Dated SF home; multiple nearby sales of similar vintage are being razed for larger new builds. Is this primarily an HBU (as-improved = raze/rebuild) conclusion, or a functional obsolescence/condition issue under the same use?
Thanks
Thanks
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Functional obsolescence/HBU
- Thread starter KiKki
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Marty S.
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It is external obsolescence. Land value has apparently increased greater than the improved value of the existing houses making it financially feasible to buy the existing houses, and then knock them down and rebuild.
This is an externality -- something from outside the property -- that is affecting the property value and its H&BU.
The external obsolescence is applied to the building improvements, and the other impact of the externality(ies) would be reflected in land value.
It also should be reflected in the H&BU As-Improved discussion as a financially feasible alternative and then, probably, as the maximally productive use, depending on your data, local market conditions, and how you write the analysis.
Marty S.
This is an externality -- something from outside the property -- that is affecting the property value and its H&BU.
The external obsolescence is applied to the building improvements, and the other impact of the externality(ies) would be reflected in land value.
It also should be reflected in the H&BU As-Improved discussion as a financially feasible alternative and then, probably, as the maximally productive use, depending on your data, local market conditions, and how you write the analysis.
Marty S.
Last edited:
Gobears81
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This is both a functional obsolescence issue and an HBU issue. It is not, in itself, external obsolescence.
The home no longer meets current standards for that market from a size perspective (which is functional obsolescence) and perhaps nearing the end of its useful life from a physical depreciation standpoint. Judging from your post, the highest and best use is for redevelopment.
The home no longer meets current standards for that market from a size perspective (which is functional obsolescence) and perhaps nearing the end of its useful life from a physical depreciation standpoint. Judging from your post, the highest and best use is for redevelopment.
Thank you for your response but I think it is not accurate.
2. Some confusion seems to revolve around the instance where the matter appears to be generated in the market itself. Is it external obsolescence if tastes change in the market since those changes come from outside the property? The answer is no. The key is whether the market is reacting to something inside or outside the property boundaries. If the market’s reaction is to something inside the property boundaries (like low ceiling height in an industrial building),the obsolescence is functional, but if the market’s reaction is to something outside the property boundaries (like an airport near a house or an economic recession), the obsolescence is external. Appraisal Institute Inconsistency: It’s Hiding in Plain Sight in Your Appraisal Part 5 – 101
A reviewer is telling me that the problem with my subject is just functional not HBU. I know that in the raze and rebuilt scenario use won't change, so that is what I want to clarify.
Thanks, exactly my view; I just needed the reinforcement. I appreciate it.
CGinMN
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They want to lend on the house, so they don’t want you to conclude HBU as improved is for tear down. Based on what you are saying it could be functional or external. Whether it is also a HBU issue depends on how strong your backbone and data are.
I would say sometimes in these scenarios it’s an either/or. HBU is that either the home will be razed, or it will continue in use at least for the interim. The value under either scenario is often very similar and too fine a slice to make the distinction. That is unless the home has severe functional issues or structural issues which makes the obsolescence incurable.
If every comp you look at was torn down, then obviously you have your answer. Also, it is important to understand lot dynamics. What exactly builders are looking for? For example, most lots are 40 foot around here, but builders really want the 42+ feet for a modern build. Also an alley is important, otherwise a front entry driveway would require reduced build size making the project no longer feasible. Slight slope allowed for a walkout which is a bonus. Neighboring houses or uses on the block sometimes might make a difference. Mature trees can sometimes help and sometimes hurt depending on local rules. Lots to consider beyond just condition of the house.
I would say sometimes in these scenarios it’s an either/or. HBU is that either the home will be razed, or it will continue in use at least for the interim. The value under either scenario is often very similar and too fine a slice to make the distinction. That is unless the home has severe functional issues or structural issues which makes the obsolescence incurable.
If every comp you look at was torn down, then obviously you have your answer. Also, it is important to understand lot dynamics. What exactly builders are looking for? For example, most lots are 40 foot around here, but builders really want the 42+ feet for a modern build. Also an alley is important, otherwise a front entry driveway would require reduced build size making the project no longer feasible. Slight slope allowed for a walkout which is a bonus. Neighboring houses or uses on the block sometimes might make a difference. Mature trees can sometimes help and sometimes hurt depending on local rules. Lots to consider beyond just condition of the house.
It is very common in this area. The property is a small and old for the area on a canal with ocean access in a very high end golf community. I told them before completing the assignment. But now they came back with a lot of questions that are already explained in the report, so I am doing copy/ paste with page number. But it confuses me a little bit because I assume the reviewer has some expertise.
George Hatch
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This is exactly the type of situation where it pays to address this question early on in the appraisal report, all through pg 1. You need to prep the reader in advance for what you're going to do on pg 2. You don't want to just spring it on them at the last minute when they get to your SC analysis and comp selection.
Not directed to the OP or their specific example because I don't know exactly how they wrote their report. But in general
Be specific in the neighborhood analysis. If there is a trend for remodel/flips or redevelopment in the area then that's worth some attention. If the composition includes a wide variety of ages, sizes and condition then that's worth a comment. If there is short term rental activity then comment on that. Even if your subject doesn't fit into any of these other trends they might still be of effect on the value or marketability.
If you think the property is worth about as much in its current configuration as if vacant then say that directly. If the existing combo is worth a little more but might not be for long then that brings in the question of remaining economic life. for example:
REL is an economic construct that includes consideration of both the physical condition and the economic environment. Regardless of the condition of the improvements, if they don't add to the value as if vacant then it is what it is.
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In the sales comparison, pay attention to the financing and the types of buyers. If some or most of the comps are being purchased by contractors or developers and they're not using SFR financing then that indicates to both their intentions AND which property attributes they're valuing. In terms of redevelopment, a 1200sf on 6000sf lot isn't the same as a 1200sf on a 10,000sf lot. The lot is the thing, not the SFR. It will be real common in my region for the listings to include comments like "the value is in the land" or some such when that's the case.
OTOH, if most of the comps are being purchased with SFR financing then that indicates to then using those properties in their current configuration and not as redevelopment-bait. Sooner or later we're all running into datasets where some of these properties are going one way and some are going the other way. A comment might be instructive: "of these sales, it appears ~15% of them were marketed and purchased for redevelopment". You're not ignoring the minority trend but you're also not fixating on it. Don't lose sight of the point that what we're looking for in the value conclusion is most probable.
As CGMinn noted, lot configuration can be a big issue, too. If the requisite side setbacks for a 40ft wide lot are 5ft each then the bldg envelope can't exceed 30sf width. That might cut into the ability to run a 3car garage side-by-side. They might have to switch up to a 2+tandem design to get 3 cars into a garage. A wider/shorter lot of 6000sf might be more valuable to a developer than a narrower/deeper lot of 6000sf even though the overall sizes are similar. A parcel with alley access might be more valuable than one with no vehicular access to the rear.
Not directed to the OP or their specific example because I don't know exactly how they wrote their report. But in general
Be specific in the neighborhood analysis. If there is a trend for remodel/flips or redevelopment in the area then that's worth some attention. If the composition includes a wide variety of ages, sizes and condition then that's worth a comment. If there is short term rental activity then comment on that. Even if your subject doesn't fit into any of these other trends they might still be of effect on the value or marketability.
If you think the property is worth about as much in its current configuration as if vacant then say that directly. If the existing combo is worth a little more but might not be for long then that brings in the question of remaining economic life. for example:
The most profitable use in the "as is" condition is the existing use, but at the current rate of redevelopment for the area the REL of these improvements may be less than 10 years.
REL is an economic construct that includes consideration of both the physical condition and the economic environment. Regardless of the condition of the improvements, if they don't add to the value as if vacant then it is what it is.
---------
In the sales comparison, pay attention to the financing and the types of buyers. If some or most of the comps are being purchased by contractors or developers and they're not using SFR financing then that indicates to both their intentions AND which property attributes they're valuing. In terms of redevelopment, a 1200sf on 6000sf lot isn't the same as a 1200sf on a 10,000sf lot. The lot is the thing, not the SFR. It will be real common in my region for the listings to include comments like "the value is in the land" or some such when that's the case.
OTOH, if most of the comps are being purchased with SFR financing then that indicates to then using those properties in their current configuration and not as redevelopment-bait. Sooner or later we're all running into datasets where some of these properties are going one way and some are going the other way. A comment might be instructive: "of these sales, it appears ~15% of them were marketed and purchased for redevelopment". You're not ignoring the minority trend but you're also not fixating on it. Don't lose sight of the point that what we're looking for in the value conclusion is most probable.
As CGMinn noted, lot configuration can be a big issue, too. If the requisite side setbacks for a 40ft wide lot are 5ft each then the bldg envelope can't exceed 30sf width. That might cut into the ability to run a 3car garage side-by-side. They might have to switch up to a 2+tandem design to get 3 cars into a garage. A wider/shorter lot of 6000sf might be more valuable to a developer than a narrower/deeper lot of 6000sf even though the overall sizes are similar. A parcel with alley access might be more valuable than one with no vehicular access to the rear.
