And I've pointed this out several times in several different threads, but it never gets addressed.
The idea that someone is completing an appraisal assignment and completing an approach to value within that assignment but doesn't complete that approach with the objective of concluding market value is a fundamental flaw in valuation practice.
As I've posted before (and will post again), there are 8-steps in the valuation process as taught by the recognized texts. Texts that are cited by numerous authorities (such as the Board of Equalization in their assessment handbook when discussing how to appraise real property).
The first step is "Identification of the Problem". Within that first step includes the following:
- Identify client and intended users
- Identify the intended use
- Identify the purpose of the assignment
- Identify the effective date of the opinion
- Identify the relevant characteristics of the property
- Identify special assignment conditions (Extraordinary Assumptions and Hypothetical Conditions)
The bolded bullet-point is further discussed:
Appraising Residential Properties, AI, p. 70)(my bold)
J Grant, you continue to say that you do the cost approach but it does not represent market value.
It is not ME that says the CA does not represent MV, it is the fromat of the CA itsel. The final value line of the CA states INDICATED VALUE, not INDICATED MARKET VALUE, or OPINION OF MARKET VALUE.
According to recognized valuation practice and procedure, you cannot do an appraisal and select the appropriate techniques without first identifying what type of value you are trying to determine. Without identifying the purpose in step one, any technique you use may or may not be appropriate; and if it is, it is appropriate due to coincidence and not design.
I understand that, of course!! But, see my further argument below.
SR1-1(a) is very clear: "be aware of,
understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal"
In multiple cases, I (and others) have posted what the recognized methods and techniques are and have cited the source. Yet you continue to hold on to the position that when you do the cost approach, it is not an indication of market value; that when you do it in your appraisals (which the purpose, in the case of GSE SOW-driven assignments, is to determine market VAlue) the process you use is not a cost approach indication of market value but an indication of something else.
Denis, the value "I" develop from the CA is done the same way as the value you develop...we follow the steps and arrive at an indicated value of the cost approach , which is not an opinion of market value till you say it is in your appraisal (after the reconciliation), and not an opinion of market value in my appraisal till I say it is (after the reconciliation.)
Like it or not, we are following the same steps, only you are calling the value developed from the CA market value prematurely, before the reconciliaiton.
The value value line after each approach says INDICATED VALUE. It does not say INDICATED MARKET VALUE . (yes I understrand if I am doing a MV purpose appraisal that is the SOW, but it STILL does not make the indicated value MV, till after the reconciliation)
The 3 approaches yield values that the appraiser can rely on to form an opinon of market value, but the approaches do not yield MARKET VALUE (until the appraiser says they do, after the reconciliation...but what is more correct is that the 3 approaches support the appraisers OPINION of MV, or the appraiser's OPINION of LV, or whatever the type of value the SOW and purpose of report is)
That is the difference I am trying to describe.
Of course, I recognize the purpose of the appraisal is to develop MV, and with that in mind, I choose certain data, or apply certain standards when choosing the data ( we might apply different standards for collecting data for LV, for example.). So the first part of your post was already what I am doing...I understand the purpose of the appraisal is to develop an opinion of MV, and the three approaches are a means to do that.
However, each approach in and of itself does not deliver MV (or LV, or any other type of value). It yields an indicated value, developed from the market of course, but it still is not YET an opinion of MV, untill we analyze the value and conclude that it is a credible and supported market value, (or liquidation value or whatever value we are trying to derive from the market).
You are going into the assignment with the intent of completing the cost approach not to determine market value, but to determine something else (I still don't understand what that something else is, but it doesn't matter; whatever it is, you state clearly that it is not market value).
You are seriously mistaken and I advise anyone who thinks you are correct to reconsider their position.
If you want to argue that the cost approach is not meaningful in many residential assignments, you'll win that argument (at least with me and certainly in the majority of my markets).
If you want to argue that it is sometimes difficult to accurately measure all forms of depreciation, you'll get many to agree with you (including me).
If you want to argue that when you do the cost approach, you don't consider it reliable and therefore don't give it much (if any) consideration in your final opinion-conclusion, that is an argument you should be making in your reconciliation statement in the report
Again, the appraiser is not relieved of the obligation of employing the correct techniques in an approach to value; agreeing or disagreeing with
how it works and why is not an option. If the appraiser does not understand and correctly employ those techniques, the appraiser must not accept an assignment where those techniques are a requirement.
The appraiser is 100% responsible for reconciling the value indications in his/her final opinion of value. It is in the reconciliation that the appraiser weighs the pluses and minuses of each approach against the quality of the data and the usefulness of the approach to mimic the market. It is in the reconciliation process that the appraiser can give zero consideration to the cost approach if he/she believes that the quality of the data is poor and another approach is more appropriate (due to appropriateness and quality of data).
But what is not acceptable is to complete the analysis incorrectly and then say, "I'm not considering it because the way I did it, it doesn't provide an indication of market value; it is something else."
