new construction vs used housing

[Restrain]

Here's a prime example going back in time. It's set in Texas, but it should give you some insight.

Builders routinely build in concessions (upgrades, etc) that are not disclosed. Further, new home sales compete for a different market (Mama want's that new home, no matter what). When things were strong, paired sales (same builder, same development, same quality of finish) showed a 15% differential between a new home and a 2 year old resale. This level held constant for years.

Here's a big warning. If you use new home sales against a 12 year old home, and do not use the known sales of 8-15 year old homes from the same neighborhood, it can and will cost you your license, should that file be pulled by the lender for review.

 

[Pittsburgh Pete]

I have reread the original post and still find the statement “Depending on what part of Michigan you are in you have to consider the external obsolescence that exists when you are trying to do an adjustment for age” utterly confusing.
Maybe you consider me being picky but I am only trying to learn something new. So if you have a book or other info in writing showing that there is a correlation between an external obsolescence and an age adjustment, please let me know.

Once again--from the top. The OP had new construction sales available to him. In this particular market, even the new construction suffers from EO--undoubtedly selling for less than cost to construct--Michigan has 15%+/- unemployment with ripple effects impacting real estate, no doubt.

To gauge an adjustment to these newly constructed units to the subject (which is 12 years old), the appraiser would most probably have to go back in time to compare new construction to older homes (no older home sales are currently available) to calculate this adjustment for the subject's age relative to current new construction. Levels of EO would undoubtedly come in to play as the EO has probably increased over time as the market has deteriorated. It's a messy market, I'm sure. Not my market but I'm fairly sure that was the point Mr. Evans was trying to make but I'll defer to him on this.

 

[Michigan CG]

Pete is correct.

There is another point to be made in this also. If you have two identical homes, only one is 10 years old and the way most residential appraisers do a cost approach they will take a cost new and then attribute all of the depreciation to physical when that is incorrect.

Then some take this adjustment (from the cost approach) and apply it to the age adjustment when in fact some of this is actually external, and not physical. Most likely the external is already considered in the sale property price.

If it costs $100/SF to build a house new but it will only sell for $80/SF then there is 20% EO. Using a cost new to figure depreciation for a 10 year old home needs to figure that in. If the 10 year old home sells for $60/SF there is not 40% physical depreciation, there is only 20% because of the EO.

 

[Pittsburgh Pete]

Pete is correct.

There is another point to be made in this also. If you have two identical homes, only one is 10 years old and the way most residential appraisers do a cost approach they will take a cost new and then attribute all of the depreciation to physical when that is incorrect.

Then some take this adjustment (from the cost approach) and apply it to the age adjustment when in fact some of this is actually external, and not physical. Most likely the external is already considered in the sale property price.

But you were clearer and more concise than I was.

 

[Michigan CG]

But you were clearer and more concise than I was.

I edited it to make it more clear.

 

[Michigan CG]

To the original poster, age adjustments are based highly on physical depreciation. or some random number from the "list".

Assuming no functional depreciation, you need to figure out what the EO is by finding new construction COST and then what the new construction is selling for. This gives you a good idea of the EO.

Then take the new construction after subtracting EO and apply it to the 10 year old property which would give you physical, and a good indication of age/condition.

 

[AlwaysLearning]

Pete is correct.

There is another point to be made in this also. If you have two identical homes, only one is 10 years old and the way most residential appraisers do a cost approach they will take a cost new and then attribute all of the depreciation to physical when that is incorrect.

Then some take this adjustment (from the cost approach) and apply it to the age adjustment when in fact some of this is actually external, and not physical. Most likely the external is already considered in the sale property price.

If it costs $100/SF to build a house new but it will only sell for $80/SF then there is 20% EO. Using a cost new to figure depreciation for a 10 year old home needs to figure that in. If the 10 year old home sells for $60/SF there is not 40% physical depreciation, there is only 20% because of the EO.

This does make sense, thank you. Although, the method will work correctly only if one could get a reliable cost/SF to build new.

 

[Michigan CG]

This does make sense, thank you. Although, the method will work correctly only if one could get a reliable cost/SF to build new.

Assuming you don't live in Chicago, I would bet your cost new is close to mine at about $85-90/SF without land.