Functional Or External Obsolescence?

[Thebookdoesnthaveit]

I am appraising a house in the middle of nowhere. The residence is on a 28,000 acre ranch with numerous outbuildings, barns, sheds and ranch homes of average quality. Some of the homes are over 80 years old with remodels. The house, which is part of the property, is approx. 9,500 sf and is of ultra luxury on the first floor (4,800 sf) and average quality on the walkout basement level (4,600 sf). I thought I was in a different house when I walked down there! The walkout basement has 6 bedrooms and 6 bathroom. Other issues are that the kitchen on the first floor is very small - not what you would expect for a luxury house and there is no garage. To make matters worse, no one wants to pay for a house of this quality. The upstairs portion belongs in a high-end subdivision or resort town, not on a working ranch. The property was listed for sale and people who have looked at the house are not interested as it is "too weird" due to the aforementioned issues.

So, do I only have functional obsolescence or do I have a combination of functional (no garage, too many bedrooms, small kitchen) and external obsolescence (over built for the neighborhood)? How do I account for this stuff? If I use replacement cost new for, let's say, an excellent quality house overall, would I have to make another external (?) adjustment for the quality being excellent when the market will only pay for a good quality house??

Thanks in advance.

 

[Zero]

What you've described is Functional Obsolescence. Per the AI definition, External Obsolescence is only due to negative influences outside the property.

 

[hastalavista]

You will hear differing views on the "functional" vs. "external" question, but my perspective is simple and clean:

If the improvements were inappropriately built on the site (too luxurious for the location, in your case), then it is a functional issue. The mistake isn't due to anything going on outside of the owner's control (or, original builder/developer); the mistake was made in the choice of the type of improvement that was built.

If, on the other hand, when the improvement was built the site could support a luxury residence and something changed outside (think, a large industrial development or entry-level tract-home developments surrounding the ranch), then that is external. The site and improvements matched at the time they were built. Something outside of the property (and outside of the control of the owner/developer) occurred which changed the value of the improvements.
This would be similar to a general economic downturn; that's an external event.

My 2-cents.

 

[Thebookdoesnthaveit]

Thanks, that sounds perfect. Now how to quantify? Would you just cost out the residence using replacement cost new of a typical good quality residence and call it good or use reproduction cost new of an excellent quality residence and adjust for functional obsolescence, or does it even matter in the end, as both should result in the same number?

 

[hastalavista]

In theory, replacement cost would eliminate the functional design issues and, I think, the super-adequacy issues of the over-the-top finishes, etc.

Is the house just too big, or is the house size right but the quality-level is too high?
And, what about the basement?

If it is floor plan configuration and quality (as in, the existing improvement is superior to what the market will pay for) then replacement cost should take care of that.
If it is size, then the larger size would be used and a functional adjustment would be applied.

At least, according to me!

(and, you may have a combination of the two going on).

Out of curiosity, how much contributory value (in general percentage terms) does the super-house/large-basement reflect given the 28,000 acres of the site?

And, personally, I'd opt for replacement cost if that is appropriate given what you have.

 

[Mike Kennedy]

Client type, Intended Use and Intended Users?

 

[Mr Rex]

Client type, Intended Use and Intended Users?

Obviously a GSE or FHA/VA with 28,000 acres and numerous ranch style homes in addition to the 9400 total sf white elephant.

 

[Terrel L. Shields]

Would you just cost out the residence using replacement cost new of a typical good quality residence and call it good or use reproduction cost new of an excellent quality residence and adjust for functional obsolescence, or does it even matter in the end, as both should result in the same number?

The proper way to to do the cost approach is to use the REPLACEMENT COST - regardless - luxury range, whatever. Not something that it isn't.

I would probably look at a straight-line depreciation for physical depreciation.
To calculate the FO, you need to find similar ranches, and extract the contribution of the dwelling, adjust by reverse engineering the CA, again using straight line depreciation (if 10 years old and TEL is 70, then physical depreciation is 15%~. The difference between the DCN and contributory value is the functional obsolescence. But your problem is to accurately value the land. 28K acres is worth something....I would be surprised if it isn't double the value of the dwelling. And if the view is "right" - be cautious. The market might be national not regional. How far do you want to go for comps?

http://www.landbrokermls.com/States/50/Wyoming/Search-Results

BTW, I am one who leans on the notion that the externality is "the market" and "the market" for executive ranches is an offsite factor. OTOH, even a small ranch house could become "invisible" in the market place. Not out of the question.

 

[Michigan CG]

The bad thing it is a very tough assignment. The good thing is you can take the rest of the year off with the fee you should be getting.

 

[Thebookdoesnthaveit]

In theory, replacement cost would eliminate the functional design issues and, I think, the super-adequacy issues of the over-the-top finishes, etc.

Is the house just too big, or is the house size right but the quality-level is too high?
And, what about the basement?

If it is floor plan configuration and quality (as in, the existing improvement is superior to what the market will pay for) then replacement cost should take care of that.
If it is size, then the larger size would be used and a functional adjustment would be applied.

At least, according to me!

(and, you may have a combination of the two going on).

Out of curiosity, how much contributory value (in general percentage terms) does the super-house/large-basement reflect given the 28,000 acres of the site?

And, personally, I'd opt for replacement cost if that is appropriate given what you have.

% contributory value of the improvements is about 10% of land value. That's based on what the listing agent is allocating to the house.