Extraction Method

[Zephyr999]

Disagree. If I don't believe some particular research, or approach to value, is necessary for credible results, I DO NOT HAVE TO PERFORM THAT TASK, and it absolutely IS an appropriate 'out' (to use your words). I am responsible for developing my SOW, not the intended user. And, at least in the case of agency work, neither the agencies, nor the investors, nor the lender, nor the borrower care whether the cost approach has been developed or not (sans the prior example of some lenders requiring it for insurance purposes).

So then 'held to similar standards as peers' relates to the lenders, investors, and borrowers? Really?

 

[alebrewer]

@alebrewer we are discussing it's applicability...it's more about the stance of "I don't complete the cost approach because I don't believe it is necessary for credible results." From the world of science/medicine: it's like saying I don't do periodontal evaluations of healthy patients because it doesn't produce credible results. Uhm, hard to swallow that reasoning, which is why I claim lower standards given its the results of completing the approach that leads to the 'credible' or not credible' opinion. Belief is not part of the equation and thus my stance on not a valid exclusion reason.
Best of luck to you in your pursuits of working this all out.

(1) if you did not believe that performing the income approach was necessary for credible results, would you still perform it? Based on your logic, if not, you'd be lowering your standards. Why would the cost approach be more or less important than the income approach?

(2) your example of periodontal evaluation is not a good example. It is a scientific fact that periodontal evaluations (even on healthy patients) prevent future periodontal issues (not that I claim to be a Dentist). Deciding whether a cost approach is, or is not, necessary for credible results is not a fact - it is an opinion. Poor example.

(3) not sure where you're trying to go with the belief part?

 

[alebrewer]

So then 'held to similar standards as peers' relates to the lenders, investors, and borrowers? Really?

I'm sorry, I thought you were the one who said 'credibility is in the eye of the intended user'. I was just pointing out that the intended user doesn't care whether the cost approach is developed or not. Regarding peers, and using FAQ 175 as basis for my judgment, it has been my experience (in reviewing appraisals literally in the thousands) that some appraisers choose to develop the cost approach, and some do not. Kind of doubt if someone could cite an appraiser as failing the SOW work rule for determining that the cost approach wasn't necessary for credible results. But, given the animosity I've witnessed in this thread, I wouldn't put that above someone.

 

[Zephyr999]

(1) if you did not believe that performing the income approach was necessary for credible results, would you still perform it? Based on your logic, if not, you'd be lowering your standards. Why would the cost approach be more or less important than the income approach?

(2) your example of periodontal evaluation is not a good example. It is a scientific fact that periodontal evaluations (even on healthy patients) prevent future periodontal issues (not that I claim to be a Dentist). Deciding whether a cost approach is, or is not, necessary for credible results is not a fact - it is an opinion. Poor example.

(3) not sure where you're trying to go with the belief part?

The income approach is not credible for properties that are not producing an income stream. A valid reason to exclude. It may not be credible once completed due to lacking or poor data, but you don't know that until you research and test the theory.
The cost approach would not be credible for raw land; an unimproved property. A valid reason to exclude. If improved, it may not be credible once completed due to lacking or poor data, but you don't know that until you research and test the theory.
The sales comparison approach may not be credible for a unique property type (the Eiffel Tower as an extreme). A valid reason to exclude. It may not be credible once completed due to lacking or poor data, but you don't know that until you research and test the theory.

Belief=theory...needs to be proven or dis-proven.

 

[CANative]

The only good thing about America's bank and the bank that is Well off, is that they don't care about the CA. All they want is 3 sales and maybe a listing. And a value.

 

[Michigan CG]

Examples, please? Surely you aren't joining Zephyr and CANative by throwing around unsubstantiated assertions?

And I thought we were discussing it's applicability in residential assignments? No argument that it has applicability in other types of appraisal work - and possibly for other types of value.

First, no unsubstantiated assertions, just my experience.

We are talking about residential appraising but when one has a full understanding of the approach one would find it more supportive in residential. The methods for using the cost approach are the same in agricultural type work as they are in residential work.

If you were to appraise a residential property that has equestrian facilities would you not use a cost approach for some of your support?

 

[Michigan CG]

I think you referenced the 12th Edition earlier so I dug out my 12th Edition and the only thing it does is give a definition and does not explain the process for which to do it.

I posted the below yesterday which does explain the process very well and this process was taught in both my residential and commercial cost approach classes.

Go to Appraising Residential Properties, 4th Edition, page 250.

".............To estimate land or site value by extraction ......... the appraiser deducts the contributory value of teh improvements from the total sale price of EACH COMPARABLE........"........... " ......... The resulting indications are then reconciled into an opinion of land or site value for the subject....."

 

[Deleted member 152047]

After reading through this (mostly) all I keep thinking is:
1) we are held against a standard of practice based on what our peers do, not don't do... 2) letting a form direct proper methodology and practice is shortsighted...
3) being 'coachable' in this world goes further in 'connecting the dots' than continuing to argue a position that does not meet #1 above.

Well said!

 

[Deleted member 152047]

...a better comment is, "cost does not always equal value", because sometimes it does.

Replacement cost is one facet. The real trick is quantifying the accrued depreciation, which can be daunting. No, cost does not always equal value. However, if your cost approach is off by more than 10%, you have obviously missed a significant amount of depreciation.

The caveat to this is when the other approaches well exceed the cost, which is often times seen in the NNN market. That market operates completely differently.

 

[Pittsburgh Pete]

Replacement cost is one facet. The real trick is quantifying the accrued depreciation, which can be daunting. No, cost does not always equal value. However, if your cost approach is off by more than 10%, you have obviously missed a significant amount of depreciation.

The caveat to this is when the other approaches well exceed the cost, which is often times seen in the NNN market. That market operates completely differently.

Typical in such situations; however, we are also dealing with different property interests. If Cost is further adjusted for property interest valued, it will be more consistent with other approaches.