How would you calculate obsolscence and contributory

[Anonymous]

I will throw this out for a mauling.

Large house in the country. Has eccentric owner who has 2 wind generators, a back up diesel generator, wood fired furnance, and two giant (about 15' x 6' each) solar panels complete with tracking hydraulic system. He spent $40,000 setting up this energy plant system. His total utilities run $60/mo. (his well even runs off the solar panels) His bills before this was about $150/mo.

I calculated the contributory value based upon capitalization of the $90 savings at current interest rates over the likely remaining life of the energy systems (15 years or so.) Yielded an adjustment (PV) of about $10,000. I allowed this from the $40,000 (RCN of energy plant) as functional depreciation ($30,000) and adjusted the comps up by the $10,000 (none have anything similar in energy efficiency.)

Anybody with a better suggestion?

Ter, bewildered in the forest but never lost

 

[Austin]

Sounds like a good answer to a test question in a cap theory class, but…, always that but. As my grandmother use to say: “That is to much sugar for the scent.” Most people would not care a whit about that contraption and probably demolish it or sell it for scrap. In cases like this, my experience has been to throw the textbook out the window and fly by the seat of your pants. Find the most comparable sales, bracket the subject the best you can, see where it fits in the bracket that is most reasonable, and be done with it. Just ignore the contraption. This is a judgment call, not an arcane academic exercise in appraisal theory. I have an appraisal buddy that does that kind of stuff all the time just to impress himself. If it is one of a kind, it ain't science, and if it ain't science it doesn't correlate, and if it does not correlate tell them to call Mrs. Cleo. If they can find her that is. I hear she is on the lamb.

 

[Roger]

I don't see how you can capitalize improvements to residential property.
The typical residential buyer is not looking for a return on their investment, they are looking for a place to live.

Last week I had a contractor built residence with three separate, complete ground source HVAC systems, three seperate electrical systems, backup generator, etc.

I made a small adjustment for the additional systems, nothing for the heavy duty electric service, etc.

Of course there was no market data on which to base an adjustment.

Naturaly, he had a fit when he saw the appraisal, telling how much it would cost to do all this extra work, etc. etc.

I attempted to explain cost vs. value to him, guess I finally got my point across, he hasn't called me back in the past 6-7 hours!

Some of these super adequacies are the most difficult to deal with.

 

[George Hatch]

Capitalizing the savings is certainly one way to do it, and I doubt you'll get any complaints, let alone get mauled. I believe the number of critics willing to weigh in on an appraisal solution is inversely correlated to the complexity of the problem. Thus, everyone and their dog feels like they can review a dogbox SFR appraisal, whereas a sandwich position in a leasehold analysis seldom gets a second look.

In using the cap-the-savings method, it looks like you did make some assumptions. For instance, the savings of $90 a month over the 15 years is assuming the savings basically keep pace with your rate of change component in your yield rate. No increase or decrease, proportionately. It also assumes there will be basically no maintenance costs, no replacements, and no functional obsolescence because of changes in technology during those 15 years. It also assumes the improvements do indeed have the 15 years remaining economic life. Your depreciation estimate is based on their cost new. May I take it those improvements are all essentially new?

Sometimes we run into problems where there just isn't sufficient data in the market to support those adjustments. That's when you are forced into using more creative approaches, like the one you used. An alternative approach to your problem would be to make no adjustments at all in the Sales Comparison, but use the extra amenity to move your subject up in the ranking among your comps. In other words, use the not-quite-quantifiable amenity to justify going to the top of your range. I've had a few assignments where its actually easier to use the qualitative method in a comparison grid, rather than trying to pin the tail on the donkey by quantifying an adjustment I might not be able to support.

Data or no data, quantify or qualify, our values still have to pass the 'rule of thumb' approach. You know, where the appraiser sits on the opposite curb, looks at the property over their thumb, and asks themself, 'if it was my money, would I pay this much?'


George Hatch

 

[Tom Hildebrandt]

George et al,

Nice common sense post.

I like the idea that Roger at least tried some method of measuring the contributory value and the functional loss rather than just using the seat of the pants "no good data, just a judgment call" type of solution.

We may not be able to quantify the matter precisely because of lack of comparable sales, but by knowing and using recognized techinques ( poor and archane as some may be) we can at least narrow the possible range and add some credibility to our analysis.

Regards

Tom Hildebrandt GAA

 

[jtrotta]

Terrell; you said it was a Large House in the country and gave some idea of the cost of this system; didn't say what range of value you thought it may be in tho; the only reason I bring this up, is about several years ago there were special programs funded in part by the govt. & states for residential self powered, power systems and some folks grabbed at the idea. In turn over time I have found that these folks, had excess capital to venture into these prgrams and today (some may be obsolete) various people are looking for those concepts in many area's. Perhaps going back over the past 5 years of sales you may find one and be able to use it as a base. Check your local Realtors and see if they have any input for you. In our area they're similar to the "Antique" sale, which are far & few, so the research is non-typical. In our area when you go into the $400K mark these homes (most) have there own power generator's and other items that are limited in lower bracket homes, so I've noticed.

Good Luck

 

[Ken in Arkansas]

Terrel -

I like your approach to the problem. It is almost identical to procedures recommended in a course I attended years ago on handling these exotic types of equipment. I would raise one point, that being that it appears you discounted a net savings of $90 per month over the life of the equipment. Did you consider increases (LIKELY increases) in the cost of energy and the resulting additional savings that might be realized? I don't know what basis you would use for forecasting such increases, but it could impact the bottom line.

 

[Anonymous]

Actually, I did simplify the problem somewhat. Generators in this area are common due to the huge # of poultry farms which have them. So it is common for SFR in the country and in town to have smaller autostart generator systems. The small ones are pretty much transparent in the market.
I have also appraised one other property very similar where a retired engineer had used a greenhouse excess heat and Hardy woodstove system to heat the home. This saved on winter bills and, no, the buyers did not tear it out and/or ignore it. They still use it and they paid, at least partly, for it.
When there is a considerable investment, regardless if it is a pool & enclosure, commercial buildings, mother-in-law, etc. the sellers are rarely willing to allow the market to ignore it. This usually means fewer willing buyers and an extended marketing time.
Several people posts remarks regarding future increases in fuel costs, etc. True. But that aspect I am comfortable with. Without significant evidence that the prices are likely to higher or lower, forecasting future interest rates and utility rates are mere exercises. Higher future utility rates might be coupled with higher interest rates which dampens the change. i.e.- using current market rates for a forecast are adequate.
Remaining economic life and maintenance costs were glossed over in my example...the fellow had had some problems with lightning on his power inverter system. Based upon manufacturers statements and what I know about the other factors, I guaged 15 years as average for the panels, etc. The batteries do have to be replaced periodically.
While clearly these items do appeal to a smaller segment of the market, they are not without appeal. Clearly, anyone would like smaller bills, and if in California, this "set up" could save hundreds every month (we are talking 2,900 SF home with well, both which can be fully operated by the solar panels and win generator on an average day (but does not have enough capacity to run the air conditioner all night, according to the owner)
I beg to differ with anyone who says that "income" is not important to homeowners. We have energy efficient subdivisions in my community which cost buyers about $7,000 more than a similar house and they are selling quite well and reselling just as well. These are passive systems with superinsulation, high efficient heaters and water heaters, etc. The savings in bills can be translated into a real, defensible number and the suggestion to fly by the seat of your pants is really bad appraising. Try telling that to a judge if you underappraise a property with such improvements in a divorce proceedings and a low price would favor your client. The judge likely will throw out your testimony as inappropriate and suggest that you did it only to favor the client....very bad for business especially if it lands you in front of the State Board trying to explain how you quantified your seat of the pants.

 

[Austin]

Let me try this one on you guys to illustrate my above stated point: I live in Pittsylvania County, Virginia. This county has a system of reduced real estate taxes for senior citizens that own farmland. My father owns a lot of farmland and this program saves him about $1,000 per year in taxes. Question: If you guys appraised my father’s property, would you report two values, one value to senior citizens and another for non-senior citizens? Would you state that for senior citizens the estimated price is $500,000 but to non-senior citizens it is worth $490,000? The $10,000 difference is attributable to the capitalized tax savings. Warning, this is a trick question so think it over carefully before you answer.

 

[Anonymous]

No trick to that. Is it transferrable? The tax credit (homestead exemption in my neckathawoods) benefits an individual not the property. In Oklahoma, some Indian properties pay no tax Do we analyze every tax payment? Is the property over appraised? Is it underappraised? (by the assessor) capitalize the difference as positive or negative?? Nope. I served on the board of equalization and my estimate is that 50% of all property in my county is over appraised or under appraised by more than 20%. I crunched a 100 unit list once and found on average it was 103%, quite good in handgrenades and horseshoes. But the range was 65% to 151%. If you had been the one paying taxes on half again more than you sold the property for, you ain't happy anyway. Market value suggests a hypothetical sale. Until we alter our definition of market value to limit it to only senior citizens, then it is transparent in the marketplace. And in my state, the homestead exemption won't kick in for the first year after a sale anyway.

Capitalizing works because it DOES replicate in a fashion, the marketplace. Two identical properties. One has super insulation, etc. the other has no insulation. One has utility bills of $60 a month. The other $150. Which will a buyer take knowing that? The question is how much premium would a buyer pay to save $1,080/year. And you are not going to get a satisfactory answer with paired sales. Yes, there is an element of smoke and mirrors with capitalization, but it is plain, understandable, defensible, and that makes a whale of a difference if you are being twisted in the wind by an att'y for the opposition where one or the other parties may be forced to pony up 50% of the total.