Methods for the determination of external obsolescence of the commercial real estate-case study

Received: February 27, 2018
Lviv polytechnic National University
Lviv Polytechnic National University

The purpose of the study. Solving the problem of the calculation of aggregate obsolescence of a real estate object in general and external obsolescence in particular, as being less investigated and described in scientific papers is a topical issue. A topical issue being investigated and described in scientific papers is the problem of calculating the aggregate obsolescence of a real estate object, particularly its external obsolescence. The drawback of the existing methods of determining the external obsolescence (except a paired comparison method) is the necessity of storing a great amount of selling or renting data, which is rather difficult within Ukrainian market conditions. Current methods used for the investigation of external obsolescence of commercial real estate which require less data are proposed [ISA, 2017; NSA-1, 2003; NSA-2, 2004]. Methodology. In the process of real estate valuation obsolescence is considered to be an important factor for the valuation of buildings by the cost approach and is determined as sacrifice of utility or loss in value, due to several possible causes [Kharryson, 1994; Ekkert, 1997]. The subject of the investigation and analysis shows a potential gross revenue received from leasing; revenue losses from rental payments; the possibility of gain contingency; and transaction costs, that comprise net operating income. In this case they should serve as a market proof of the level of the rate of return of the real estate being evaluated. The results. Today the value of external obsolescence of the real estate is determined with the use of a large amount of market data. In general, the market comparison is a key position in determining aggregate improvements and depreciation and the aggregate depreciation is the difference between replacement or renewal costs and market improvement value, and depreciated cost of replacement of land improvements is a difference between the selling prices of real estate and market land value. The investigations related to the development of new methods of the estimation of the external obsolescence of real estate have been carried out. In the paper it is proven that for the improvement of the evaluating methodology of real estate and determining its external obsolescence new methods should be applied, which will allow the real estate evaluators to avoid subjectivity in calculations and, subsequently, “legal deficiency” in obtained results. Scientific innovation. Existing methods of valuation of the external obsolescence do not always meet modern market demands and it is necessary to develop new methods having certain advantages over the methods being widely used in practice. The introduction of new methods of calculating the external obsolescence of commercial real estate is important for improving the valuation methodology for modern real estate market of Ukraine. Its practical significance. The investigations enable obtaining the mathematical dependences for determining the correct and scientifically grounded coefficients of the external obsolescence for the commercial real estate property objects. It is feasible to apply the investigations represented in the paper for determining the external deterioration of commercial real estate with the purpose of the calculation of depreciated costs of replacement or depreciated costs with further calculation of its market value [Hubar, 2014, Perovich & Hubar, 2016].

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