External obsolescence prove it exists

[Couch Potato]

Greg, regarding your example, in my mind it is still the physical fact that the house is too big that is the problem.

I'm trying to think of this logically, and the following question comes to mind:

If over improvement is EO, than isn't all depreciation than EO?

But, in my example the house is clearly not an overimprovement. The market accepted it where it was. The diminished value occurred due to market interference by government causing house that the market would view as underimprovements to be constructed on the other lots. The change in market perception of the home only occurs because of the government interference.

In the case of poor maintenance, what about its loss in value would be attributable to something external? Yes, the other well maintained houses would be worth more, but the other houses is not what is causing it to be worth less.

 

[Ben Vukicevich SRA]

Bill G,

Here's another one for you to read written by Robert E. Anderson, MAI, SRA.

I'll try to find a few more for you. I'm heading home now and I have more books in my home office to take a look at.

 

[Fred]

The excerpt says that non-conformity causes the house worth $30,000 to have a loss in value versus houses worth $10,000 and $14,000. That’s why I keep asking where is the loss? It goes to Jim’s question original about how to prove loss. It’s hard to prove a loss when there is a gain.

 

[Ben Vukicevich SRA]

Steven,

Bill G. wanted further info on why I considered an over-improvement as to size EO and not FO. I'm just finding and posting articles for him to read on the EO position as I find them.

 

[Fred]

I am aware of that, Ben. And this is hardly the first time I ran into the EO and FO confusion. That said, whether you want to call the "loss" in value E or F, there first has to be a loss. This goes to Jim's original question about proving a loss. You text is a perfect example of what I meant.

 

[Steve Owen]

Here is a simple example of why EO accrues to the improvement and not to the land. Suppose you have a house located next door to a bar; it is in an area without zoning regulation. By comparing that house to other houses like it, but not located next to a bar, you determine that it has a loss in value due to EO because of the nearby operation of the bar.

Is the land worth less?

For those who said yes, I would submit that the way to cure that is to move the house and build a restaurant on the land. Now the bar enhances rather than detracts. Is the land still worth less?

Remember that you value the site, as if vacant, at its highest and best use.

A similar situation would exist with the junk yard. Terrel suggested that the way to solve the problem is to remove the junk yard. But, another way to solve the problem is to add another junk yard on the subject site.

Of course, you cannot do that so long as the residence is there. Therefore, the EO accrues to the improvement.

I felt that those who said that loss of value because of location of a site could be attributed to EO for the land had an interesting point. However, I don't think it is generally thought of that way, or taught that way. When you are valuing an unimproved parcel it is hard to think of any loss as EO because if you construct an appropriate improvement there will not be any EO.

 

[Fred]

Steve O,
I'd ask you the same thing the other way around. If vacant land near the hazard sells for less than land away from the hazard, does the value of the land near the hazard go up after you improve it?

Suppose the land values were 20 and 30, for near hazard and away. The improved values average 140 and 150 for near hazard and away. What would you conclude then?

 

[Steve Owen]

Steve O,
I'd ask you the same thing the other way around. If vacant land near the hazard sells for less than land away from the hazard, does the value of the land near the hazard go up after you improve it?

That was really the point I was trying to make. You appraise the land as if vacant at its H&B. It is what it is. If you put an appropriate improvement on it, then you may not have any EO.

Now, for some kinds of hazards, this may not follow so clearly. There is no question that location can affect the value of a parcel. It's just that you can minimize that by using the land correctly (read, as the market would prefer).

In your example, I would not expect that kind of correlation. Land close to a hazard would usually have a different H&B than at a distance. However, if it did happen the way you gave in your example, there would be little question that the hazard was affecting the value of the land. I would still not say the land has EO.

The question is "can land be obsolete?" I would say the answer to that is "no" but it can have different values based on its location. So... I'm not saying the land value could not be impacted, I am simply saying that we do not call that obsolescence. The assumption is that any tract of land has some appropriate use... you have to find its most appropriate or "highest" use to find its market value. If highest and best use is different for the subject tract than the H&B for similarly developed properties, then it is likely you have some external obsolescence.

Another question raised in this thread was about whether a certain type of obsolescence is functional or external. One poster actually asked the question, when does functional become external. My answer would be, when I say it does. The original poster asked for mathematical proof. I would respond that, to the extent such proof exists, it is right there in his original question. One property sold for less... you don't know what to attribute that to based on math, you know what to attribute it to based on logic. Like much in this profession, the idea that it is external is an opinion.

So, those with the large house in a small neighborhood. Want to call it functional? In my opinion you would be wrong, but I don't really think it makes much difference. That is simply appraiser-speak for a way to describe to laypersons why it suffers some loss in value. If you get the math right you will still get the bottom line value right.

 

[incognito]

Ben, another interesting reference, indeed. Though I think I see what the authors are saying, I still have a pretty hard time accepting it...

Greg, again, I understand what you are saying, but you state, relative to my physical depreciation example,

but the other houses is not what is causing it to be worth less.

I agree, but IT ISN'T the other houses that are causing an overimproved house to have a diminished value(EO), either. It is the physical size of the subject, relative to the market, which is...

Steven, regarding if or not there is an actual loss, could this scenario perhaps illustrate a loss?

A typical single family house is built on a typical SFD site, of the border of a subdivision, backing up to vacant commercial, or better yet, vacant industrial land. It exists there happily, marketing successfully several times, for 10 years. However, the owner of the industrial site puts in a concrete plant, a new railroad spur, and it becomes a nightmare to live next to, and the subject is sold after an extended marketing period and repeated price reductions, SIGNIFICANTLY less than it's previous price, despite an otherwise healthy market. Other similar homes in the neighborhood continue to market well, with stable or better values.

Now certainly it could be argued that the land value diminished. However, the sale price of the subject reflects a sale price (value loss) over and above the total land value. This must be attributable to some type of loss in the value of the improvements, exclusive of physical and functional?

I do not think this is an unrealistic example, and I offer it for discussion purposes. Is what you are suggesting is the (improvements) had no loss, because people were overpaying all along, knowing the possibility of the industrial use?

 

[Fred]

The question is "can land be obsolete?" I would say the answer to that is "no"

Do you mean it can’t be obsolete because of semantics (the term is usually not applied to land?
Or do you mean it doesn’t work conceptually?

One of the minor problems with this depreciation theory (and there are major ones) is that there are more than three sources. What if a building is locked into long-term below market leases? What would you call that gap in the cost approach: managerial obsolescence, entrepreneurial obsolescence?

What is it about land that is sub-standard or landlocked, so that the owner can make no use of it, and it is only marketable to a neighbor who might have use for it? What would be inappropriate about the word obsolete? (Notwithstanding that the Wisconsin Board sanctioned an appraiser for applying the label “unusable” to that type of land). I don’t care about labels because the vocabulary is not that standardized, but ideas are important to me. I would have no problem with someone calling a substandard parcel functionally obsolete. The shoe fits.

Bill
First I think I agree with you earlier comment, even though it had some typos. If bad design can be redefined from FO to EO, then there is no longer such as thing as FO. In a bit of irony, the term functional obsolescence will become functionally obsolete.

Steven, regarding if or not there is an actual loss, could this scenario perhaps illustrate a loss?

Yes and No. You show a loss because you put depreciation to its original context of measuring at two points of time (before and after). However, in a straight as-is market-value appraisal, we are measuring one property at one point in time. And my comments were made about houses that have more size and more quality than then the neighborhood. Measuirng at one point in time, how can there possibly be a “loss in value?” That takes me right back to your comment to Greg B.

IT ISN'T the other houses that are causing an overimproved house to have a diminished value(EO), either. It is the physical size of the subject, relative to the market,

As Ben's text example shows. the overimproved house is worth $30k and typical for the neighborhood is $10k to $14k. To accept that the overimproved house has a diminished value, I would have to accept that 30 is a diminshed version of 10 and 14. And that's never going to happen. It goes right back to why the orignal question is raised about how to prove or show that there is a loss of value and my contention that it is hard to prove or show in a case like that because it doesn't exist.