External obsolescence prove it exists

[Fred]

"Remember before I posted that when the Society and Institute had different philosophies about the cost approach; and when the memberships mergered, the textbooks did not?"

We merged in 1982? The first photo I posted was from a joint SREA & AIREA text book which labels it EO. Seems EO had both their blessings in 1982. Doublespeak in the appraisal field. Never.

The merger was in 1990 somewhere around November, as I recall. That is why the earlier defintion was "joint" SREA and AIREA. After the "merger," it was changed to AI.

 

[Fred]

but i thought May is a big fan of the conventional cost approach and the 'Three Approaches'? You?

I am not sure if he was a big fan or a small blowhard.

The book does espouse the fales notion that value is the "correlation" of the approaches and is steeped in what you have heard me call rote-formulitic thinking. It's 300 pages and only 10 address sales comparison.

That doesn't mean the book is not a masterwork. The contemporaneous AIREA first editions were written by committees. May worked alone. That book is the oldest explanation of "effective age" that I know of. The AIREA doesn't pick up the idea for about 10 years.

 

[Ben Vukicevich SRA]

Steven

I was assuming that you were using "Institute" in your post, as in American Institute of REA, not as in AI-Appraisal Institute. AI did not exist when the joint terminolgy text book was published in 1982. They both agreed on it as being EO then. So you're saying AIREA had two printed meanings of over-improvement-EO&FO? Nice.

They were a snooty bunch. First, I PO'd them because I was eligible for RM reciprocity via my SRA designation. I hung them out from 1979 to 1982, never getting it. They kept sending me a plethora of multi colored pages/copies on eligibilty requirements and I kept throwing them away-they were great at having colored copies of everything. LOL I was young back then (25)with a family and didn't need the cost of an extra set of dues. Then they roped me into getting it because they changed the rules and candidates had to attend so many of the monthly meetings or be booted. Designated members didn't have to show up. So I applied for reciprocity so I wouldn't have to show up. LOL

They actually asked me if I would give up my SRA designation when I faced the Spanish Inquisition at the final interview. I PO'd them when I said " No, I worked my *** off for that one."

 

[Jim Bearden]

Why do you all accept a text book definition when there are so many differences.

 

[Ben Vukicevich SRA]

Mike,

Toto is installed. Damn it's amazing. What flushing power for 1.6 gallons. And the slow close seat/lid...smooth...no banging.

Well, the guys at the plumbing supply place warned me...you can't stop with just one. LOL.

 

[John Hassler]

Let me start off by saying that I'm in the camp that thinks most of what is considered external depreciation is often a combination of functional depreciation and reduced land value. So let me present a hypothetical situation that might be best described as external depreciation (or perhaps more correctly as economic depreciation, a term which should be recognized by those in the biz over 15 years).

Let me postulate the following. Take two identical residential properties. For their market, they have good appeal (conforming size, style, lot, etc.) meeting all home buyer expectations. Lets call them perfect homes for their market so lets call them Perfect Home A and Perfect Home B.

Now lets say the city changes the zoning of Perfect Home A where residential is still allowed but so is commercial/office. You can find land sales to prove the zoning change has added $25,000 to the site value but nothing to the overall value when used as a residential property (Perfect Home A has the same market value as Perfect Home B). Using the Fannie Mae definition of H&BU as improved you determine that the H&BU is still as residential.

You are appraising both homes. In your Cost Approach you use the same building cost figures for the improvements which is as you should since they are identical. Remember, these are perfect homes for their market so there is no functional depreciation as a residence. The cost approaches are identical except that the site value of Perfect Home A is $25,000 more than that of Perfect Home B and, based on the data in the paragraph above, you also include $25,000 of external (economic) depreciation. Does anyone believe this is correct?

To those that think Perfect Home A has functional depreciation, how do you reconcile the fact that your data shows the H&BU is as residential AND at the same time your data shows there is no superior residential design for the market?

 

[pprice]

Without reading through "all" of the posts in this thread, I have gathered that the original author's contention was that EO can be only attributable to the land.

With that in mind, let me pose the question of an industrial property - let's say a pulp mill. Five years ago, Company ABC pays $80 million for this existing pulp mill. Three years later, for various reasons, the market price of pulp deteriorates substantially. Causes could be related to numerous issues like increased global capacity, changes in governmental regulations, more modern plants developed in the southern hemisphere, whatever. But the fact remains that prices of the product produced plunge. Would that effect the price buyers are willing to pay for a pulp mill in the US? Of course it would.

Now, does it effect land value? It might or might not - if the land is valued as vacant, and if there are alternative uses for the site, the state of the pulp industry might have very little - if any- effect on the land value. However, this situation certainly effects the value of the improvements. Thus, it is clear that External Obsolescence can be attributable to Improvements - which was the main point here.

There were many other points illustrated (locational factors already being considered in the land, as vacant, etc). But I think it is quite obvious that External Obsolescence issues can/do effect Improvements. Much of the conversation focused on EO in terms of "location" (like heavy traffic or a railroad track). However, when you use a different form of EO (like changes in economic conditions), it becomes very clear that EO does effect Improvements.

Patrick Price

 

[xm72mhd]

I have a external obs question. And I am calling it obs because I can't spell obsolescence.

Saw an appraiser apply external obs to cost approach for new construction due to poor economy. Didn't use it anywhere else in the report. Did you ever do that? It brought the cost approach into line with the sales results, but it was never explained in the report quite how that works. Nor was there any comparison or explanation as to what or where wasn't obsolete.

 

[Joyce Potts]

I have a external obs question. And I am calling it obs because I can't spell obsolescence.

Saw an appraiser apply external obs to cost approach for new construction due to poor economy. Didn't use it anywhere else in the report. Did you ever do that? It brought the cost approach into line with the sales results, but it was never explained in the report quite how that works. Nor was there any comparison or explanation as to what or where wasn't obsolete.

Absolutely correct, IMO.

That's a perfect example of the market not recognizing or meeting the 'cost' or cost doesn't equal or exceed value. In the case you cite it's because of externalities, i.e, poor economy. In fact, I've done it myself.

I'll be interested in reading other comments.

 

[incognito]

As long as the comps are recent, it seems Kosher to me!