economic obsolescence).

I presented an example to Jim:

2 houses are located next door to each other. Both are on IDENTICAL sites, fronting on railroad tracks. One is 2000 sq. ft. and one is 4000 sq.ft., and are otherwise similar in age, quality and condition. Both are within the functional size range for the neighborhood, and are considered functional homes.

-I submit that the 4000' house will generally suffer from more ($) external obsolescence than the 2000' house.
-Jim submits that NEITHER house suffers from external obsolescence, because both are on similar sites???