External obsolescence prove it exists

[Couch Potato]

Comments on this scenario solicited:

I extracted location adjustment of -$3,000 to the comparable due to subject's location on a busy street, as opposed to a quieter location within the subdivision.

GRM is 150, extracted from market. Rental market shows a $70/mo rent penalty if the rental is on a busy street.

Breakdown depreciation, analysis of external obsolescence:

$70 rent penalty x 150 GRM = $10,500 total external obsolescence due to location.

$10,500 - site adjustment of $3,000 = $7500 attributable to improvements.

Agree or disagree?

I would only alter it in the following manner.

$70 rent penalty x 150 GRM = $10,500 total location adjustment.

$10,500 - site adjustment of $3,000 = $7500 external obsolescence.

 

[xm72mhd]

If most of you don't understand the basics that external and/or functional obsolesence only has to do with the improvements and not the land, there's not sense in arguing, IMO.

Not to mention that the market is the only viable method to measure any form of obsolesence.

Go for it.

Joyce,

Most of us are speaking from experience or logic in this discussion, but there is some published authority to the contrary of your position. I quote, "External factors frequently affect both the land and building components of a property's value." The Appraisal of Real Estate, 12th Edtion, The Appraisal Institute, 2001, page 412.

Now that is not the only word, nor is it my intention to stifle the discussion, but it might be helpful to think it through. I know that it has been drilled ionto us that EO goes to improvements only, but I don't think that is all together correct.

 

[xm72mhd]

Good discussion, and I think there may well be effects to both land and improvement components of value when we are dealing with EO.

So the economy has gone bad on the southwest side of town because the local auto plant is unexpectedly idled for nine months

If that was what is occurring that scenario might provide some support, but no such explanation exists for the EO adjustment of which I speak. The appraiser used Marshall & Swift, which is usually OK with me. Marshall & Swift costs for single family residential "good quality" pretty much meets what I call "average." But, what the heck, one of us might be wrong. Anyway I adjusted it to meet my market info. But by golly I'm not real sure that is true for multi-family, but I'm checking up on it.

So, sales of multi-family are only appreciating 3%, and rents 2% over past 4 or 5 years. Appraiser plugs in the SF cost figure he thinks is correct for proposed construction, and then takes off 10% EO.

Now everybody down here knows Pueblo doesn't keep up with Phoenix or even Denver so I guess if you choose comps from either of those places you might have some locational differences to adjust for as well as EO due to economics. But since this adjustment wasn't due to closure of the local cement plant and is only due to Pueblo being on the tail of the economic doggy, I don't think we are talking local slump. Our chamber has bragged for decades about the low cost of living here. (Talk about positive spin on rigor mortise).

Now the guy used all local comps, in fact, very near the proposed subject, and his site comps were from there also. So seems to me he took care of any possible EO as far as the lagging economy right then and there. Our economy did get even worse in 2001, right along with everybody else and it is now coming back, right along with everybody else.

I think he used the wrong SF cost and needed to get back to the market.

 

[xm72mhd]

that is reflected in lower site value is not technically external obsolescence; the land just isn't worth as much.

...as much as what? Exactly the same sort of reasoning could be applied to the improvements. They "just aren't worth as much."

EO is one explanation as to why either is "just not worth as much" as something else. Indeed, in my scenario, the appraiser's explanation for why sales are not worth as much as proposed new construction was rooted in economic EO. What kind of economic event occurred to creat this EO we are not told.

 

[xm72mhd]

Joyce is correct due to the way External Obsolescence is defined.

Please explain what in the definition of EO in The Dictionary of Real Estate Appraisal, 4th Edtition supports that statement.

 

[Fred]

Greg and Jim illustrated the key point. The entire property is affected by a negative external factor. As he pointed out, the “loss” to the land shows up in lower land value part of the cost approach, but it is not called obsolescence. The part of the loss attributable to the improvements is called obsolescence.

Here is where the confusion comes in. Just because the term "obs" only applies to the building, doesn’t mean that only the improvement contribution “suffers” the supposed “loss.”

Repeating part of what I posted on “proving” obsolescence exists. I don’t really think anyone was questioning that location or other external factors can make one property worth more or less than another. However, in the cost approach, isn't proving the obs, because it is based on a hypothetical version of subject.

$70 rent penalty x 150 GRM = $10,500 total external obsolescence due to location.
$10,500 - site adjustment of $3,000 = $7500 attributable to improvements.
Agree or disagree?

Agree tha in the sales comparison approach, if you called the whole thing a location adjustment; or split the amount into site and obs adjustments.

 

[Ben Vukicevich SRA]

Comments on this scenario solicited:

I extracted location adjustment of -$3,000 to the comparable due to subject's location on a busy street, as opposed to a quieter location within the subdivision.

GRM is 150, extracted from market. Rental market shows a $70/mo rent penalty if the rental is on a busy street.

Breakdown depreciation, analysis of external obsolescence:

$70 rent penalty x 150 GRM = $10,500 total external obsolescence due to location.

$10,500 - site adjustment of $3,000 = $7500 attributable to improvements.

Agree or disagree?

Wow, now that takes me back to SRA demo days. LOL

You could also develop a land/site to building ratio and use that against the TEO to get the EO attributable to the improvements.

 

[Couch Potato]

Please explain what in the definition of EO in The Dictionary of Real Estate Appraisal, 4th Edtition supports that statement.

That would be where EO is defined as an "element of depreciation." (One can then look at the definition of depreciation and see that it is "the difference between the cost of an improvement on the effective date of the appraisal and the market value of the improvement on that same date.") Since EO is part of depreciation, and depreciation only applies to the improvement; logically EO only applies to the improvement.

 

[Couch Potato]

...as much as what? Exactly the same sort of reasoning could be applied to the improvements. They "just aren't worth as much."

EO is one explanation as to why either is "just not worth as much" as something else. Indeed, in my scenario, the appraiser's explanation for why sales are not worth as much as proposed new construction was rooted in economic EO. What kind of economic event occurred to creat this EO we are not told.

Externalities do not cause land to depreciate, they merely lower the value. (For example, one's land was worth $500,000; but the cities runway for the new airport ends at your property line. Likely the land is not worth as much as it was, but it has not depreciated.)

 

[Joyce Potts]

God love you Greg. You tried and I admire your effort.

I've given up on this crowd. I've never seen such an anal bunch that are so caught up in the minutia that they've lost sight of the big picture.

I liken you to Isaac Newton. You're trying to discuss the basics of gravity to a group who think the results would be different had it been a pear instead of an apple.

And that was a personal POTT shot. Let the moderating begin.