Remaining Economic Life

[Mejappz]

Thats true also in California, in a State Board Review probably less than 10% of all residential reports have a Cost Approach that was supported by any land or lot sales, and almost every review I have ever done the cost approach was simply backed into. The goal is a USPAP violation based on creating a report or part of it that is not credible or supported by the data.

Give me almost any report that is located in a dense

urban or suburban area like where I live and I will guarantee you that the appraiser has no lot or land sales and he just made the cost approach be close to his SC Approach. The same goes for the income approach on 2 to 4 units and his GRM is normally just made up to create a number similar to the SC Approach. The truth is since F & F will not purchase a loan and since the major lenders won't fund a loan based on a Cost or Income Approach, it's almost like they have set the appraiser up to fail if he gets into a State Board Review.

This thread is peer evidence on how difficult it is to complete an-accurate cost approach . The real old guys like Uncle Billy at 93 says that prior to WW-11 residential appraisers rarely used sales comparables buty used teh cost approach, but that was Pre-Levitt Town Tract Homes, and after WW-11 the GI Bill and FHA went to the SC approach I don't know if that is true, depends on how much Uncle Billy had to drink on that particular day : ) LMAO

I think Uncle Billy is right.

 

[Zoe]

I think Uncle Billy is right.

Tell him he is anyway. LOL

 

[Terrel L. Shields]

This thread is peer evidence on how difficult it is to complete an-accurate cost approach

I guess the curiosity to me is why so many do have trouble with the approach.

But the SA is no more accurate than the CA or the IA since all are dealing with variables that ...well. they are variable. It's hard to hit the 1" bull's eye with a shotgun. And all we have are shotguns to work with. Precision target rifles don't exist. I did one turned in earlier today. 25 acres and a house with a shop building...red iron, good quality. So I start with the CA. My land sales suggested 20-30 acres in this area was about $4000 an acre. land valued as if vacant and available for HBU. 2 of my comps had similar land and were within 3 miles. I work up 3 comps to deconstruct them.

So I end up with one extra sale where a large shop building on 5 acres sold- no house. Excellent for extraction, estimated 4000 SF was $32,000 of the price, $8 a SF.

So, I had 2 sales with similar shops - larger 1, smaller 1 and one sale without a shop.

But I go to the cost book, and derive the RCN of the house and the shop... my observed effective age seems comparable to the extracted ages of the comps. End value was $192k.

I go to the SA, estimated the land values from vacant land sales, adjust dollar for dollar (land valued as if vacant and available for HBU). I estimate the RCN of the barns, crunch some numbers - based on the $8 SF... the left over is allocated to the dwelling, and bingo. The newer dwelling was lower EA than the older. (surprise surprise surprise) - And they crunched nicely. Then I ran a sensitivity on the size and age/effective age/condition. $35 SF and about 1.75% per year depreciation.

The SA came in at $186k. Comps at $189k 180k, 186k ~3% difference w CA. So, isn't 3% a reasonable expectation of the precision we can expect in any situation? I mean the normal confidence interval of data is pretty large. That's why you need an appraiser. This isn't the efficient stock or gold market. This is an inefficient market.

 

[Terrel L. Shields]

about 1.75% per year depreciation.

To those of you math challenged, I guess I should have added that the inverse of 1.75% is your total economic life. 57 years...

 

[alebrewer]

To those of you math challenged, I guess I should have added that the inverse of 1.75% is your total economic life. 57 years...

That is about the only reliable method I've found for estimating TEL, although I've found - through scores of observations - that my reciprocal factor is usually closer to 1.2-1.3 than to 1...

 

[Terrel L. Shields]

That is about the only reliable method I've found for estimating TEL, although I've found - through scores of observations - that my reciprocal factor is usually closer to 1.2-1.3 than to 1..

Suggesting you are delving into higher quality housing- or newer housing where the rate of depreciation is slower than in the latter years. This is a house of indeterminate age, remodeled about 30 years ago with some reasonable amount of maintenance since. The comparables were also remodels and aged. In fact, I had appraised one of the comps many years ago when it was newer.

 

[alebrewer]

Suggesting you are delving into higher quality housing- or newer housing where the rate of depreciation is slower than in the latter years.

yet another reason the CA can be misleading. I've also developed a log based depreciation schedule - for 75 year, 70 year, 65 year, and 60 year tables, to account for the relatively higher depreciation in the early years, and relatively lower depreciation in the latter years. Still hold much disdain for the CA, but I do enjoy delving into it's intricacies...

 

[glenn walker]

Cost Approach:

Los Angeles County and not one single sale of a city size, lot in five years ? How do you support your Site Value ? The home is 1,200 Square feet cost new at $145.00 Per Sq.Ft. =$174,000- The garage is 440 sq.Ft at $38.00 Per Sq.Ft. Cost New=$16,720 -Total Estimate Cost New $190,720. Less Physical Depreciation at 38% =$72,474 and functional at 5% or $5,912 =Depreciated Cost of Improvements =$112,334- As is value of site improvements=$30,000-Indicated value by the cost approach=$142,334. The Appraised value by the sales comparison approach is $550,000 with no lot or land sale's and using the extraction method and I arrive at a site value of $400,000 on a 7,000 Sq.Ft. lot. Final cost approach is $542,000. In reviews we probably see 80% or more of reports where the appraiser is just backing their site value in to match their sales comparison approach, we all know that is not correct methodology BUT we also know that in some of these areas the land or site cost are 50% to 65% of the total value.

In my cost approach I generally place little to no weight on it unless i have land sales. Then I explain how I arrived at my site value. But with no lot or land sales and with difficulty in estimating a reliable physical depreciation on these older homes, its all an-act of futility and will probably not pass a State Board Review.

I had one reviewer who insisted I find some land or lot sale's, but there were none. I insisted he try to find me some find some. he admitted he had gone back years in that market area and he found nothing. He then said I had just backed into my cost approach. I explained that yes and no, yes being without any lot sales , that what ever was left after deducting the $142,330 had to be the site value. My final explanation to him on how I did it is posted below. He finally gave up and I told him look we can do this two ways, I can remove the cost approach or if you insist on it being included, you either find me the land sales or you live with it. ( See Below )

The Subject's market area is almost completely built out, therefore the Extraction Method, a variant of the Land Residual Method, will be used to estimate the Subject's Site value. A nominal price of $57.14 per square foot of site area was derived and shown below as the site estimate. Market responses to lot size and site utility are a function of the consideration of the property as a whole.

 

[alebrewer]

I insisted he try to find me some find some.

That's awesome...

 

[Terrel L. Shields]

unless i have land sales

I assume there are a lot of tear downs though, right? I mean they do build new houses in LA I presume. Teardowns to me are vacant land sales and I've rarely found the teardown to sell significantly more or less than a bare lot.