How would you calculate obsolscence and contributory

[Caterina Platt]

Ter,

Here goes, the only female to post to one of these topics generally left for the guys. (must be one of those right brain/left brain things)

Anyway, your straightline assumption of $90 per month savings over the estimated life is the safest and most defensible way to approach this, IMHO. We must work with past data, we can in no way begin to assume what will happen to energy rates in future markets. Just ask Enron!? As the equipment ages, it's efficiency would likely decline. It would also be likely that this declining efficiency would at least partially offset the increased savings if the energy prices were to rise.

As my former boss would say, 'How's that for appraiser BS?' Only has to be as good as the opposing council's BS, right? :lol:

I think your approach to the problem as a whole is great. I think the blind assumption that a unique improvement is transparent in the market is often a cop out and a disservice to our customer. It sounds as though your market as a whole definitely has some awareness and will add value for increased energy efficiency. Considering that part of the definition of arm's length is 'knowledgable buyer', and the fact that the typical farmer/rancher type is a bit independent, I would say the chances of a hypothetical buyer appreciating such equipment would be good.

Any buyer would consume energy. If utilizing the equipment doesn't pose a substantial inconvenience, who wouldn't use what is already in place to save a buck? Would I pay 25 cents on the dollar for it? Probably. In fact at a cost of $10,000, the improvement makes sense as it would be paid for by the cost savings in less than 10 years. Too bad the initial cost doesn't make as much sense.

 

[Austin]

In relation to my above posts, a few thoughts and examples to illustrate my position on this issue: About 25 years ago, a local farmers co-op, Southern States, came up with a scheme to sell chicken feed. Actually the Federal Government was behind the idea to diversify the tobacco based economy. Southern States contracted with about every farmer in the county to go into the chicken business. The deal was that the company agreed to buy all of the chickens the farmers produced if the farmer purchased the feed from the company. They forgot to put a price for the chickens in the contract. The farmers all built chicken houses that measured 60 x 150 feet. About half of the farms in this county have one of these chicken houses. The chicken business lasted about 6 months and as they say, the company got the money and the farmers got the bag. Based on what some of you guys posted above, you would probably make an adjustment for the chicken houses based on the depreciated cost which would be around $20,000. I have appraised scores of local farms with these chicken houses, and guess how much they contribute to value? The answer is zilt, nada, or zero $’s. They just take up space.
Example # 2: I once did an appraisal for the estate of a deceased architect who was an eccentric genius. He was never married and had lived alone. The subject property was a 5,000 square foot metal class S building with a full size movie theater, living quarters, observatory to view the heavens, electronics lab, geology museum, etc. It was professionally designed and was a quality piece of work. It was reported that he had over $150,000 invested. It was less than five years old. You guys, based on what you said above, would most likely have estimated the replacement cost and deducted a small amount for physical depreciation. After being on the market for about two years, it sold for about $25,000 and the building was dismantled and moved to a commercial location.
What is the moral of this story? When you have oddball situations like these examples, you can’t go by the book for a very simple reason, that being you are extrapolating outside the boundaries of reasonable support. I used this example in another thread the other night about going by the book and extrapolating: My 1st grandson was born on December 19, 2001. He weighted 7 pounds and 5 ounces and was 20 inches long. The first 30 days of his young life he increased his weight over his birth weight by 10% and grew ½ inch. . If you go by the book and follow the trend line, as some of you guys seem intent on doing, by the time my grandson is 21 years old he will weight 172,000,000,000 pounds and be 13 feet tall. You guys will probably turn me in to some board for bucking the trend, but I predict that the kid at age 21 will weigh around 190 pounds plus or minus 20 pounds and be 6 feet tall give or take a few inches. You can’t always go by the book.

 

[LavellB]

Austin, great post. I thought that I was missing something on the previous posts. Your example reminds me of a saying, " if you beat the numbers hard enough, they will confess." Another favorite of mine is, "measure it with a micrometer and hit it with an ax."

No reply needed.

 

[Tom Hildebrandt]

Austin

The question posed to the appraiser by these improvements is do they contribute to the value of the property as a whole, and if so how much. The appraiser needs to come to some basis for his/her judgemnt on the issue. The capitalization of the income is one technique which would help provide one possible solution and a means to assist the appraiser into applying his judgement.

I agree that such a technique has limitations in the assumptions, and should not be considered to be a definitive answer. However, such a technique is a recognized technique, and it can help the appraiser to get a grasp on the appraisal problem. Just because a particular solution has limitations is no reason to not use it or to totally disregard it. The application of judgement in this process is exactly what the "reconciliation" phase in the appraisal process is intended to accomplish.

Your words of caution regarding the cash flow projections are certainly valid, and worthy of consideration, and it is true that the projections could be tweaked with a variety of different considerations beyond the simple projection accomplished by the original poster.

However I would opine that viewed in the context of the appraisal problem posed by the original poster, such an extensive development of the cash flow is not warranted as typical appraisal practice would not warrant that for the purpose and use of this appraisal. If the appraisal was requested specifically to measure the contributory value of the improvements for the purpose of a lawsuit specifically directed at these improvements (say faulty construction) then a more thorough development of a variety of methods would probably be warranted.

Regards

Tom Hildebrandt GAA

 

[Austin]

Tom: Another angle: As you know, I use a lot of regression methods and alternative sequences of adjustments on the marketing grid. I follow this sequence of adjustments on the marketing grid based on what I have learned from doing regression analysis. When you do a marketing grid, adjust for physical differences first in the order of their dollar replacement cost. Usually in this order: Basements, garages, porches & decks; fireplaces. Then I do a simple graphical regression of GLA versus adjusted sale prices up to that point. I estimate the trend line and compute the equation for the trend line. I use the slope of the trend line to do a size adjustment. In other words, I do the cost approach in reverse order. Wouldn’t it make sense to disassembly a watch in the exact reverse order that it was put together? After all, it was put together in a particular order for a logical reason.
Then I look at the dispersion of points representing the adjusted sale prices about the trend line. I have used this procedure and multiple regression analysis hundreds of times and have found that 95% of the time that nothing else affects value significantly. Once you get the range of data points within a range of 10% of the trend line price, you can’t tell if anything else affects price or not because you are operating in the range of normal random variance. Like shooting in the dark. Until you have used a statistically significant amount of data and accounted for the physical differences in the sales, you are only practicing voodoo when you make adjustments. At least in my experience and opinion. That is the main reason that I did not like the solution to the problem as posted. He was making a sweeping assumption that the market would recognize his theoretically correct use of discounted cash flow analysis. If I were doing this assignment I would estimate the price as if the factors in question did not exist and then in the reconciliation explain that these items were not bracketed by the data and to report a value contribution would amount to extrapolation into an unknown area. I would say that in my opinion the gravity of these items skewed the price to the upper end of the indicated price range but to what extend God only knows. Just a matter of person preference from a number cruncher.
Also, in my opinion, the underlying cause of this discussion is fear and intimidation as a result of USPAP. Some idiot could turn you in to the state board and based on your experience, you can fill in the blanks. USPAP has taken the judgment out of appraising and replaced it with a society of professional hoop jumpers in my opinion. The political appointment of Appraiser Board members has assured that the board is well supplied with hoop jumpers as you also know from experience. That is why I give appraisal boards such a hard time. Appraisal Boards are potentially dangerous in the wrong hands and they do a diservice to the appraisal profession as most government good intentions usually do.

 

[Tom Hildebrandt]

Austin

You know I agree with you regarding the regulatory agencies and the potential they have to be the worst possible nightmare for the appraising profession. We already have several state boards that epitpomize the "witchhunt mentality".

I also understand your point about the regression analyis. But I bet you do not have many data points in any population of data that reflect the kind of functional issues that are presented in a residence by the original post. If you do no have data for the regression to analyze, you can not get meaningful results regarding the measurement of that item. If you had a statistically relevant sample of properties which had simlar overimprovements, I would agree that the results from the statistical model would provide superlative results, but otherwise....

Your statistical model, if it accurately predicts a value, can show what probable market value for the subject would be, sans any overimprovement. The difference between the replacement cost, adjusted for any other functional and physical differences, would leave the difference due to this factor. If your thinking is correct, then the entire cost of these improvements, less any physical depreciation accrued in the improvements, would be the maximum functional loss due to the improvements. But we do not have any data to show what a buyer might pay because we have no similar sales. The income analysis as described would set the maximum value range which a possible buyer might place on these items.

By doing this, you have thereby provided a reasonable range that the overimprovements might be expected to bring. You can reconcile that range into your final value in whatever manner you fell appropriate in your professional judgement.

Regards

Tom Hildebrandt GAA

 

[Caterina Platt]

Austin,

I enjoyed your post and examples, but I'm not sure we're comparing apples to apples here.

The examples you describe are both of the lack of utility in the marketplace for a highly specialized improvement. Without seeing these 'chicken coops', it's hard to determine if they'd have any other potential uses (airplane hangar??? :roll: ). The eccentric bachelor pad is understandable, just how many people would want to live in a glorified warehouse and share the same interests as the former owner?

The self sufficient energy system of Terrel's subject has two factors in it's favor that niether of the above do- 1) virtually all buyers use energy to heat, cool, light, etc. and 2) the improvement benefits the homeowner with a measurable return on the investment.

The initial cost of the equipment vs. it's monetary benefit and useable life make it unfeasible, so obviously, that is what makes the improvement unique to the market. It's utility however, would not be unique. When an improvement would be beneficial to virtually any buyer and provide them real savings on the operation of the home, I would think long and hard before I consider it valueless in the marketplace.

Caveat: Terrel's description of 'in the country' leads me to believe there is some agricultural influence to the area. If so, great. Farmers generally will have an appreciation for large, potentially noisy, but useful equipment. If it's a high end, large tract, primarily residential development, the likelihood of it being considered an 'eye sore' increases and I'd rethink it's 'benefit' to the property.

 

[Austin]

Caterina: I guess it boils down to our individual experience as to how much is the market willing to pay for energy savings. Another of my examples: My son-in-law is in the HVAC business. They do installations and service work. He and my daughter just had their first baby and moved back to town so grandma and grandpa could enjoy the little grandson. Their house was constructed by a building contractor for his son. Exceptional quality with large fireplace with heat inserts in the den and the basement has a wood stove with blower. They heat with LP gas and the same for hot water. Son-in-law told me when we were looking at the house that the furnace and water heater were gas-eaters and he would have to change them at some point. Last week they got their gas bill for the last 6 weeks and it was $475. I was reading the label on the gas hot water heater and the energy rating was based on an LP gas price of 50 cents per gallon. At today’s prices, it will cost $800 per year to heat the hot water. Son-law hit the ceiling when he saw that gas bill. Question: Did he use discounted cash flow analysis on the extra gas cost when he was negotiating the purchase of this home? Answer is no. Is he in a big hurry to install a more efficient heating system and water heater? Answer is no. Does he burn the two fireplaces (he has free fire wood from you know who) to conserve energy? Answer is no. Why? Even if he saves 50% on the bill it would take about 4 years to equal out the replacement cost, so what is the big deal? It is just one of those little things that is not worth worrying about.
Son-in-law came to our house Saturday night. He had just finished installing a wood system in his uncle’s farmhouse. The system sets in the back yard and burns wood to heat hot water that heats and furnishes hot water to the house. Big energy savings because the uncle is a cattle farmer with an ample wood supply. Question: Why is this uncle installing this wood heating system? To save money and conserve energy? Answer: No! Correct answer is to screw the big gas companies out of their money. The system cost $4,200 not including installation. If I ever appraise uncle's house I will make a $5,000 adjustment and explain it as a personal satisfaction energy adjustment to screw the big energy companies.

 

[Caterina Platt]

Austin,

:lol: Guess that would be precisely why the owner spent $40K installing the system in question. The savings account for some value, but not nearly enough for the cost.

Your daughter and son in law's home is another thing. $475 is enough to make your hair stand on end. Maybe I'm a cheapster, but $200 per month would equal an annual IRA contribution, or a payment on a decent used car. I wouldn't needlessly give it to the propane guy. Suppose that means I too like to 'screw the power company', or is it that I don't want them screwing me? 8O

Oh well, the major point of concern I suppose is that your daughter and grandbaby are closer, which is wonderful!