I have to agree with Mich... The usual complaints come from California and Florida. The argument in another thread about the actual site value and how that simple sales comparison of vacant lots fails to take into account the land residual values...well, it is very relevant to those areas and makes the CA more difficult.
There is a great article in the Appraisal Journal. I've referenced it before. It is an understanding between
the relationship of SA, CA, and IA that is about "time-space relationship between price, cost, and value.
Face it. The SA is a HISTORIC look at past sales. The Income A is a FUTURE look of anticipation of future benefits and the CA is the one approach that is here now TODAY.
Without the COST of construction plus the cost of the land, then the SA has no link with the real world. If you don't know the value of your LAND, how do you know what to adjust differences in site value? Simple paired sales ?? But against what metric? How do you know it is reasonable? Likewise, if you don't know the cost of construction how can you vet the quality...And, the prudent buyer checks to see that they can buy cheaper than they can build or they would build.
But in the end, the most ignored approach is the INCOME approach. Why did a lot of people walk from their McMansions as "strategic" defaults? For one they anticipated a profit from a future sale which did not transpire. Secondly, they cannot service the mortgage with the income potential - that is to say the income won't pay the mortgage. They sought cheaper places to live. Even presuming that a future rebound would make them whole again, they realized that in such an expensive home, the cost of credit in the mean time would eat them up far worse than a house half that price.
There is a reason for 3 approaches. It is an integrated approach to valuation that provides an internal check of reasonableness. Yes, one of those three methods may be the "best" way to value it. But when making a decision about investing in a rental multifamily, do you ignore cost and simply buy what the market says its worth? A lot of people did and lost their hienies. Our duplex market to the best of my knowledge is 90-100% REO property. And owners who did sell out tended to not do maintenance and updates that they normally would have expected to do. I can think of 2 small apartment complexes that sold recently. Both were quite shabby and sold cheap, both under pressure from the bank. They were servicing expensive loans but refinancing wasn't possible because they owed more than the LTV the bank is now willing to take on. And ultimately, it is the income from those rentals that dictate the price. Buyers are now only interested if the property will cash flow readily with a high discount for above average vacancy and rent loss. Likewise, new apartments can draw a lot of folks from shabby apartments because the cost is now competitive. How can that be? Easy. A new apartment with energy efficiencies and current construction costs and low land cost investment is very competitive. The renter will likely save money on utilities and have a new apartment to boot. And the old apartment with higher turnover has higher maintenance costs and cannot lower rent prices because of their unusually high cost of capital (from 7-8% interest loans from 10 years ago that they cannot now refinance.)
As for the Cost Approach taking a lot of time. It doesn't necessarily. Even using an assemblies method, I spend no more time on it than the sales approach. I gather land sales, use NBC cost book CD and compare that with the sale price of new houses or builder's estimates. A quick grid of the land sales is generally created. A copy of the NBC printout is pasted into the report.
For the income approach I see a lot of malarky about "predominately owner-occupied" blah blah blah. In reality, if you check census surveys you often find that 30% or more homes are rented. There is sufficient rentals to estimate the actual rents. And there is often numerous sales to estimate the GRM. GRM is a simple method but not inaccurate if done right. I have known a many a landlord who set rents at 1% of the cost of a house. $40,000 = $400 a month. My CPA uses a simple sinking fund method that is similar to vet investment houses. 9 years (108 months...) to payout. If it won't pay out by then, then he doesn't want it.
When is the last income app you've seen on a house that wasn't actually rented? Why? The approach works.
