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Cost Vs Sales On Unique Properties

Discussion in 'General Appraisal Discussion' started by Pamela Crowley (Florida), Jul 31, 2005.

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  1. Pamela Crowley (Florida)

    Pamela Crowley (Florida) Elite Member

    3
    Jan 13, 2002
    Professional Status:
    Retired Appraiser
    State:
    Florida
    Please consider and discuss:

    Problem:

    Unique properties with no sales of similar properties anywhere near it:


    Keeping in mind:

    Cost Approach vs Sale Comparison:

    Taking into consideration the above definition of market value provided by Fannie Mae, which is what almost all of us use for our residential appraisals, exactly how can putting the most weight on the Cost Approach for your final reconciled opinion of the subject market value relate to this definition of market value?

    Has anybody done research that shows the cost of building that very unique structure where it's located IS what the "typical buyer of a similar property in a THAT (or VERY similar) location" would actually buy it for?

    What is used for functional and/or external depreciation in the Cost Approach to make it 'fit' with that definition of market value?

    (Hope my questions are understandable!)
     
  2. xm39hnu

    xm39hnu Senior Member

    0
    Jul 10, 2003
    Professional Status:
    General Public
    State:
    Florida
    First thing to decide on unique properties is whether the client wants market value or use value. I went through all this a while back when asked to appraise a small church. The conclusion I reached (with the help of forum members) was that for a market value appraisal, the prop had to compete with and be marketed just like any other property. Highest and best use determines what you use for comps.

    We've beaten the "cost is not value" mantra to death, and no consensus has been reached. Usually (in my pre-appraisal experience) a buyer is going to discount a unique structure's cost by the amount needed to convert it to his chosen use--in other words, to cure its defects. Less money would be required, for example, to convert a skating rink into a supermarket or retail store than would be required to convert, say, a church into a nightclub. So again, it would appear that HBU plays a key role, whether you're using cost or sales comparison to reach a value.

    Once HBU is determined, cost to cure can be calculated. So (without capitulating my position that "cost is not value") functional or external depreciation can be extracted from the market, lending meritricious credibility to the cost approach. But I still take the position that market reaction to the defects is a better indication of market value.
     
  3. Chris Colston

    Chris Colston Elite Member

    0
    Jul 24, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    Florida
    What is your definition of UNIQUE?? Are you referring strictly to residential?

    Don't ya hate it when a question is answered with a question? :rofl:
     
  4. Ray Miller

    Ray Miller Elite Member

    0
    Feb 20, 2002
    Professional Status:
    Licensed Appraiser
    State:
    Wisconsin
    It is over built or under built for the area I do a nartive report on the value if sold in the open market in that area.

    I also include the cost approach but don't give it any weight.

    I might figure the value on similar subjects in similar areas around the state with similar markets like the subject. To show that there are buyers, instead of taking 6 months or 1 year it might take 5 years to sell it on the open market.

    It depends on the scope of work.
     
  5. Pamela Crowley (Florida)

    Pamela Crowley (Florida) Elite Member

    3
    Jan 13, 2002
    Professional Status:
    Retired Appraiser
    State:
    Florida
    OK, here's one example to zone in on:

    6,000 GLA, proposed construction, SFR on 10 acres

    in an area suburban to rural area of mainly 1,000 - 3,000 GLA SFRs on 1-20 acres. Largest GLA in this area that has not sold in over 5 yrs is 4,200 GLA on 5 acres.
     
  6. Ray Miller

    Ray Miller Elite Member

    0
    Feb 20, 2002
    Professional Status:
    Licensed Appraiser
    State:
    Wisconsin
    Nartive Report. I would consider this a complex assigment at this point.

    It is over built for the area for sales approach opinion of value to be really firm.

    But I would give a market opinion value after a lot of research in similar areas of the state. With a time line for selling. Which might or might notbe below the cost approach.

    I would project out like I do for ERC appraisals.

    I would note a lot of disclosures in the report, such as you have listed on overbuilt subject. What is and what is not selling in the market area.

    I would also want to look at highest and best use. What could it be legal coverted to and what has others in the area have done.


    The cost approach opinion of value is XXXXXXXXXXXXXXXXXXXXX.

    The sales approach opinion of value is xxxxxxxxxxxxxxx over this period of time.

    The income opinion of value is xxxxxxxxxxxxxxx.

    The highest and best use appears to be a (three leged horse, owenr wasted his money).
     
  7. Edd Gillespie

    Edd Gillespie Senior Member

    0
    Oct 16, 2004
    I hit one like that. 'course not exactly like it, but close.

    The advice I got was to adjust the comps (which I used the best I could find). Then complete the cost approach on the subject (it was new). And the difference between the two approaches told me what the functional adjustment for the huge and unusual size needed to be.

    I've not heard this particular method anywhere else, but when you're dealing with a greatly unusual subject it may call for some unorthodox methods that can be explained and repeated to get to the market value and not just the cost to build it.

    Seemed like a logical method to get to the amount that the subject is overbuilt for the existing market.
     
  8. Ryan Nyberg

    Ryan Nyberg Senior Member

    0
    Jan 15, 2002
    Professional Status:
    Gvmt Agency, FNMA, HUD, VA etc.
    State:
    Washington
    Pam I did one like that but I will go one step further. Subject was 6,000 SF on 5 acres with 3 acres in a flood plain with river frontage. The house was in an area where there were 5 sales in 2 years in that half the county. Largest sale was 1,800 sf. This was the largest house in the county. The next largest house was 3,500 sf sold 18 months ago and was on 20 acres on a hill top with basically 270 degree view. These types of properties are ones that you could hand to 100 appraisers and come up with 100 different values and 100 different appraisals. Sometimes the cost approach on these types of properties will show what the upper end will be. One could in theory run a cost approach for the other sales and see what the difference between sales price to cost approach is and come up with a possible value as well. IMO these types of properties should be completed with a range of values.
     
  9. Pamela Crowley (Florida)

    Pamela Crowley (Florida) Elite Member

    3
    Jan 13, 2002
    Professional Status:
    Retired Appraiser
    State:
    Florida
    IMO, that makes the most sense possible for this situation, but would definately entertain other theories.

    For you experienced reviewers, what do you think about reports that give the most weight to the Cost Approach for what does appear to be an overbuilt for it's area SFR?
     
  10. CANative

    CANative Elite Member

    121
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    When market value is the goal it is assumed (by definition) that the buyer purchases in accordance with the realities of the current market, and with current market expectations, rather than in relation to an imaginary or hypothetical market that cannot be demonstrated or anticipated to exist.

    An opinion of value based on the cost approach is not an opinion of market value and the report should state that.
     
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