Anybody have a really good simple cost approach example

Discussion in 'Urgent - Help Needed' started by JENIFFERW, Mar 28, 2008.

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  1. JENIFFERW

    JENIFFERW Member

    0
    Nov 26, 2007
    Professional Status:
    Licensed Appraiser
    State:
    California
    I really try to comply with the new FNMA forms cost approach requirements. I usually have to use the extraction method due to lack of vacant land sales, especially now that the market is bad. I use a free data source, www.building-cost.net, which I like. I almost always have to complete the cost approach these days due to my current clients mostly requiring it. Problem is, I am not really sure how to handle things like external, functional, and physical depreciation when doing the extraction. It seems confusing. I know I should take the class, and I plan to soon, but just thought I would ask for some help from the master appraisers in the mean time:)
     
  2. Matt Mattina

    Matt Mattina New Member

    0
    Nov 3, 2003
    Professional Status:
    Certified General Appraiser
    State:
    California
     
  3. Jungle Boy

    Jungle Boy Senior Member

    0
    Oct 30, 2002
    Professional Status:
    Real Estate Agent or Broker
    State:
    Florida
    Estimating depreciation is difficult unless you have older and newer improvements which have sold recently on similar sized sites within the neighborhood. Then you can compare selling prices, and have an idea of what depreciation could be. Even then it would be quite unreliable, and therefore may or may not be accurate as part of the extraction method.

    Think about it. You're trying to estimate depreciation on comps & sales which you have only seen from the street. Then you look at the photographs on your computer, and try to come up with a professional estimate of depreciation. Makes me laugh, as it seems so silly.

    Due to the fact that most clients want it for insurance purposes anyway, I have statements similar to below in the cost approach section.

    Put in a statement similar to the comments on cost approach:
    The cost approach to value is added for the benefit of the lender. The cost approach to value is unreliable when the subject and comparables are over 10 years of age, and may or may not be accurate. The cost approach is not to be used for insurance replacement cost purposes, and is added for market analysis only.

    Put in a statement similar to this in the support for opinion of site value box:
    Market extraction method used to estimate opinion of site value. No unimproved lot sales were found.
    Market extraction is not reliable when the subject and comparables are over 10 years actual age. Therefore it may or may not be accurate.

    So far, have never had anyone question it.
     
  4. Kevin A. Spellman

    Kevin A. Spellman Senior Member

    0
    Aug 30, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    Massachusetts
    Introduce yourself as a student of real estate within a building department of a municpaility that is active with new home construction and hopefully it will be in your service area. Ask for the new permits and send a letter to the builder/developer and ask to be an observer of the process and let them know you are attempting to create a skill to understand the cost to build a residential structure and to create a reliable price per square foot. First generation knowledge for construction is superior to any on-line artificial intelligence cost services.

    In respect to the obsolescence issues, you will just have to perform a valuation service when an exercise of theses obsolescence’s is evident. Make sure you understand the scale of economy theory. There is an inverse relationship between the size and price per square foot. The smaller the area typically is a higher price per square foot.
     
  5. ZZGAMAZZ

    ZZGAMAZZ Senior Member

    0
    Jul 23, 2007
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    Just my opinion based upon relatively limited experience, but remember to reconcile your level of confidence in the CA relative to the SCA and the IA.
     
  6. Doug Smith SRA

    Doug Smith SRA Member

    0
    Jan 16, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Montana
    To Skin a Cat

    Don't give up quickly on the sales comparison approach. Approach the search with an attitude that there are sales out there no matter how settled the neighborhood. Make sure your search is complete. After the sports page, glance at the classified for land sales every day. Follow up on any promising leads. You may not need that sale today but save it for later. Always check for sales. Keep your eye out for "tear downs" in the neighborhood. The difference between purchase price and demolition is relatively easy to calculate.

    Allocation looks good when you read about it or hear about in appraising 101 but it is accepted as method. Run the numbers from assessment data to at least see if there is a consistent ratio. Run the numbers from a competing neighborhood and see if the ratio makes sense.

    If you don't do subdivision work yourself, check with an appraiser who does. Run some per square foot findings past that appraiser as a check on your work.

    The extraction method requires both a good knowledge of improvements and depreciation. No matter how many sales are used, if one of these is out of kilter, the error is perpetuated. Extraction is best used depending on confidence levels with these two factors.

    There is always the income capitalization technique but again this works better in appraising 102 than it does in the field.. a pun intended.

    I go with the premise that there are sales out there....

    Doug
     
  7. Fred

    Fred Elite Member

    0
    Jan 15, 2002
    Professional Status:
    Retired Appraiser
    State:
    Virgin Islands
    I have been looking for an example of the "done right" cost approach for a long time. :)

    Maybe it's just the "crazy old aunt" in me, but I'd ask "why" before "how." For example, on how to make adjustments, if your comp sales are 100, 105 and 110, I'd ask why make adjustments? So, you can conclude 106 instead of 107? There just doesn't seem to be any reason for it.

    So my question is, if you have no vacant land market, why are you doing the cost approach at all? If factors and conditions don't exist in the market, why put them in the appraisal? For example, my neighborhood has no rentals. All houses are owner occupied. Why would anyone do the income approach? I assume almost no one would. So why would anyone do an approach based on the presence of vacant land that the prospective buyer can use to build a new one, instead of buying subject - in absence of vacant land or a land market? These factors and conditions just aren't present in the market. The absence of a sound reason why the analysis is relevant is what leads to the problem of how to do it. For example, how is the buyer suppoed to calculate the cost of an option that doesn't exist?

    Just a wild guess here, but the reason why you are doing the approach is that someone is forcing you to do it. That reason doesn't lead to any "good" how's? How can there be a "correct" way to employ an irrelevant analysis?

    There are serious questions about the legitimacy of the cost approach to market value under any circumstances. Certainly if you have to resort to extreme measures like extraction and allocation, you are about as far from a "good" cost approach as you can get.
     
    Last edited: Mar 29, 2008
  8. Dennis J. Black ASA IFAS

    Dennis J. Black ASA IFAS Senior Member

    0
    Mar 5, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Florida
    Steven,

    I knew you were a woman. And may I say not a very pretty one.

    Jenniffer,

    Steven is right, the true question is why, not how.
     
  9. Fred

    Fred Elite Member

    0
    Jan 15, 2002
    Professional Status:
    Retired Appraiser
    State:
    Virgin Islands
    You should have told me sooner. I would have never started shaving.
     
  10. timd354

    timd354 Senior Member

    17
    Jan 11, 2008
    Professional Status:
    Certified Residential Appraiser
    State:
    Maryland
    We all know the answer to why... In most cases where the lender is requiring the cost approach in order to use it to estimate the insurable value of the property. They should get an insurer to provide this, but they are too lazy and/or ignorant to do so.
     
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