Is The Cost Approach Flawed?

[ucbruin]

Your post actually illustrates my point Of it is done correctly dividing the effective age by TEL absolutely does consider the market. Done correctly it is directly based on the market

Appraisers are taught in beginning courses how to extract total economic life and effective ages from actual market data Those are NOT supposed to be numbers just taken fromm a manual or web site. If those numbers are derived correctly then the depreciation IS market based. Yet one could search the archives of this forum and find countless post indicating the poster does not know how to extract those numbers from the market.

"...total economic life and effective ages from actual market data Those are NOT supposed to be numbers just taken fromm a manual or web site."

Aren't these some of the "flaws" (flaws to some, real life to others) of not only the CA but of appraising as a whole?
Effective age, total effective life, remaining economic life, remaining physical life, etc. are subjective...

"Those are NOT supposed to be numbers just taken fromm a manual or web site."

Would you consider MS a manual?

 

[hastalavista]

Or am I misunderstand TS' and DD's post regarding how the CA adds to the SCA.

You misunderstood my post.
I didn't say substitute the cost approach for the SCA.
I did say (or mean to say) that the CA is meaningful and can provide insight into the market dynamics.
I also said that its valuation needs to be part of the reconciliation process.

Specifically, in a market that is overheated (like the one I described in my area of operation), I'd still rely on the SCA if I felt (and I usually do) that it provides the most credible indication of value. But it would be reasonable to consider the CA and reconcile to the lower end of the SCA if I concluded that was appropriate as well.

 

[Have Laser-Will Travel]

Your post actually illustrates my point Of it is done correctly dividing the effective age by TEL absolutely does consider the market. Done correctly it is directly based on the market

Appraisers are taught in beginning courses how to extract total economic life and effective ages from actual market data Those are NOT supposed to be numbers just taken fromm a manual or web site. If those numbers are derived correctly then the depreciation IS market based. Yet one could search the archives of this forum and find countless post indicating the poster does not know how to extract those numbers from the market.

Your post actually illustrates my point Of it is done correctly dividing the effective age by TEL absolutely does consider the market. Done correctly it is directly based on the market

Appraisers are taught in beginning courses how to extract total economic life and effective ages from actual market data Those are NOT supposed to be numbers just taken fromm a manual or web site. If those numbers are derived correctly then the depreciation IS market based. Yet one could search the archives of this forum and find countless post indicating the poster does not know how to extract those numbers from the market.

Thanks!

 

[DWiley]

Would you consider MS a manual?

Yes, of course. And just using numbers from MS, Buildingcost.net, etc. is an example of the kind of flawed application I was referring to.

 

[Michigan CG]

Effective age, total effective life, remaining economic life, remaining physical life, etc. are subjective...

Effective age is subjective from observation of the subject property but can sometimes be supported by the cost approach if one knows how to use the cost approach.

The remainder can be estimated by using the cost approach.

==============================================

All three approaches to value compliment each other and that is the misunderstanding of the cost approach.

The cost approach can be used to discredit an appraisal. Not only the one that an appraiser submits but also the one that the reviewer develops.

Depreciation is extracted from sales. If the cost new of the subject is $150/SF and the comparable properties are selling for $120/SF (land value taken out) then we know that the total (from all sources) depreciation is 20%. If we have a healthy new construction market and don't have some goofy nearby obsolescence (railroad track, airport, factory, busy road) then we can attribute the depreciation to functional and physical.

If the subject property is constructed similar to the new construction homes being built then we can attribute all of the depreciation to physical.

The cost approach can be a very valuable tool if one knows how to use it.

There is a reason the cost approach class offered by the AI is two days.

http://www.myappraisalinstitute.org/education/course_descrb/Default.aspx?prgrm_nbr=201R&key_type=CO

 

[Terrel L. Shields]

the cost approach doesn't require the estimated depreciation

Shoot me. Of course it does.

I never heard of market extracted depreciation

It's been around long before licensing. You extract it from comps. 1992, no one Submitted reports without at least two approaches. Part of USPAP is to be familiar with the methods and concepts of appraisal. Read the following, understand it, apply it.

http://pages.jh.edu/jrer/papers/pdf/past/vol05n01/v05p041.pdf

how the CA as an indicator of an over-heating market

How about telling the client what I said, an overheating market will collapse. The CA can support your sales derived value.

 

[Have Laser-Will Travel]

Shoot me. Of course it does.

It's been around long before licensing. You extract it from comps. 1992, no one Submitted reports without at least two approaches. Part of USPAP is to be familiar with the methods and concepts of appraisal. Read the following, understand it, apply it.

http://pages.jh.edu/jrer/papers/pdf/past/vol05n01/v05p041.pdf


Thanks!

 

[Eli]

Principle of substitution is central to cost approach.

Property rights is central to cost approach. It is a good indicator of value for fee simple interests.

Adjustments can be required for different property rights or interests.

Local cost sources for replacement cost estimates are best. Better than national sources. The cost approach is awesome if you spend a week on it.

Depreciated cost estimates are great as a source for adjustments in the sales comparison approach when you have no better source for an adjustment. The Cost approach forces the appraiser to do a thorough analysis of highest and best use of the land as if vacant and as improved.

To me, it’s the hardest approach. Income capitalization is the easiest. Sales Comparison approach is next easiest, and Cost Approach is hardest.

 

[Meandering]

Principle of substitution is central to cost approach.

Property rights is central to cost approach.

And let's go there.
Cost Approach, when the old house is now on a non-conforming lot, so, you are not then estimating a market replacement new, if new, can't be built on an undersized lot, and let's ditto that for the house that is now in a commercial only zone. However, in the commercial only zone, we may find the land is now more valuable than the costs to build a new house, but, the zoning might allow a new house to be built. So, have estimated market value? Or have we just provided another data point in our overall analysis?

.

 

[Terrel L. Shields]

Land is valued "as if vacant and available for its highest and best use." Any difference between that and its current utility is attributed to external obsolescence