External obsolescence prove it exists

[Joyce Potts]

The Good Book Says Land Doesn't 'depreciate'

There's a reason the estimated site value is listed above the improvements on most residential form reports.

The old school always taught that land doesn't depreciate. The value or estimate site value is what it is. Hear me out.

Your question is two-fold. The land needs to be valued as if vacant and ready to be put to its HBU. Its value already includes forms of adversities but you're just NOT supposed to call it 'depreciation' from an appraisal perspective.

Then you need to address all forms of depreciation (physical, functional and external) to the improvements.

Land and the term 'depreciate' are a often a semantics problem, IMO. I would argue that land can economically depreciate. I would argue that a newly discovered environmental condition may depreciate the site value and I would also argue that a freeway that was just built in front of the residential site would depreciate the value. But I"ve been over-ruled many times.

This all speaks to the historical reference of the word 'depreciate' and the old appraisal text book that normally teaches that land doesn't depreciate.

Anyone else because I've almost confused myself.

 

[Ben Vukicevich SRA]

Brad

No. I'm just fine in my body of knowledge, thanks.

Over-size is EO. I live in one. I violated HBU analysis as my structure is not ideally suited for the land/site. My property suffered from the principle of regression. My house is of standard build but over-size for the neighborhood when it was built. The neighborhood could not carry that value range back then. Since I built my house and was the initial daring guy, several more similar-sized and larger homes have been built nearby. The neighborhood can now carry the value range without EO being present. The EO is gone...wow.. and according to the texts EO never goes away but I can show you several examples that it does.

 

[Mike Garrett RAA]

Town has single major employer. Most of the workers live in town in new subdivisions. The plant closes, all of the residents lose their jobs. Hundreds of houses hit the market all at the same time. Very few sell and are on the market for 180 days or more.

You are appraising one of those properties that manages to get under contract. The market indicates the value is, say, $180,000. Your client requires a cost approach. You do the cost approach and it comes in at, say, $220,000 before you consider depreciation.

How would you handle the depreciation? For the sake of illustration, lets say the house is just 4 years old. The builder paid $38,000 per lot in the subdivision, built the house house to average Marshall/Swift construction. The property sold new, four years ago for $199,000.

 

[Ben Vukicevich SRA]

Mike,

Develop a Land to Building ratio from the data that you have regarding the prior land sales to the builder and the final sale prices of those new dwellings when they closed. Then apply the percentage attributable to the building/improvements only as the EO in the Cost Approach.

 

[John Hassler]

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.

Lets call the $400k sale "House A" and the $500k sale "House B". Now lets add in a third home "House C" which is physically identical to the other two which sells for $525k because of some desirable external influence (cul-de-sac, adjacent to a park, whatever). Does House B now have $25k of external depreciation?

 

[incognito]

Ben, I would be inclined to think your house suffered from functional, not external (or economic-same thing). I understand your explanation, but it appears to me to be a classical example of functional obsolescence due to overimprovement. As the market became more accepting of larger homes, it went away. External, by definition, is EXTERNAL of the subject property. Being too big, is a feature of the improvements, and must be functional.

I would agree that external can go away, but that is different than being "cured". That cement plant in your back yard may close down, and be demolished, and the external would go away. But it could not be cured, IE you, as the owner, could have done nothing to have eliminated the external obsolescence.

Functional, though, can be cured, and can also go away. Your house is a good example of it just going away.

 

[incognito]

Does House B now have $25k of external depreciation?

No, house C just has a land value $25,000 higher...

 

[Webbed Feet]

<snip> Any influence on value that external influences ON THE LAND may have, are already in the land value.

Mr. Geiger,

I feel rewording that to be "Any influence on value that external influences on the land may have should already have been considered when the opinion of land value is made in the Cost Approach" would be in order. But I do not say this means EO is just for land or just for improvements.

Take your 4,000 or 2,000 SqFt house example. But bulldoze one of them and make the other a vacant lot for residential building only, no other uses allowed. Ask 50 buyers if the train going by three times a day shaking both lots, vacant or improved, would only effect their willingness to pay a certain price for either as compared to similar situations without the railroad tracks. I believe most of your buyers will say both are negatively impacted. So one might say it is the land in this case.

But wait!... What if a use for a railroad depot structure is allowed... One is put on the vacant lot next to the house.. Suddenly, the lot with the depot has no EO for it's market... Now I guess we could say the other lot with the house on it now has depreciation chargeable against only the improvement.

To me, your question as which house would have the most, or even amount, is a different question entirely.

Barry Dayton

 

[John Hassler]

No, house C just has a land value $25,000 higher...

I was hoping to hear from someone who thought House A had external depreciation in comparison to House B.

 

[incognito]

Barry, I guess I should have implied that we were talking SFD zoned land, here...

Regarding the example of the vacant lot, and buyers intentions, I do not think it is relevant. External obsolescence is NOT an issue in land valuation. External obsolescence only is attributable to improvements. That is what all of the texts say??? So a typical buyers opinion of what he or she may build on a vacant site is not a consideration. The only consideration is what a typical buyer may pay for already completed improvements.