Extraction Method

[Mr Rex]

Nowhere in that section does it say that the appraiser may give weight to the cost approach. I know I'll be lambasted that it 'infers' the appraiser may give weight to the cost approach, but that is an inference, not a statement. The reason, at least in my opinion (which isn't very popular here), is that Fannie doesn't care about the cost approach. In fact, in that section, it DOES say that, "Appraisals that rely solely on the cost approach as an indicator of market value are not acceptable." The don't care about the cost approach. They care about the sales comparison approach, hence Cert 4...

The cost approach to value assumes that a potential purchaser will consider building a substitute residence that has the same use as the property being appraised. This approach, then, measures value as a cost of production. It may be appropriate to use the cost approach when appraising new or proposed construction, property that is undergoing renovation, unique property, or property that features functional depreciation, to support the sales comparison approach analysis. The reliability of the cost approach depends on valid reproduction cost estimates, proper depreciation estimates, and accurate site values.

 

[alebrewer]

The cost approach to value assumes that a potential purchaser will consider building a substitute residence that has the same use as the property being appraised. This approach, then, measures value as a cost of production. It may be appropriate to use the cost approach when appraising new or proposed construction, property that is undergoing renovation, unique property, or property that features functional depreciation, to support the sales comparison approach analysis. The reliability of the cost approach depends on valid reproduction cost estimates, proper depreciation estimates, and accurate site values.

lol... 'may' be appropriate to use in a VERY limited range of circumstances... that's kind of like saying, "ok, granted, USPAP discusses three different approaches to value, and we don't want to go against USPAP, BUT we REALLY don't think much of the cost approach."

 

[Zephyr999]

Read it - and don't really disagree with it's postulates. To an earlier post, though, "And to clarify, IF: (a) the appraiser has an accurate assessment of site value, (b) an accurate assessment of RCN, (c) an accurate assessment of accrued depreciation from all forms (P,F,E), and (d) an accurate assessment of the contributory value of the site improvements, then I'll grant that the cost approach MIGHT return a meaningful estimate of market value. To djd's point, though, even the term 'market' in the type of value being appraised infers sales comparison (i.e. what the 'market' is doing). I would submit that the amount of research necessary to truly obtain accurate assessments of a, b, c, and d, make the cost approach prohibitive to perform, AND if an appraiser performs the cost approach without an accurate assessment of ALL of a, b, c, and d, he/she is potentially producing misleading results."

It is my professional opinion that I WOULD be potentially producing misleading results by performing the cost approach for residential assignments.

Based on what? Disdain?
It's beginning to appear it's more a lack of understanding the recipe to process it (sorry)... personal choice to expand knowledge base (i.e. read the book and then let me know what you think..wink, wink)

 

[Artemis Fowl]

Sorry, Joe, I was really talking about extracting the site value, not developing the cost approach.

Please explain the difference here.

To George's point, if someone were to judge me (at least in a professional/review capacity) based on my disdain for the cost approach, I'd be incensed - peers or no. And I can assure you that no state investigatory body would cite a breech of S1/S2 for choosing not to complete the cost approach (at least not the folks in Texas).

I just plain don't believe you and this entire statement is terrifying. I KNOW this is a misleading thing to say. Examples forthcoming I am sure. FYI...the reviewer/judge isn't gonna care about your feelings.

Read it - and don't really disagree with it's postulates. To an earlier post, though, "And to clarify, IF: (a) the appraiser has an accurate assessment of site value, (b) an accurate assessment of RCN, (c) an accurate assessment of accrued depreciation from all forms (P,F,E), and (d) an accurate assessment of the contributory value of the site improvements, then I'll grant that the cost approach MIGHT return a meaningful estimate of market value.

WILL...fixed it for you.

To djd's point, though, even the term 'market' in the type of value being appraised infers sales comparison (i.e. what the 'market' is doing). I would submit that the amount of research necessary to truly obtain accurate assessments of a, b, c, and d, make the cost approach prohibitive to perform, AND if an appraiser performs the cost approach without an accurate assessment of ALL of a, b, c, and d, he/she is potentially producing misleading results."

It is my professional opinion that I WOULD be potentially producing misleading results by performing the cost approach for residential assignments.

I agree...doing it wrong would produce misleading results. You must see a lot of wrong ones. It's not as hard to do as you make it sound.

A sales comparison approach is used in all the approaches to value. Comparisons to establish costs. Comparisons to establish depreciation. Comparisons to determine cap rates and expense ratios. These tools are not exactly distinct and stand-alone.

 

[alebrewer]

Based on what? Disdain?
It's beginning to appear it's more a lack of understanding the recipe to process it (sorry)... personal choice to expand knowledge base (i.e. read the book and then let me know what you think..wink, wink)

If I based my professional opinion on disdain, I would be allowing my feelings to guide my performance - something I try very hard not to do. Sorry you're hung up on the word disdain. Maybe it would be better to say, "And to clarify, IF: (a) the appraiser has an accurate assessment of site value, (b) an accurate assessment of RCN, (c) an accurate assessment of accrued depreciation from all forms (P,F,E), and (d) an accurate assessment of the contributory value of the site improvements, then I'll grant that the cost approach MIGHT return a meaningful estimate of market value. To djd's point, though, even the term 'market' in the type of value being appraised infers sales comparison (i.e. what the 'market' is doing). I would submit that the amount of research necessary to truly obtain accurate assessments of a, b, c, and d, make the cost approach prohibitive to perform, AND if an appraiser performs the cost approach without an accurate assessment of ALL of a, b, c, and d, he/she is potentially producing misleading results."

 

[alebrewer]

A sales comparison approach is used in all the approaches to value. Comparisons to establish costs. Comparisons to establish depreciation. Comparisons to determine cap rates and expense ratios. These tools are not exactly distinct and stand-alone.

I'm guessing you meant 'cost' - and I've already stated that there are situations where I absolutely believe the cost approach may be necessary. The example of appraising a state prison comes to mind. I don't know of any residential appraisers who determine cap rates and expense ratios, though. I'm guessing you do?

 

[alebrewer]

Going WAY back to one of my initial comments, IF performance of the cost approach is not necessary to produce credible results, why would you do it? You're just exposing yourself to additional scrutiny should you find your appraisal the subject of an investigation. IF, however, you believe it is necessary to produce credible results - by all means, you SHOULD be performing it. Again, however, it is my opinion that the cost approach is not necessary for credible results in residential appraisal assignments. I'm sure someone is going to provide an example of some off the wall, unique, made up residential assignment where they think it might be necessary, but I cannot think of one.

 

[Zephyr999]

If I based my professional opinion on disdain, I would be allowing my feelings to guide my performance - something I try very hard not to do. Sorry you're hung up on the word disdain. Maybe it would be better to say, "And to clarify, IF: (a) the appraiser has an accurate assessment of site value, (b) an accurate assessment of RCN, (c) an accurate assessment of accrued depreciation from all forms (P,F,E), and (d) an accurate assessment of the contributory value of the site improvements, then I'll grant that the cost approach MIGHT return a meaningful estimate of market value. To djd's point, though, even the term 'market' in the type of value being appraised infers sales comparison (i.e. what the 'market' is doing). I would submit that the amount of research necessary to truly obtain accurate assessments of a, b, c, and d, make the cost approach prohibitive to perform, AND if an appraiser performs the cost approach without an accurate assessment of ALL of a, b, c, and d, he/she is potentially producing misleading results."

Agreed...there are a lot of steps to do it properly. That said, it's doable. Many of your peers do it routinely...it gets easier the more you invest in it.
So if you agree with what you stated above...what is your supported professional reason for not completing it? Because you believe the form says you can skip it??
And then as an instructor you shout that from the mountaintop to a class...as the authoritative USPAP instructor? Interesting to say the least...

 

[Artemis Fowl]

I'm guessing you meant 'cost' - and I've already stated that there are situations where I absolutely believe the cost approach may be necessary. The example of appraising a state prison comes to mind. I don't know of any residential appraisers who determine cap rates and expense ratios, though. I'm guessing you do?

I'm thinking that perhaps the appraisal world is a little bit bigger than your part of it. Perhaps many of those here with opposing viewpoints to yours recognize that.

 

[alebrewer]

I'm thinking that perhaps the appraisal world is a little bit bigger than your part of it. Perhaps many of those here with opposing viewpoints to yours recognize that.

I'm thinking that perhaps the appraisal world is a LOT bigger than my part of it - or yours. Not sure who may or may not recognize that...