Which Approach to Value an Addition to a Daycare in a Dwelling

[J Grant]

The CA will give you the most flexible option WRT arriving at an opinion of value. As such, I've found the CA to be especially handy when trying to attain an opinion of value that might otherwise not be attainable under one of the other approaches.

An opinion of value - but is that market value?

Market value is the most probable price of a property should bring in a transaction. A property can cost 600k to build and yet sell for 500k or 600k or 700k. (land value factored in for the example)
Okay, the cost approach was "attainable" - what else supports that a typically motivated buyer would pay what the CA attained?

Clearly, the CA is more important with some proprietress than others, and IMO, it can strongly support other approaches. As far as replacing another approach, idk what the clients want to accept - but perhaps some do.

 

[alebrewer]

An opinion of value - but is that market value?

My bad - I should have said estimate of value.

Market value is the most probable price of a property should bring in a transaction.

You don't say?

A property can cost 600k to build and yet sell for 500k or 600k or 700k.

Works the other way too... A property could sell for $600k, yet cost $500k or $600k or $700k to construct - depends on how much you manipulate the cost data.

and IMO, it can strongly support other approaches.

and IMO, it doesn't.


All that said - the post was a parody, J. It was not meant to be taken seriously.

 

[J Grant]

Works the other way too... A property could sell for $600k, yet cost $500k or $600k or $700k to construct - depends on how much you manipulate the cost data.


All that said - the post was a parody, J. It was not meant to be taken seriously.

Guess I missed the parody part - it is hard to fathom the OP survey includes going two states away for a Daycare sale is an answer -

The point is, the cost approach may or may not align with what buyers are willing to pay, and when a buyer pays less than cost to build or replace, the subject is then seen to be an over-improvement or super adequacy - I have a problem in trying to make the approaches closely align(not accusing you of doing that) the problem with the expectation that the approaches should closely line up can lead to manipulating data - in some cases.

 

[Marty S.]

"Daycare" is a business use and maybe/probably requires a special license to operate and is not necessarily a description of real estate. Remember the definition of market value: What would a typical buyer use that space for, and what would they pay for that space in your market? As others have suggested, go through the four categories of Highest and Best Use and see what conclusion you come to, paying mind to "legally permissible" (i.e., zoning but knowing what special permissions can be transferred to a buyer -- and I'm assuming that a daycare license is not transferrable), and physically possible. Would a buyer look at that space and say, "Wow -- home office!" or maybe "Teenage kids hangout/family room" or whatnot?

Let us know what you come up with!
Marty

 

[Terrel L. Shields]

Also, what's with the crotchety old man avatar?

Trim the beard and its me - male pattern baldness and all. (my hair looks like it had a party during the night when I get up.)

Is the breezway open, or enclosed, to the addition

Enclosed. 15' or so.

I heard it has been cold Arkansas.

For FHA, if the owner has an in-house day care it is doable FHA if the % of the dwelling being used is below 25%

No FHA, not secondary market. In house lender.

Depending on the floorplan

Addition has a bathroom and office, rest is open, typical house finish in and out. Main house has kitchen, and a wall was removed so there are 2 rooms and 2 baths except kitchen/dining and storage area. Not a good home 'as is'. The addition will add 1600 SF to 1700 SF and there are few houses over 2,000 SF in the entire town.

HBU is current and proposed. There is a need for such a facility in a town of 2,200. That's why they are expanding.

Functional depreciation will be your biggest wildcard,

Yep, and without market data to support a deduction for FO, should you? Ultimately, I feel this is one of those situations where the cost approach is most applicable. Although weak, it is no weaker than the SA. I have the costs, they seem reasonable, and I have the old report to guide me by (its less than 3 months old.) The SA is basically going to be replicating the CA with an across the board adjustment.

The income approach, again, is dependent upon being able to develop a good net income operating statement and then what? How, where do you get a cap rate? How much of the income relates to the books, chairs, etc. of FF&E? I don't think that helps. It's been a while since I've encountered a similar situation.

 

[Terrel L. Shields]

it is hard to fathom the OP survey includes going two states away for a Daycare sale is an answer

The town is within 10 miles of a state line. I certainly would have tried to decipher any FO depreciation had I found a daycare sale. I didn't' find one. I checked 2 Arkansas counties (separate MLS) and the MLS in OK covers 4 counties basically. I didn't check the Tulsa MLS because I felt that market would be markedly different.

What would a typical buyer use that space for, and what would they pay for that space in your market?

The town in question has very, very few restrictions upon property. Most of the restrictions relate to state law regarding a daycare. Certainly, in the original appraisal, I did deduct for the FO of restoring the walls to make it useable for a dwelling like it originally was. But the addition begs the question - would a residential buyer even look at a 2-piece property? I would say the typical buyer would be someone wanting to take over the business and operate it as a daycare. Wherein lies the rub. No sales of daycares, and I found nothing I thought would be an adequate proxy for a daycare, like someone running an insurance or law office out of a house. My own insurance agent bought my old agent out, and he's housed in a dwelling on one side and bakery on the other...yummy cookies they sell there too. But he's looking to move into a better facility - it was just all that was available within his budget.

So, I will develop and weight the CA. I will do an across-the-board adjustment at cost in the SA, and give it the lesser weight. And I won't develop an IA - I just don't see it would be very reliable. And the SA and CA will necessarily replicate each other for all practical matters. So, if I were to leave out the SA, wouldn't really see a problem with that.

PS - if this was for secondary market, I would have turned it down flat out.

The point is, the cost approach may or may not align with what buyers are willing to pay

That may be true, OTOH, the seller may set the price as what they have invested. And the buyer might be looking at the ability of the property to cash flow. Which is a consideration on why the income approach might give you a value. But what value? Market value or value in use? I would argue the income approach will give you a value of the on-going concern. The lender only needs (requires) the value of the real estate. The total property value (including on-going enterprise and FF & E) can be different from the market value of the real estate.

Thanks for the responses, it's an interesting problem.

 

[J Grant]

If it is an MV purpose, I still do not understand why T is only considering the typically motivated buyer as a daycare use buyer, and no sales with an ADU or a building are being considered just because they are not daycare use.

 

[Terrel L. Shields]

nd no sales with an ADU or a building are being considered just because they are not daycare use.

Find one... How far out do I go? Town of 1,900. Next town is on the lake and mostly retirees. So, where do I go to find such a 2 piece property with any non-residential use in a residential area.

 

[George Hatch]

You don't need a current sale to identify how such a property has previously sold or rented relative to other property types.

 

[J Grant]

Find one... How far out do I go? Town of 1,900. Next town is on the lake and mostly retirees. So, where do I go to find such a 2 piece property with any non-residential use in a residential area.

how many acres of land is it on>

IS it possible that a number of buyers would want it for residential use or mixed commercial/res use even though it has a daycare license? IF it is in a residential area, why would not it also appeal to res use as well as res income or mixes use buyers?l