Question regarding Cost Approach!

[Fred]

Dr. Kinnard siezed upon it the true white light of appraising and its been "fact" ever since.

I have Kinnard's 1971 income-property book. He refers to it as the "so-called cost approach" and it has no mentiion of entrepeneurial or developer's profit in the index or the illustrated work-ups for cost new. I have the book he co-authored with Boyce in 1984 for residential property and there is no mention of it there either. If you actually have a gripe here, you need to lay it at someone else's feet.

Now it is gospel..and renders the Cost Approach meaningless.

Care to explain that in a lucid, step-by-step way.

 

[timd354]

Steven,

That was the basis for the board to turn down my application! The other part they looked at was their opinion I didn't adequately support a market rent for the subject property, even though I stated in the report numerous times the property had never been rented and there was very little to no market evidence on rents for this particular type of property.

Three months prior to my hearing an appraiser from the same town as I was dinged by a reviewer for the exact same violation and he got his license?

Stefan, just a question....if there was little to no market evidence on rents, then how did determine your opinion of market rent...you did'nt by chance just pull it from thin air did you?

 

[Darrel Clark]

Considering entrepreneurial profit – In my market area, entrepreneurial profit is built into the land costs. It is the developer who takes the risk and gets the profit, if any. Usually, the general contractor builds and sells the home. Contractor’s profit is, of course, part of the Marshall & Swift cost figures. That said, in my area, E.P. does not have to be added to the M&S costs. IMO.

 

[Mark to market]

In my area I am currently figuring EI at 10% and not depreciating it. For all but two appraisals in the last 4 months I am coming within a couple of percent of the sales approach either higher or lower.

As long as the cost approach is straddling the sales approach by coming in both higher and lower I feel it is fairly accurate. At some point in the future the cost approach will start trending towards coming in all higher or coming in all lower then the sales approach. When this happens, (and there are no significant cost fluctuations) I will let the market determine a new EI.

 

[Mark to market]

It just occurred to me that if your EI is market derived it would be an excellent indicator of a declining market if you have to adjust it down.

 

[Mike Boyd]

M & S is not the final word. The local building cost should be. The fact is market conditions dictate whether the market will pay more or less than cost. In a falling market, its more likely that cost will exceed sales unless you use a negative Enterprenuerial Profit factor...which cost books don't include (out of practical considerations that are wholly sane to me.) In rising markets, the cost appraisal will lag sales despite EP - because builders are raising margins according to demand. E. P. is another fantasy that muddies the appraisal sciences into the swamp of fable and voodoo. There is, without a doubt , more bad cost approach information than any other aspect of appraising.

I agree with Terrel. I suppose in a perfect world and if you employ physical and economic depreciation accurately and if you itemize each cost item down to the gnat's as$, know exactly what the specific builder is charging for EP and arrive at a very accurate value for the land (through an exacting land appraisal), the cost approach could possibly be equal to the market approach. The theory is that the cost approach reflects the upper limit of value in that a knowledgeable buyer would not pay more for an existing house than might be paid for the purchase of a lot and to build new. The problem with perfect world scenarios is that....it isn't.

 

[Fred]

As long as the cost approach is straddling the sales approach by coming in both higher and lower I feel it is fairly accurate.

So, as long as it matches the sales comparison. That sounds like all the reason in the world for not doing it in the first place. I have a roulette wheel works the same way. As long as it is close to the sales comparison, I feel it is fairly reliable.

 

[Mark to market]

So, as long as it matches the sales comparison. That sounds like all the reason in the world for not doing it in the first place. I have a roulette wheel works the same way. As long as it is close to the sales comparison, I feel it is fairly reliable.

Steven,

I take it you are suggesting that we would be better off without the cost approach?
I guess if you were feeling lucky there would be no reason to use it other then USPAP.

For myself though it is nice to have that confirmation of value. Unlike your weighted wheel, the cost approach occasionally spits one out that is nowhere near what I anticipate sparking new research before the appraisal gets to the underwriter.

By the way I always enjoy reading your posts.

 

[Couch Potato]

So, as long as it matches the sales comparison. That sounds like all the reason in the world for not doing it in the first place. I have a roulette wheel works the same way. As long as it is close to the sales comparison, I feel it is fairly reliable.

You should sell subscriptions to your wheel at $300 a year.

 

[Fred]

You should sell subscriptions to your wheel at $300 a year.

What about my Ouija board? As long as it says I have the same thing the doctor says I have, then I feel the board is accurate.

Steven,
I take it you are suggesting that we would be better off without the cost approach?
I guess if you were feeling lucky there would be no reason to use it other then USPAP.

I think the point is more about reasoning and rationale, then the specific method. If a test has the same characteristics as random chance... BTW, USPAP doesn't require the unecessary.