Cost Approach "violation of USPAP"

[Jo Stinett]

I am reviewing an appraisal that has the following comment for the cost approach:

"The cost approach is not considered a reliable approach to value as it relies on physical condition to estimate depreciation and accurate land sales. It is difficult to estimate accrued depreciation in homes of this age (year built 1958). This is a built out area with no accurate land sales. The cost approach would be 'misleading' and a violation of U.S.P.A.P. so it was not preformed."

This comment does not impact the value conclusion of the appraiser and I do not want to be critical based upon my own personal tecniques, but I just wanted to get your take.

 

[freshman]

The cost approach would be 'misleading' and a violation of U.S.P.A.P. so it was not preformed."

Aside from the above statement, I put a similar comment in my reports if the cost spprosch is not used and why.

From the comment he/she made, it sounds to me as he/she feels that anything added to the report that would possibly mislead the reader, would be a violation of USPAP. Not that the cost approach it self would be a violation of USPAP.
A typical stip from an UW would be to get a cost approach to use for the insurance and then, because an appraiser has E&O go after the appraiser if a problem arises.
I also add an 'insurance purposes' disclaimer.

 

[Brian Weaver]

"The cost approach is not considered a reliable approach to value as it relies on physical condition to estimate depreciation and accurate land sales. It is difficult to estimate accrued depreciation in homes of this age (year built 1958). This is a built out area with no accurate land sales. The cost approach would be 'misleading' and a violation of U.S.P.A.P. so it was not preformed."

This is what I mean by some appraisers being incapable of cobbling together a coherent sentence to explain what they're doing or not doing. Good grief. If our board could...we'd be sending some licensees to a writing course rather than a regular CE or QE course, as a function of discipline.

I'm certain that the appraisers means something else...but...as written...the appraiser is telling the reader;
The Cost Approach is useless because I can't figure out how to depreciate the subject property. In fact...its really hard to do and I haven't a clue where to start on a 50+ year-old house. My other problem is that nobody has purchased a vacant lot in this area since Kennedy was president...so...I haven't a clue as to what the dirt is worth in 2009. So...I'd better say something clever to deflect any criticism over my own ignorance of this entire approach...like...it would be USPAP violation if I actually took a stab at doing it. Yeah...that's the ticket.

Egads.

 

[Lee Lansford]

One of the most SIGNIFICANT shortcomings among appraisers (at least from the perspective of my little corner of the appraisal-universe) is their complete inability to effectively communicate. Seriously. I've read appraisal reports where, once I'm finished, I don't know whether the appraiser is a genius or an idiot (though I more often surmise the latter as far as effective communication).

And, if some believe that such is not all that important "as long as the value is 'right'", think again. One might know how to credibly develop an appraisal, but if one can't communicate the results, the results might not be credible.

And some appraisers wonder why they often receive "stips" once they have communicated their appraisal. Geeez.

 

[Michigan CG]

One of the most SIGNIFICANT shortcomings........ is their complete inability to effectively communicate. .........

COMMUNICATE.....??

You want appraisers to communicate, like discuss what they are doing.....tell a story.....give narrative analysis and support those adjustments? Are you nuts....why would I do that, I am an expert......and in order to throw three a day out I don't have time for that communication stuff.

:new_smile-l:

 

[Mike Kennedy]

10-too many years of Internet-speak. English is now an often forgotten archaic language. Yo. Ah bee lee dat.

Whuzzupp wit dat.


Yo Jo - wuz dat dere duhprizer a Coit or a Lic??

 

[Lee Lansford]

COMMUNICATE.....??

You want appraisers to communicate, like discuss what they are doing.....tell a story.....give narrative analysis and support those adjustments? Are you nuts....why would I do that, I am an expert......and in order to throw three a day out I don't have time for that communication stuff.

:new_smile-l:

I know.

I ask too much.

 

[freshman]

The Cost Approach is useless because I can't figure out how to depreciate the subject property. In fact...its really hard to do and I haven't a clue where to start on a 50+ year-old house.
You are probably not too far off on that statement but one could argue that a cost approach on a 50 + year old house would be more of a guess than an opinion. The detail and research for a SOW such as that would be very labor intensive and the fee necessary, probably not acceptable to the vendor.
In reviewing I find similar comments in appraisals and my quess is that it defers other questions from an UW on the absence of the cost approach in the report.
Usually with more eloquence.

 

[CANative]

I can't say that I totally disagree with the comments in the work the OP is reviewing. In fact I almost started a new thread with the very same thread title but decided it would be too time consuming and burdensome to fully articulate my position in such a discussion.

Most texts I have read don't give high opinions of the cost approach when the purpose of the appraisal is an opinion of market value. Especially when there is no relevant data to support the site value opinion using direct comparison methods and when the improvements are old. And since the cost approach is a hybrid method that relies on market data, this approach is not very convincing in unstable markets.

I'd say the USPAP violation comes in when accepting an assignment with client conditions requiring a cost approach no matter what.

Someone... PLEASE tell my why no residential mortgage assignment for a single family property has ever required completion of the income approach?

 

[Mr Rex]

Quite frankly, IMHO that comment is slightly better than an obvious PFA made up Cost Approach and the comment Cost Approach data based on information provided by Local Builders.