Overbuilt - Functional Or External ?

[Terrel L. Shields]

Situation. The house below has been under construction for a year. It appears to be about 7,000 SF and high quality. It is 1 mile from my house in a greenfield (rurban) subdivision of 60 odd lots of 1 acre ml. 4 miles to nearest city limits. It's twice as large as most houses in subd. History. 2006 farm bought by builder backed by Realtor, lots priced at $65 k. 1 sale before collapse. Lots sold after foreclosure for little as 10k. Now in $30's with 12-15 houses. This was about 3-4 lots and may well be largest house between here and Bentonville, Rogers, Springdale, or Fayetteville (each being some 20-30 miles away.)

Denis and I always argue over this. Is it a functional defect in the house? Or, an external obsolescence due to lack of market (economic obsolescence)? I've argue that it is an externality. There would be no functional issues if sited 20 miles away in the high priced executive lots near Walmart Hdq., or Pinnacle Hills, or a number of exclusive subdivisions. What do you think?

 

[Deleted member 134708]

I've never ever subscribed to functional obsolescence for sunk cost things

This is 100% sunk cost problem.

If I took a side I'd say external for sure.

But reality on realities terms it's just sunk cost.

 

[jay trotta]

Over improvement- An improvement which is not the most profitable for the site on which it is placed because of its excessive size or cost, and consequent inability to develop the maximum possible land value. May be temporary or permanent.
An over improvement typically reflects environmental obsolescence, although a substantial market may exist for such property among a group which takes personal pride in owning the most expensive home in the block and is willing to pay a price commensurate with cost.

IMO, don't know your area well enough to form a different opinion.

 

[Terrel L. Shields]

environmental obsolescence

That is an externality, which is my argument

 

[J Grant]

Looks like an over improvement for the area.( I voted functional due to lack of choices...but there is no functional defect in the house, it is simply too big to recoup costs on sale perhaps )

Lack of market for a white elephant house is not an external obsolescence. The same subdivision shows no adverse impact ( no ext obs ) for the smaller homes of market accepted size.

.

 

[jay trotta]

That is an externality, which is my argument

appears we agree

 

[J Grant]

Over-improvement refers to improvement on a land in excess of the need. It is over in the sense that it does not make the best use of the property, or is excessive in comparison with the improvement of similar properties. An over improvement lessen the market value of the property.

I like the above definition and the one below. .
OVER IMPROVEMENT
An improvement, excessive in cost or size in relation to land value or value of surrounding improvements.

 

[J Grant]

Over improvement- An improvement which is not the most profitable for the site on which it is placed because of its excessive size or cost, and consequent inability to develop the maximum possible land value. May be temporary or permanent.
An over improvement typically reflects environmental obsolescence, although a substantial market may exist for such property among a group which takes personal pride in owning the most expensive home in the block and is willing to pay a price commensurate with cost.

Above from the Society of Real Estate Appraisers...just because they come up with a definition does not mean it is right. I find it problematic. First of all, what is "environmental obsolescence? " That would usually mean an adverse environmental issue, there are none. if they wanted to say external obs, they should have said that, but I disagree imo it is funct obs causing the loss of value.

Then the definitions's last sentence is contradictory. If there is a substantial market willing to pay a price commensurate with cost, it is NOT an over improvement, it is just a big house. If there is no loss of value, aka there is a market for a property and they are willing to pay commensurate with cost, it's just a big house, its not an over improvement. An over improvement means it cost more to build then can sell for ( loss of value), which results from lack of demand/.market /.

 

[J Grant]

There would be no functional issues if sited 20 miles away in the high priced executive lots near Walmart Hdq., or Pinnacle Hills, or a number of exclusive subdivisions. What do you think?

The whole point is that the house is NOT sited 20 miles away in higher priced area/area with other similar large homes. It was built where it is, an area of smaller, less expensive homes. The market reaction to the house on the location where it sits creates the obsolescence, and it is functional obs, a function of the house being too big for the area...assuming little demand for that size house /sells below cost to build.

If there are buyers and a market for the house on the location where it sits, it does not have funct obs or over improvement, it is a big house compared to others in area but there is a market for it and the size commands value on sale.

 

[Gobears81]

I voted functional. It sounds like residential development is feasible, but that the ideal improvement is a smaller, average quality house. Thus, it could be regarded as functional obsolescence due to super-adequacy. FWIW, if in my market, even in a higher priced subdivision, the size of this house would immediately be seen as having functional obsolescence.
In the town I used to live in (which actually had residential construction), it seemed like the builders - who were also the subdivision developers - were more desirous of higher-priced subdivisions. But while those lagged, the median-priced, average-quality subdivisions sold quite well. In that market, you could make a strong argument for both functional and external obsolescence on a house of this type.